Q2 2022 Intact Financial Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the intact Financial Corp, Q2, 2022 results conference call.
At this time all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded today Friday July 29, 2022, I would now like to turn the conference over to Szuba Khan Vice President of Investor Relations. Please go ahead.
Thank you Michele good morning, everyone and thank you for joining the call today are.
A link to a live webcast and published information for this call.
Hosted on our website intact at SEDAR com under the investors tab.
As usual before we start please refer to slide two for cautionary language regarding the use of forward looking statements, which form part of this morning's remarks and slide three for a note on the use of non-GAAP financial measures and important notes on adjustments terms and definitions used in this presentation with.
With me today are.
Charles animal our CFO .
Got it.
Our senior Vice president of personal lines.
Pink bubble executive Vice President and Chief operating Officer, Darren Godfrey Executive Vice President of specialty lines, Ken Anderson Executive Vice President and CFO .
We will begin with prepared remarks, followed by Q&A.
With that I will turn the call to Charles.
Thank you <unk> good morning, everyone and thank you for joining us today.
We delivered strong second quarter results, despite higher than expected catastrophe losses and cost pressures.
This is thanks to the actions we've taken over time as.
As well as our disciplined underwriting and deep claims expertise that being said we are at.
The impact of the challenging environment is having on our customers, we understand that providing them with the second to none experience is.
This is particularly important in these times.
We worked pretty hard to be therefore, our customers, despite labor and supply chain disruption.
In fact, our people know that we exist to help people and businesses do well in good times and be resilient in bad times.
And they understand that nothing should stand in the way of being true to that purpose.
Yesterday evening, we announced second quarter net operating income per share of $3 14.
Top line growth of 36% this quarter was driven by the contribution from RSC as well as organic growth up 4%.
The overall combined ratio was 97% with low ninety's underwriting performance across all segments.
Let's look at each of our lines of business, starting with Canada.
Personal auto premiums increased 28% year over year.
Mostly driven by RSC.
Organic growth remained relatively muted at 1% as units were under pressure given our cautious stance on rate. We expect this pressure to be temporary as the <unk>.
<unk> is actually catching up and gradually reflecting headwinds in its prices.
This is no surprise that the combined ratio was very strong at 89, 8%.
Slide 8% inflation on claims cost in <unk>.
Higher driving activity.
Inflation this quarter continues to be driven by global supply chain disruption, leading to higher market values of used cars repair costs and test.
We've been anticipating these trends and proactively managing them for some time now.
<unk>.
There is a high degree of caution already embedded in our reserves for both short and long tail claims.
It's true of past years as well as for the current year.
That's why I look at the underlying performance of this line very much including the development from prior years.
A proof point of discussion is the strong level of prior year development at close to five points.
It certainly helps that we don't seek cost increases on 40% of our claims that are not physical damage in nature.
Certainly pass product requirements on accident benefits and bodily injury continue to help provide stability in personal auto.
Second rates have been moving higher as the portion of relief provided true rates during the pandemic has been rolled back.
Note that unlike many of our competitors.
A large portion of our relief was provided as onetime rebates.
Further rate increases to deal with inflation were deployed also earlier this year.
And at the same time, the gradual shift of the car pool to newer car models is automatically reflected in our pricing.
Which is yielding additional premium over and above our rate increases.
So in aggregate recent rates and insured values generated close to four points into.
And based on what's approved to date and embedded and upcoming renewals.
I expect that to increase to close to nine points by Q4.
That alone anticipates and in my view covers prospective inflation and driving activity.
That being said.
Our game plan and auto it's not only pricing grip equally important is how we manage claims and our supply chain.
Our capabilities on this front generated one third of our ROE advantage.
Really help mitigate inflation in particular, our alliance on our service centers and are relying networks has been important in addition to our parts purchasing activities.
We also clearly benefited from our salvage disposals as an increasingly important source of income.
As the course cost of parts and scrap metal increased.
But as cost pressures persist that we've been taking additional actions in claims for instance, we.
We've deployed machine.
Machine learning applications to the front lines to make smarter decisions between repairing and declaring total losses.
We're also seeing more volume through our growing number of dedicated service centers.
Which provide courtesy car fleets and lower repair cost.
And so with the actions we've taken so far I expect our personal auto business to run at a sub 95 combined ratio in the next 12 months.
Looking at the industry the environment is evolving largely as we anticipated we see rate increases.
<unk> to the mid single digit range in the near term for the industry.
In personal property premiums grew 28%. In addition to the <unk> acquisition. This was driven by five points that we're getting growth and for market conditions that combined ratio of 97, 6% included 16 points of cats.
Weather and inflation are continuing to support a firm market.
While.
We've been seeing sustained increased cost in materials for a number of years.
This remains well captured by rate momentum and indexation.
This business is very well positioned to continue to deliver strong performance consistent with the past few years.
Okay.
In commercial lines premiums grew 42%, which included seven points of organic growth the.
The combined ratio improved by four points to 86% as we continued to take advantage of.
The hard market here in Canada.
It increases continued to be above loss cost trends, we expect market conditions to remain favorable due.
Due to a combination of elevated cat losses, and inflation pressures overall, our commercial lines business is well placed to sustain.
