Q1 2022 Intact Financial Corp Earnings Call

Good morning, ladies and gentlemen, and welcome to the <unk> Financial Corp, Q1, 2022 results conference call at this time all lines at listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call required immediate assistance. Please press star zero for the operator.

This call is being recorded on Wednesday May 11 2022.

I would now like to turn the conference over to Sue <unk>, Vice President Investor Relations. Please go ahead Sir.

Thank you and US good morning, everyone and thank you for joining the call today.

Link to our live webcast and published information for this call is posted on our website at <unk> Dot 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 me today, we have CEO , Charles <unk>, our CFO Louis Marcotte.

Does the Belgium are our senior Vice President of personal lines, Patrick Barbeau Executive Vice President and Chief Operating Officer, Darren Godfrey Executive Vice President Global specialty lines and Ken Anderson.

Vice President and CFO .

We will begin with prepared remarks, followed by Q&A with that I'll turn it over to Charles.

Thanks, <unk> good morning, everyone and thank you very much for joining us today.

Our society gradually emerges from the pandemic other global challenges are coming into sharper focus.

The humanitarian crisis caused by the war in Ukraine, as exacerbated global macroeconomic conditions supply chains remain disrupted while labor markets continued to be tight.

Central banks are responding to inflationary pressures with higher interest rates.

Economic growth is poised to slow.

And another quarter of elevated cat losses, certainly underscores the reality of climate change.

But regardless of the environment, we continue to be there for our customers.

I think our teams are doing a tremendous job in integrating our largest ever acquisition.

And both the strategic and financial strength of our business are stronger than ever before.

The resilience of impact was again evident in our quarterly results.

Last night, we announced first quarter net operating income per share of $2 70.

13% increase over Q1 last year.

Driven both by the accretion from RSC and strong growth in our distribution business.

Top line growth of 86% this quarter.

It was driven by the <unk> acquisition as well as robust organic growth of 8%.

In large part driven by the strength of our commercial lines platform.

Across all operations.

The overall combined ratio was 91, 7% with strong performances in all segments, especially after taking into account nearly four points.

Of cats, and the fact that Q1 tends to be a high season.

When it comes to weather.

Let's now look at our results by line of business, starting with Canada, and personal auto premiums increased 37% year over year, mostly driven by RSA and the impact of pandemic relief provided last year.

Organic growth continued to be muted as driving activity remains below pre pandemic levels.

The combined ratio of 93% wasn't in line with our expectations.

Reflecting typical first quarter seasonality.

Overall, our personal auto business is very solid thanks to the profitability actions, we took prior to the pandemic.

And I continue to expect it to deliver at the low end of our mid Ninety's target range. This year.

Looking at the industry, a gradual pickup in claims frequencies in inflation.

Driving insurers to slowly resume rate actions as we anticipated.

We expect premium growth to remain muted in the near term.

In personal property premiums grew 38% again, driven by Drs acquisition as well that's five points of organic growth on the back of a firm market conditions.

Despite six points of cats, the combined ratio of 87, 6% was very strong.

<unk> solid growth in earned rates.

Whether continuing to support firm market and given our industry, leading supply chain capabilities. This business is very well positioned.

While we've averaged sub <unk> performance over the last five years, we of course remain vigilant about volatility and natural disasters.

We're committed to operating personal prop at a sub 95 combined ratio even when losses are elevated.

In commercial lines pre.

Premiums grew 36%, which included 13 points of organic growth.

At 88, 5% the combined ratio remained robust reflecting strong rate actions in a hard market, we expect market conditions to remain favorable due to elevated cat losses.

<unk> pressures and rising reinsurance costs.

Our commercial lines business is well placed to sustain low ninety's or even better performance in.

In the long run.

Moving now to our U K business, which delivered a combined ratio of 98, 9%, despite a particularly heavy cat quarter in the U K and personal lines severe windstorms in February drove nearly 14 points of cat losses for the quarter.

Normalized for extreme weather the combined ratio was in the high <unk> in line with Q1 expectations.

Momentum in our pet insurance business continues to be solid.

Market conditions remain quite competitive in both home and motor in part due to the UK pricing reforms that went into effect at the beginning of the year, we've maintained pricing discipline given the market backdrop as we're detriment to see improved performance in this segment.

We're supplanting we're supplementing this discipline by applying our core competencies in risk selection.

Hi.

In commercial lines performance continues to be very strong with a combined ratio of 90% driven by our pricing actions and the hard market conditions, we're continuing to optimize our footprint prior to seeing the strong regions and specialty businesses.

Overall, you can <unk> business is in a good position we're focused on building out performance and then turn to share more details on our road map in the coming months, including at our next Investor Day on September 20 <unk>.

Our U S commercial business is growing at 19% driven by hard market conditions policy growth and new products.

The combined ratio.

It was very strong at 86, 8% improving nearly 10 points from the prior year quarter, which itself was impacted by the headline grabbing Texas winter storms.

During the quarter, we decided to exit the U S public entities space.

As the operating environment is fundamentally changed in recent years.

However, the remaining lines in our U S portfolio are very healthy and we are well positioned to deliver sustainable low <unk> performance or better as we remain focused on portfolio quality, while market fundamentals remain quite compelling.

Turning to the RSC acquisition, which is closing on its one year anniversary next month.

The integration is very much on track in Canada policy conversion in the broker channel continues to progress very well.

Proximately, 50% of policies have converted to <unk> systems, so far.

Good traction with our broker and affinity partners and our retention levels are largely in line with expectations.

We've also made significant strides in our efforts to optimize our footprint in the past few weeks, we closed on the sale of quota in Denmark for close to four times book value.

We announced the sale of RSA is middle East business and took steps to reduce our earthquake exposure by approximately 40% which includes.

Winding down the CNS operation of RSA, Canada.

In addition to RSC integration, our teams are making significant progress on other strategic priorities.

We executed on several initiatives during the quarter the transform our competitive advantages and expand our leadership position right here in Canada.

We launched a fourth generation usage based insurance program for customers in Ontario, and Quebec, and modernized our broker portal and on the distribution side broker link again was active on the M&A front <unk>.

Competing for more acquisitions, including its largest ever transaction.

BARDA.

Last month, we also released our five part climate strategy, taking the next big stride towards a more sustainable future first we've made a firm commitment to achieve net zero emissions by 2050 with an interim target of halving emissions across our global operations by <unk>.

30 <unk>.

Second we are doubling down on helping society adapt to extreme weather impacts of climate change.

Been very active on the adaptation front for over a decade, and we think we need to do more this includes investing 8 million and a new partnership with the nature Conservancy of Canada to conserve wetlands and.

In addition to increasing our support for the intact centre on climate adaptation.

<unk>.

We will incentivize green behavior by our customers create green products and source green materials within our supply chain.

<unk> will enable the transformation of existing industries and support the creation of new ones in building, a sustainable future through products services as well as <unk>.

Investments.

And finally, we'll calibrate closely as we've done in the past with governments to accelerate climate action building on our track record of sharing our expertise in climate change.

Overall, we're off to a strong start in 2022 with a lot of momentum across all the businesses organic premium growth is in the high single digits. <unk> is up 13% book value is up 32% year over year and we produced an operating.

Ro.

More than 16% for the last 12 months.

We've achieved this despite an unprecedented period of upheaval.

And the world around us thanks, mostly to our people.

Over the past five years, we've compounded noise at 20% a year and beat the industry ROE by 670 basis points on average that is close to 700 basis points.

With a robust balance sheet, a strong momentum in our business and the RSC integration very much on track, we are well positioned to meet our financial objectives. In the years ahead with that I'll turn the call over to our CFO Louis Marcotte.

Thanks, Charles and good morning, everyone.

Before I get into our results for the quarter, Let me comment on our position in the face of global macroeconomic and geopolitical uncertainty.

We have little or no direct exposure to Russia, or Ukraine, whether in our insurance operations or in our investment portfolio.

We are monitoring inflation trends closely.

And we are well placed to manage changes given our current rate position, our prudence in reserves and our ability to leverage a well integrated supply chain.

<unk> book value exposure to rising interest rates is limited as our claims liabilities are discounted and offset most of the interest rate risk on the asset side.

Finally, our investment portfolio was slightly underweight equities and our capital margin provides a substantial buffer against the ongoing volatility in capital markets.