Low ninety's or better performance moving now to our <unk> business, which delivered a combined ratio of 91, 3%.
Personal lines. The combined ratio was a strong 88, 3%, which partially reflected a revised estimate of prior quarter cat losses.
Normalized for this and seasonality.
Our combined ratio was firmly in the mid <unk> range despite cost pressures.
With a focus on bottom line performance, we've maintained pricing discipline in a competitive market.
That continues to adjust to reforms introduced at the start of the year.
We expect inflation will support rate increases over time in the UK.
In commercial lines, the combined ratio of 93, 6%, including nearly eight points of cats twice our expectations for the quarter.
The business is performing very well otherwise with.
With cost pressure is being offset through our pricing actions and the hard market conditions at the same time, we're continuing to optimize our footprint prioritizing the more profitable regions and specialty businesses overall, the U can business is performing better than expected after one year.
But we remain really focused on actions to drive sustainable outperformance overtime.
Our U S commercial business grew 14% in the second quarter, driven by our focus on expanding profitable lines and for market conditions.
<unk> ratio of 91, 1% reflected solid rate increases improvements in risk selection claims actions and strong execution of our profitability improvement plan.
As a result of our continued focus on portfolio quality and given the compelling market fundamentals.
We are well placed to deliver sustainable low <unk> performance or better in this business.
Turning to the RSA acquisition, which closed in about a year ago I'm pleased to see that the integration is very much on track in Canada.
Policy conversion in the broker channel is nearing completion.
And almost 85% of personal lines broker policies as well as commercial line small business and fleet policies.
As converted twin Tech systems, so far.
We also closed on the sale of <unk> Middle East business or close to book value on July seven.
The transaction underscores the progress we've made in optimizing our U can I footprint since we acquired RSC a year ago.
In addition to the integration we executed on several other initiatives during the quarter.
Just to name a few in Canada. For example, we launched the digital reporting tool for customers to file property claims through our mobile app.
Approximately one in five of our client claimants have used a tool since launch.
Loosing claims cycle time and improving experience.
On the distribution side broker link delivered in the quarter a record of acquisitions, competing 10 transactions across the country, representing close to $200 million premiums and.
In the U S. We bolstered our global specialty lines platform.
With the acquisition of Highland and MGA focused on providing builder's risk insurance.
Transaction expense, our portfolio of own distribution assets.
<unk>, our strategy of growing profitable verticals as we built a leading specialty lines platform.
Over the past five years, we've compounded net operating income per share at 20% a year and exceeded the industry Roe.
By close to 700 basis points.
At the halfway Mark of 2022.
I continue to see a lot of strength across our business, we're delivering low ninety's underwriting performance, despite ongoing cost pressures as well as solid growth led by commercial lines.
With a robust balance sheet discipline underwriting industry, leading claims management and Drs integration firmly on track.
We're really well positioned to grow our net operating income per share.
10% per year over time, and outperform the industry ROE by at least <unk>.
500 basis points every year with that I'll turn the call over to our CFO .
Yes.
Thanks, Charles and good morning, everyone I'm pleased to report strong results again this quarter. Despite all the turbulence going on around US all segments delivered combined ratios in the low nineties, we saw solid growth in investment and distribution income and strong accretion from RSC.
Gains on the sale of Denmark, and on our equity portfolio led to an 85% earnings per share growth year over year.
<unk> ROE in the high teens.
Underwriting results were solid with an overall combined ratio of 97%, but four points higher than last year's stellar performance largely explained by a significantly higher cat losses.
Year to date cat losses are $413 million compared with our annual guidance of $600 million, we can't predict.
Whether it will behave in the future, but we believe it is reasonable to expect one half of our annual guidance to hit our results in the second half of the year.
Favorable prior year development remained healthy at three 8% broadly consistent with last year and with our short term expectations. This should not come as a surprise as we have repeatedly stated that we have been prudent in our reserving and that our balance sheet was strong we.
We are seeing the benefits this year as our past decisions bear fruit and contribute to solid underwriting results. We remain prudent in establishing current year reserves, particularly in personal auto given changing driving patterns and supply chain challenges.
Net investment income of $211 million increased by 37% in the quarter largely driven by the addition of our assays and investment portfolio and higher rates. We now expect investment income for the full year to reach $865 million $25 million higher than in our prior guidance.
Any further increases in interest rates from current levels would represent upside to our expectations.
Distribution earnings grew 19% year over year with our onsite home restoration business contributing strongly this quarter. Thanks, largely to additional work generated by recent elevated cat activity.
This is a good example of the counter cyclical nature of our restoration earnings looking forward, we expect distribution to income to be in the region of $425 million for the year up 17% from last year.
Afflicted continue reflecting continued momentum in the business.
Now, let's look at our underwriting results and a little more detail starting with Canada.
In personal auto the underlying loss ratio was up nine points driven by increases in frequency and severity.
That being said the overall combined ratio remained strong at just below 90%, reflecting the actions, we've taken including prudent reserving.
While this tends to penalize our current accident year results, we see in offsetting the higher prior year development levels, which in aggregate enables us to deliver solid underwriting results when taken with our other actions. This gives us confidence in our ability to deliver a sub 90 combined ratio in personal auto despite the market environment.
Personal property the combined ratio of 97, 6% included 16 points of cat losses, four points higher than expected non cat weather related claims were also elevated and higher than last year, partially offset by lower commissions or personal property business is well positioned to absorb inflation and weather events.
In commercial lines. The combined ratio was very strong at 86% as we continued to see the benefit the rates being earned as well as other profitability actions taken over time.
<unk> prior year development was very healthy, but around three points lower than last year.
Such volatility is not unexpected quarter to quarter as the development of prior year large claims will be lumpier than in other lines.
The overall expense ratio in Canada improved by almost four points largely driven by lower variable commissions across all lines of business relative to the elevated levels over the last two years. This is tempering the impact of higher frequency <unk> severity in all lines.
Turning to the U K and I, we delivered another solid quarter, despite a challenging environment first.
Personal lines operating performance was strong with a combined ratio of 88, 3%, which included around three points of net benefit from revised estimates of the Q1 Windstorms <unk>.
Excluding this item the 91% combined ratio reflects the favorable seasonality of Q2 for this line of business.
Given the prevailing conditions in the UK personal lines market I expect the second half of the year to be more challenging.
<unk> likely to be in the upper Ninety's range, our limited exposure to UK motor, which represents only 1% of IAC premiums is certainly helpful. In this regard.
In commercial lines. The combined ratio of 93, 6% reflects elevated weather related cat losses in our specialty lines, partly offset by strong prior year development and lower expenses.
We continue to execute on our outperformance strategy, but a 92% combined ratio for the first half of the year is broadly in line with expectations.
In our U S business. The combined ratio was 91, 1%, reflecting solid underlying performance offset in part by 2% on whether cat events.
The operating results also benefited from our exited of public entities, but the entire portfolio was also benefiting from our focus on pricing discipline risk selection claims internalization and prudent reserving.
A quick word on global specialty lines, when combining our our half year results in Canada U S. UK and Europe , we have reached $2 8 billion in premiums written.
Grew at 15% and a combined ratio of 85%. There is no doubt that building. This platform further it will be a huge contributor to our growth and outperformance objectives.
It's already been one year since we closed the RSA acquisition and I'm delighted with the progress we have made against our strategic and financial objectives.
Delivered 15% of earnings accretion, which is well above the high single digit target we had set for ourselves at this stage.
Our annualized run rate synergies increased $50 million in the quarter to $175 million of which approximately $75 million were earned in the first six months of the year.
Projected accretion after three years is nearing a 20% run rate and I have strong confidence in achieving this the transactions IRR is north of 20% ahead of initial estimates thanks to stronger earnings from RSA and the sale of Denmark.
Moving now to our balance sheet, it's been a challenging quarter for capital markets with a combination of interest rate hikes and drops in equity markets, while our investment portfolio suffered mark to market losses. This was partially mitigated by higher discounting on our claims reserves overall, our financial position has remained strong with a total capital margin at the end of Q2 of $2 5 billion.
<unk>.
Broadly unchanged from last quarter.
Book value per share was up 4% from last year and down 2% from last quarter, a fairly minimal decline. Thanks, thanks to strong earnings offsetting the impact of volatile capital markets.
As we mentioned last quarter, we used the majority of the proceeds from the sale of go down to pay down debt, reducing our debt to total capital ratio to 20% in line with our long term target.
In summary, with a strong capital position on target leverage and prudent reserves, we have the balance sheet to tackle an uncertain future with potential challenges and opportunities. We have delivered solid performance. So far this year and continue to mitigate the impact of inflation.
The rate environment is favorable in all lines of business and interest rates are a potential tailwind this bodes well for future earnings with an adjusted ROE of 22% at the end of June I am confident that we remain well positioned to outperform this year and beyond with that I'll give it back to Sheila.
So maybe just one point of clarification in your remarks, you mentioned sub <unk> and.
In personal automobile and I think you meant.
Sub 95 combined ratio in the next 12 months.
To be clear.
Don't want to create confusion with investors sub 95, thanks, Paul Szuba, Mike just back to you.
Charles So in order to give everyone a chance to participate in the Q&A. We would ask you to kindly limit yourselves to two questions per person and of course, if there's time at the end you can certainly re queue for follow ups shall.
So we are ready to take questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
I would like to ask a question. Please press star followed by the number one on your telephone keypad.
I would like to withdraw your question. Please press the star followed by the number two please.
Please standby for your first question.
Your first question comes from James Gluing National Bank Financial Please go ahead.
Yes. Thanks.
Yes.
David to personal auto.
And so my question is.
Focus on the current year loss ratio in the <unk> nine percentage point uptick in that in that ratio year over year, you talked about.
Survey and the increase in reserve and can you can you elaborate on how much of that current year loss ratio would be.
Reserve, driven and how those reserves have changed versus prior years to reflect the inflationary pressures that youre seeing.
First point.
I don't think we said increase reserves I think we said we've been overtime prudent with reserves.
Lots of moving pieces.
In the environment, we've been very clear on that for the past two years, our reserving hasnt changed this quarter I think the main point I made here is that we remain prudent and reserves and Thats true for the current accident year as it was for the past few years and Thats why youre seeing.
Proof of that with close to five points of prior year development in auto and so I think for me the way I look at the performance of that business today as I am over time as I look at both the current accident year and the <unk> of course, when it is stable as it's been.
In the past year or two to look at the underlying performance of that business I don't think you should.
Ignore the <unk> D here because the reason why there is <unk> because we've been cautious in the past on current accident year. As we are now no change from that from that point of view.
Yeah.
Yes.
Okay and then.
In terms of those inflationary pressures you mentioned that.
40%.
Let's say bodily injury related hasnt seen any inflation.
Still.
I guess, that's the case.
So, perhaps maybe maybe walk through what's driving the increase in that current year loss ratio from a repair and replacement perspective.
Year over year.
Yes.
<unk> I think Patrick is very well placed to do that the known to 40%.
Per say and we've said that in the last few years.
We've seen better driving better frequency, we havent, given full credibility to that and reserving.
As well as.
As in pricing because there's lots of moving.
Pieces.
And then reforms I've been in my mind effective at keeping stability. There there is caution and reserves and then pricing and that's why we're not seeing much on this front. It's a good stabilizer and we feel good about that so I think why don't you share.
Your perspective on the 60%.
Where there has been pressure.
So that people understand where that's coming from.
Yes, perfect. So the 60% is split half and half between car repairs, so 30% of the total cost and the other 30% is total losses and.
So on car repair is very consistent with global trends.
We saw that increase coming from the price of parts continuing in Q2 labor cost is stable.
Inflation in labor cost is stable at 5% and the inflation in the cost of parts itself is in the high teens and that creates also delays to receive parts and creates.
Increase in the cost of rental in the cases, where our shops do not manage their own fleets of court Daisy cars. So overall on the 30%.
Cost of repairs. This is facing an inflation rate of around 13, 13%.
On the other 30%, which our total losses in depth, we see inflation rates in the 15% zone.
Both the frequency and the severity of desks continued to increase in Q2, so thats one but also on the damaged cars that we declared total losses, we have seen a sharp increase in market values. During Q2 definitely an acceleration from the prior quarters, but whilst salvaged <unk> used to be a very significant offset to the pressure.
From market values in the quarter did not increase enough to fully offset it.
So overall, if you look at at zero percent inflation on the 40% of the cost that is injuries inflation in the low teens for the 30% of car repairs and inflation in the mid teens for the total losses and that makes up the overall, 8% we see in auto and maybe just one note on the availability of car parks.
Because we have started to see some signs of improvement on the supply over the last few weeks you know in normal times would normally we would see around 25% of our car repairs that are being delayed by parts ordering and delivery. This ratio started to increase in Q4.
And it's reached over 50% at the end of Q1, it stay at about that level for the majority of Q2, but.
But we just started to see it go down over the past five six weeks and its been at 40% today.
And I think.
The actions in the pipeline, whether it's pricing claims supply chain management, the additional actions that.
We've introduced in the last few months.
Deal with some of the dislocation in the supply chain in my mind put us on a pretty strong footing and I think what youre seeing in physical damage is no different than what youre seeing in other markets.
The structure strategies, we have in the supply chain management, and our starting point on rates puts us.
In a very different position, but youre seeing the same sort of pressure.
Here in PD as you do in other markets.
Thank you.
Alright.
Your next question comes from Geoff Kwan of RBC capital markets. Please go ahead.
Good morning, Jeff.
Good morning. My first question was just also on personal auto you that the comments in the outlook in the MD&A talking about expecting industry premium growth progressed towards mid single digit over the next year.
Given inflation and whatnot, but Tim your combined ratios was I think about 91, 5%. This year, you're talking about less than 95% next year is that a disconnect. There in terms of like do you think that you are also going to be able to get that sort of rate or is it because what you're seeing from competitors that maybe have not as good numbers.
But that's what's going to drag the overall industry premium increase over the next year.
I think the industry is catching up.
Prudent what our outlook, what's embedded in the system and our case between rates and what we call drift.
As four points in Q2 and.
What's embedded in the system is growing close to nine points by Q4, that's our own perspective.
We've guided in the last year sub.
Sub 95 were very much still there.
And the actions, we're taking are consistent with that.
Has that been do you want to provide.
Additional color on <unk>.
Reising and risk selection.
Sure.
Yes, so on pricing as we said Charles.
About 4% in the system as we speak today and we were quick to remove the rate decreases we gave earlier in the year.
Well as a bit different than ours, but there is we gave most of them got relief in one time payments or just rate decreases.
So.
That already rimmel with current action, we have to be up about four and with the rates that are already filed and approved that's why we feel that our rates will be.
Tell us to nine points by the end of the year and we expect the industry will it will catch up on rates in the coming months to reach the mid to single digit growth.
Okay.
Thanks.
My second question was on the distribution income guidance at $4 25.
I think that seems like it's significantly below the run rate of what we saw for the first half of this year.
<unk> continued to make distribution acquisitions investments that sort of thing just wondering is it like the factors in the first half of this year that were higher than normal or are there things that you expect.
Second half to be lower than what you saw in the first half or is it seasonality just trying to get some understanding about the cadence of what we'll see over the next couple of quarters.
Sure, Jeff and Thats, why we give annual numbers to take out a bit the seasonality factor I will say in addition, this year Youll remember Q1.
Over a year over year was higher because we still had the additional CPC is coming in.
Q1 over Q1 last year, so that was an influence that drove a bit Q1 more than that.
And then it would have been usual and then Q2. This is going away because it was picked up from last year, we started accruing a lot more.
<unk> in Q2, and the distribution last year, so that new to the <unk>.
Growth in Q2 as opposed to Q1, so in the last.
The next two quarters, we're going to see good growth, but it is comparing ourselves to last year's when we had the elevated cpc's those are coming down as you've seen in our underwriting results puts a bit of pressure, but what we do on the M&A on the organic growth.
On the other side offsetting this and allowing us to drive mid teens overall growth and total distribution income for the year and Thats what takes us to the 425, so quarter over quarter. This thing is not linear clearly there is seasonality.
And so that's why we provide annual guidance to take out of it.
Sure.
The fluctuation quarter to quarter to quarter, Yes, I think that.
Jeff There is a couple of things that are we take as you've seen over time, we've been cautious on the distribution guidance. I mean, there is you've got two things there is the speed at which deals are getting done.
And thats kind of hard to predict but.
We've made really good progress on this front in particular in brokerage Inc.
The on site performance is a bit lumpy from the perspective that it's driven by <unk>.
Natural disasters quite heavy it's been really good this quarter.
Confidence that this business will perform really well, but depending on the volume of work, which is driven by natural disasters youll see.
Some volatility a little bit of volatility there.
And so in aggregate I think.
Youre right. It is cautious guidance, there's one offs as we are.
Just laid out and a degree of caution on our part because some parts of it are hard to forecast.
Okay. Thank you.
Yeah.
Your next question comes from Mario Mendonca of TD Securities. Please go ahead.
Good morning.
Perhaps I'll maybe Carl.
I'll take you up on that the idea that we would look at.
Underlying the underlying claims ratio and put in the <unk> in personal auto obviously makes a lot of testing to do that.
I'm doing that precisely, but im looking at it relative to 2019 and that underlying claims ratio apart PID is still.
Lower like 900, 1300 basis points lower than it was in 2019.
Does there come a time when you conclude that the environment is so favorable that it actually starts to the pricing pressure in personal auto or is that not.
That how you look at it.
I think no yield.
That's that.
It's a very good observation and I would say.
Part of the issue.
With 2019 and 2018, you'll remember is when we were fighting the inflation on.
On the 40%.
No. It's no inflation there reforms had been introduced.
There has been a sharp increase in 16 and 17, we move quickly on rates.
On pricing and then really strengthened the balance sheet to make sure that we wouldn't be caught by surprise here. So so I would say.
For me.
<unk> performance in 2019, and what's not at the level that needed to be in.
Don't think its a good comparison.
And even in 2019, you'll remember we were guiding towards mid Ninety's in terms of performance and for me that.
A much better way to look at that when I look at everything that's in the pipeline at the moment.
I'm I'm, saying I think if we look out 12 months, we should be sub 95, there are lots of moving pieces.
I think the industry is still catching up Mario and therefore I don't think.
That's.
That the market will become irrational much to the contrary I expect the market and if you look to our outlooks.
I expect the market to really act on the inflation that was there before the pandemic and then you inflation now you could have a debate whether frequency.
Is that a structurally different level.
I think it's I don't I wouldn't say structurally frequency is lower than it was pre pandemic.
Driving is returning to normal because people don't drive at the same time is this structural far from clear to me that it is structural and I think maybe just to give you a bit of color is that Ben why don't you talk about driving patterns and what your what youre observing but the punch line to your.
Question is I don't see a structural shift at this stage that we're prepared to price point.
Yes in terms of driving in frequency as we sit here today. The driving is very close to pre pandemic thing about the caterpillar point before COVID-19.
Workplace mobility and weekdays congestion, especially the morning Rush hour worried as we said in the past while still higher than 2021.
Below pre pandemic level. So we believe it is explaining why despite driving being very close to pre pandemic theyre still frequency is still below what we.
What are you seeing in 2019 and before.
We also have <unk>, Tim I think tools, though that some driving behavior change. So there is a bit less acceleration and less breaking events that are trending downwards.
So.
That'd be very still there to continue.
We'll see in the coming months, but we expect that.
Quincy, we continue to rise or fall off as people continue to return to the yes, yes during that forget that's fine, but we're pricing for an increase in severity versus what we see today and thats embedded in our pricing strategies.
Zero.
Second question My second question related to <unk>.
Both personal auto and personal property in Canada.
Because of the RSA deal looking at the growth on the policies written or written insured risks has been a little more challenging because it obviously, it's affected by RSA can you with RSA now in the business for a year can you talk about what you would expect policy growth to be like.
Maybe written insured risks in those two businesses.
Arsenal property in personal auto.
I think out of experience so first of all.
A big portion of the best of the book now as migrated to our system. That's good very happy with the retention we've observed the retention on the RSA transaction.
It's almost in line.
With the retention of the impact portfolio itself, which is quite something.
In the context of an acquisition, it's better than what we anticipated.
Frankly now in year two of the transaction.
Yes keep in mind that there is risk selection.
Activity is taking place when you migrate to the portfolio.
That is happening over a two year period, you migrate in year, one we're capping the dislocation.
In year, one and we're gradually bringing people to the actual impact price over two three years that can lead to.
Two less growth.
Than you otherwise would get in the following 12 months. After the first year of an integration. So we take a cautious stance I would say on organic growth NPL.
As we look out the next 12 months.
And the backdrop that we're still I think cautious in relative terms from a pricing point of view, we see that.
Narrowing in the coming period, you said that I don't know if.
Any color we can we can add maybe what I would add to this is that during the same period, we were integrating C. We.
We saw less quotes in the market than we were seeing before that then it's not.
Of course, due to arris integration, but due to debt Ken thanks, as being in the pending Macon, many competitors and.
Tempering our rate increases so that also was.
As a factor for us Nancy.
Seeing a muted growth in units but.
The market is returning to our rate position given inflation.
Expect that it will generate more people that will.
Alright, Dan Shannon. So then with our best in class segmentation, we assume that would be best positioned to take some operating piece there.
Thank you I understand that.
Okay.
Your next question comes from Michael Phillips of Morgan Stanley . Please go ahead.
Hey, Thank you good morning, everybody.
Good morning.
Can you talk switch switch off of persona for a second and maybe talk about.
What youre seeing in loss trends in your U S commercial business.
Sure.
Darren you want to give you a perspective on that and maybe just in terms of before I go to loss trends just give you a bit of an insight in terms of the makeup of the portfolio. The U S. I think we've talked about.
This before but I think it's worth repeating roughly 60% of the book is.
<unk> more of our casualty type exposure with.
Another 20% more property focused you can include auto physical damage in that as well and then about another 20% in terms of other pure specialty lines, where when we talk about surety A&H tuition reimbursements et cetera. When you look at each of the different components that there Mike.
We see similar things.
In the U S from a property standpoint, like we see in our commercial property book in Canada, we.
We see severity increases sort of in that.
Mid single digit ranges now remember again that we have indexation of amounts of insurance here as well too.
So our net trends, obviously is lower than that level, obviously from a casualty standpoint watching that triangle is very very closely.
No real uptick in terms of what we see from a loss trend standpoint, but obviously, that's an area that we're paying very very close attention to and then when I look on the pure specialty side, whether it be <unk>.
H and tuition Judy for example, not a lot of pressure there at this point in time.
Yes, I think Michael in the U S.
First of all the duration of our liabilities.
As to two years roughly.
So it remains fairly short tail given the makeup of the portfolio and keep in mind.
The areas, where we felt the distribution of outcomes from a claims point of view or the.
Probably the probability distribution of outcome from a claims point of view, where it was too wide.
We exited.
<unk>.
Healthcare.
Architects and engineer and public entity more recently.
Special cases on their own from an inflation point of view, we're out of these segments, which I think really helps the <unk>.
We'll file in the liability profile of our portfolio.
Great. Thanks, guys that's helpful.
Step back and kind of higher level longer term question.
One of the things we're seeing a lot more of a day then I think we have in awhile in personal auto.
As.
The car manufacturers kind of taken their toes back ended up being an insurance company began either format off the companies or wanted to get a slice of that business.
How do you see that for you guys is that an opportunity for you to kind of do some coronary or is that more of a threat. Maybe for you and then maybe think about for the industry as well.
Yes.
I think thats.
Our thesis for the last decade, Michael is that.
Disruption.
In the personal line space will.
We will come at the distribution level.
And that can come from manufacturers that can come from other forms of distribution.
Et cetera, we haven't seen a ton of that but that's what we've been preparing for and transforming the business.
To still still grow in an environment that is disrupted.
Ah.
And so investments in brands investment in building relationship with customer digital investment et cetera et cetera.
<unk> has been has been our focus now.
Oems.
Ben.
Manufacturing or distributing the product before pulled out came in pulled out.
It is a threat no doubt about it it's not new.
Hard to be an insurance manufacturer.
What we're watching for is the role they can play in distribution.
Obviously is this an unfortunate <unk> potentially.
But frankly, our own perspective as proximity to customers from a strategic point of view is very very important.
And that's what we're focused on at this stage, but obviously.
We're open to all are fortunate these but our strong strategic bias as proximity to customers.
Yes. Thank you that makes sense I think thats what were seeing here too is it's more of a distribution play.
You said, it's hard to be.
Yeah.
Carrier.
That's more of a getting trying to get in front of the customer ahead, so more of a distribution play.
Yes. Thank you I appreciate it that's okay.
Yes.
Yes.
Your next question comes from Paul Holden CIBC. Please go ahead.
Good morning.
Alright.
A couple questions on <unk>.
Look for commercial.
Okay.
That you still have a fairly positive outlook on premium growth.
From a customer perspective, one is.
At what age we'll have higher interest rates.
That rate momentum.
Turning to exploration.
At what stage.
At the moment.
The impact that rate momentum and that's right.
All related and would you expect the sensitivity to those factors to be different between.
Yes.
Okay.
So Paul.
We have achieved.
A portion of your question there is something with the Lions.
Your line. So maybe you can put yourself on mute.
Yes.
Okay.
Sure his perspective on the rating environment in commercial lines.
Yeah.
Go ahead, Derek Thanks, Joe.
You look at the the market conditions are cross sell various franchises today, whether it be North America UK or in Europe .
The market conditions are very very consistent with past quarters.
So how would I describe these market conditions has not changed we continue to see <unk>.
And the alpha single digit and tight capacity.
Obviously, as we've talked before about inflation concerns whether it be both physical and social inflation.
Together with the ongoing impact of climate change as signaled by the reinsurance markets.
I continue to expect that all of our CLO markets across our different geographies. We will continue to operate for some time as they currently do today.
<unk>, namely upper single digits, right and tight capacity as I mentioned before in my response to Michael I mean, obviously as while inflation is evident we do have the benefit on the property side of indexation offsetting that so together with that plus our rights.
And our ongoing profitability actions, we definitely see that we have confidence in our commercial lines portfolios to continue to operate in the low nineties all better. So I guess Paul's question in the line was cutting Paul but part of it was with interest rates going up.
You change in any way.
Outlook, maybe you can share your perspective on that.
I think we've talked in past quarters about the impact of rising interest rates, obviously, we don't have.
Significant turnover within the portfolio such that it has a significant impact.
US more for the market.
I think I think the pressure point from both inflation and changing went up I think very much outweighs any potential tailwind you could get from an interest rates and I think that's the overarching theme that you see in the industry today, and I think youll see in the industry in the foreseeable future.
I think Paul the.
The increase in the yield curve of course in relative terms is significant in absolute terms.
Not a big needle mover to your permissible combined ratio when you price.
At this stage first second point is the interest rates that one would use in calculating the permissible combined ratio tends to be cautious.
General.
I don't see if I look at.
The headwinds that the market is fighting for and the potential upside.
<unk>.
Additional investment income at the industry level.
Given duration given asset mix I don't really see this as a needle mover at least in the next 12 to 24 months.
In terms of market behavior, Paul Levine was cutting I'm afraid we missed the first part of your question. So do you want to.
Try again to ask if there was anything we haven't covered to your question and the answer we've just given.
Sorry, yeah.
No I think you've covered most of it I guess I guess.
Last part was if you would expect there to be any difference in the sensitivity between general and specialty.
<unk>.
Oh.
Yeah, Darrin, you're your thought process there.
Yes, I think you've got to look at the specialty lines in terms of the different makeup of the portfolio. Obviously, we've got a lot of diversification within the portfolio from.
From short tail to long tail to casualty too to property between lines.
Sensitive to economic cycle versus.
Insurance cycle, So I think it's difficult to make broad brush comments generally on the in the ESL space simply because of the makeup of everyones portfolio is quite different.
Having said that do I see dramatic impact impact between retail commercial and sell in terms of the impact of rising rates no I don't I think both markets.
<unk>, the same sort of headwinds and pressures and I would expect them to operate accordingly.
I would.
See there and that when I look at our specialty lines portfolio, you probably have two elements of it which have a slightly different behavior than the rest of the market accident is one area sure. It is the other area of the risk is different these are two very profitable.
Segments, but otherwise I think directionally speaking, we are seeing the same same thing.
A broader distribution of outcomes around upper single digit low teens definitely depending on the line, but in aggregate I agree with you I think directionally, it's pretty much in the same ballpark.
Alright, thanks, Thanks for the answers right.
Your next question comes from Tom Mackinnon of BMO capital markets. Please go ahead.
Tom.
Hey, Charles Thanks for taking my question good morning.
With back to Canadian personal auto again here.
The guidance now is you want to run sub 95%.
Level for the next 12 months.
Your previous guidance was you were going to be at the low end of the mid nineties target range for the year. So.
I mean this is just word play but is there any.
Is there any difference in terms of these two statements and how much.
Reserve development is in this guidance because the current levels had been running higher than we've seen in the past for personal auto.
Yes.
It's not just word play I think it's us saying look.
Historically, we've guided to mid <unk> right and then in the last couple of years, we said or last 18 months have forget we saw.
Said look we'll be running at the lower end of the mid nineties and it's very much what youre seeing 91 four and.
In the first half this year and personal automobile.
There is lots of moving pieces here I think we're saying look we'll run this sub 95, when we look at <unk>.
<unk> months out and we.
Mapped out our best guess of trends in some of the actions we're taking in some of the caution we have we're saying hey.
We'll run that business sub 95 in the next 12 months and so there's an added degree of caution maybe in the guidance, but youre not in two different zone then.
Where we were three months ago.
But <unk> in there.
Yes.
Yes, I think thats when we when we think about.
T y D here.
Yes, I mean, there is an expectation of.
<unk>.
And our guidance definitely.
Maybe what would that be.
One to two points.
One three.
Okay.
Because it's been running a little bit higher than that just the blades.
I guess youre not going to run at the same kind of levels.
And so what you're suggesting yes Patrick.
Yes.
The reason was higher is that actually linked to what we discussed about the fact that the 40%.
Long tail right now we don't see the inflation. So we as we close these claims we can see more favorable <unk>.
Doesn't mean that it will be all of the ways like that if it comes back with a bit of inflation in that line would be in the 1% to 3% if it doesn't develop who might be a bit higher yes. That's it and that's why I think we're seeing sub 95%.
<unk>.
Giving ourselves a bit of room.
Here, but we feel pretty good about what we're seeing now and as I said.
You've got reforms.
Played an important role in keeping stability there as well it's not for me, it's not flat I think it's a different sort of.
Outcome.
But then we've been cautious throughout the pandemic and reserving for long tail lines and so far so good.
It sounds good and then as a follow up.
Maybe a question for Louis.
The tax rate, 20% kind of better than what we were looking for.
Your bigger global company right now Theres always.
Tax advantages and disadvantages associated with that how should we be looking at.
Our modeling your overall operating tax rate going forward.
And we've been suggesting to stick in the 'twenty one 'twenty two range overall, I think what I see as a benefit right now is a bit more recovery of losses in the U K business that are not recognized on our balance sheet and thats for two quarters Thats taken maybe a point off the tax rate.
So.
What was 'twenty, one 'twenty two might be 2021, right now in terms of expectations.
It doesn't change drastically, but there is a bit of a positive.
<unk> with the ability to recover losses in the UK faster than.
Have you anticipated.
And you see that ability to recover those losses extending through to 2023.
Yes.
Alright. Thanks.
Your next question comes from Nigel <unk> with Zelman of Veritas investments. Please go ahead.
Thank you good morning, I wanted to circle back to <unk>.
Personnel auto and your comments on whats driving on your losses.
If I look at that 60%.
Component non related to physical injury you mentioned.
Inflationary pressures of low to mid teens.
So assuming.
Assuming a 40% stays relatively stable that implies growth rate on the loss side of about mid to high single digits.
Combine that with your expectations for premium growth in the mid single digits.
That would imply you get some upward pressure on your combined ratio of about one percentage point each quarter. So I can understand being sub 95.
Over the next 12 months, but if those trends continue, especially if you couple it with.
Higher claims frequency does that imply that.
After 12 months, you could see that combined ratio hit or exceed 95.
No.
Think that.
Youre seeing in Q2.
Eight ish percent driven by physical damage.
Frequency is below.
Where it's been historically keep that in mind.
Rates in sum insured are going to 9% based on what's embedded in the system.
By year end.
And then there is the upside of claims supply chain management and risk selection initiatives, we've talked about.
And.
The prudence in our reserving.
Is anticipating already on the balance sheet some.
Some inflation, so when I put all that together.
I am pretty comfortable we'll operate that business sub 95 in the next 12 months.
There is there is lots of action in the pipeline here that can withstand deterioration and what we're seeing in Q2 in fact.
Okay, but would it be fair to say that you'd be closer to 95 then.
90 at the end of <unk>.
12 months from now.
So it was up to 95, then 90 I mean, we're we'll be sub 95, we might be.
Yes, it closer as anything above 92, five we're getting.
Pretty tight then I don't want.
Get into too specific guidance, because there's lots of moving pieces here, but we're not planning.
For a world with <unk>.
Our risk of going beyond 95 here okay.
Okay and just last question for me when I look at your comments on inflation last quarter.
You had a pretty muted outlook for premium growth you Didnt really point to any outsized inflationary pressures in that three months later, you are seeing or at least highlighting substantial inflation.
Outside of the physical injury component, so just trying to get a sense of how what's your confidence.
<unk> may not.
Apprise again to the upside.
Three months from now and cost could run higher than what you're currently anticipating.
I think we were guiding.
Last quarter.
With regards to the industry's direction.
Pretty consistent with what were guiding this quarter.
You look at the outlook in auto for the past 24 months, we've also been saying that we expected the industry's behavior.
To pick up on inflationary trends that we've been on for for a number of years not a big change there I think that the inflation.
In Q1 was five.
It's eight <unk>.
In.
In Q2, this gives us greater confidence and we're seeing in the market that the market will.
We'll react and I think that.
We're happy growing in auto by the way, we have probably not growing at the speed of the market because our rates were more.
Cautious I think the market will gradually reflect these trends we have been on it for a longer period of time, and we're happy with that Theres not a major there's not a big change in perspective here in terms of where things are going.
And what we're what we're observing in the field.
Got it that's it for me thank you.
Thanks.
Okay.
Okay.
Ladies and gentlemen that is all the time, we have a quick question for today.
I will turn the conference back to your hosts for closing remarks. Thank you.
Thanks, everyone for joining us today following the call a telephone replay will be available for one week and the webcast will be archived on our website for one year. A transcript will also be available on our website in the financial reports and filings section as a reminder, we will also be holding hosting our investor day on Thursday September 20.
Second in Toronto with presentations by senior executives starting at nine a M.
Visit our website for further details.
Our third quarter 2022 results are scheduled to be released after market close on Tuesday November eight with the <unk>.
Earnings call starting at 11 a M eastern.
Wednesday November 9th Thank you again, and this concludes our call for today.
Thank you.
Yes.
Ladies and gentlemen, this does conclude your conference call for today, we would like to thank everyone for participating and ask you to please disconnect your lines.
[music].