That being said our operating performance continues to be solid underwriting income grew 33% over Q1 last year, driven by RSA and with strong performances across the business.

The overall combined ratio for the quarter was 91, 7% to four points higher than last year due to elevated cat losses.

Favorable prior year Reserve development was strong at four 7% of net earned premiums slightly below last year and in part driven by reduced uncertainty around claims patterns during the pandemic.

While <unk> is typically higher in Q1 compared to the rest of the year. We continue to expect that it will be favorable and in the 1% to 3% range annually, though at the upper end of the range in the short term.

Net investment income increased 45% in the quarter largely driven by the addition of <unk> investment portfolio.

For the full year, we expect investment income to grow approximately $135 million compared to 2021.

Any increases in interest rates from current levels would represent additional upside to our expectations.

Distribution income grew a solid 48% in the quarter driven mainly by variable commission revenues and growth in our onside home restoration business for the full year, we still expect distribution income to surpass $400 million supported by continued momentum in the business and growth.

Of onsite earnings future acquisitions would be incremental to these expectations.

Let's now turn to our underwriting results.

Personal auto the underlying loss ratio increased four five points on higher claims frequency from increased driving activity.

And more severe winter conditions.

So up from the prior year frequency remains below pre pandemic levels.

We remain vigilant on claim severity, even though the impact of inflation continues to be relatively muted so far.

In personal property. The 87, 6% combined ratio was solid despite six points of cats. In addition to relatively mild non cat weather our profitability actions over time continue to drive robust performance in this business.

In commercial lines. The combined ratio was very strong at 88, 5%, thanks to our profitability actions and hard market conditions. We saw strong prior year development again this year not too far from historical averages. Overall. This line is performing very well, particularly in a seasonally adverse.

<unk> quarter.

The overall expense ratio in Canada improved two six points compared to last year. This was driven by RSA as a higher mix of direct distribution business and lower commission expenses from last year's elevated level. We expect the expense ratio for the full year to be roughly a point higher than the Q1 level.

In our U S business.

Q1, combined ratio was very strong at 86, 8%.

Underlying performance was certainly robust. This also reflected our exit from the public entities business with.

With robust topline momentum and strong profitability levels in the remaining lines. We are confident that the U S business can operate in the low <unk> range sustainably.

Turning to the UK and I underwriting performance in the first quarter was ahead of our expectations at 92% normalizing for excess cats.

In personal lines, the FCA price reforms that went into effect at the start of the year resulted in particularly competitive conditions in the home and motor markets.

<unk> topline growth in the quarter.

We will we will maintain our pricing discipline and track inflation closely to support pricing adequacy.

In commercial lines, the combined ratio of 90% was strong despite eight points of cats, most of which was offset by favorable <unk> for large losses.

On the RSA acquisition I am pleased that we are delivering on both our strategic and financial objectives.

On the sale of code in Denmark, we will record a gain of approximately $400 million in our second quarter financial results.

Most of the $1 2 billion in proceeds as already gone towards paying down debt and reducing the debt to total capital ratio to our 20% target.

On the sale of our Middle East business. This business has been moved to exited lines, but it is not material to our overall financial results.

We secured 125 million in run rate synergies at the end of the quarter up from $85 million at year end. The increase was driven by an acceleration of claims internalization and real estate synergies. We are on course to achieve the $250 million target inside our 36 month timeline. This.

Glued anticipated loss ratio improvements from pricing and risk selection.

Finally, we delivered 12% accretion in Q1 and for the 10 months since the RSC acquisition closed exceeding our high single digit target for the first 12 months.

We are very confident that we will achieve upper teens accretion in the first 36 months overall, the IRR of the RSA transaction is expected to exceed 20%.

Moving to the balance sheet, we ended the quarter in a strong financial position with a total capital margin of $2 6 billion. Despite the redemption of tier one notes in the UK and adverse market movements, which reduced our margin by approximately $300 million in the quarter.

Last quarter, we launched a share buyback program in light of our financial position and the anticipated proceeds from the sale of Kodak.

So far this year up until today, we have now repurchased over 200000 shares.

For a total consideration of approximately $40 million should the need arise we have the ability to fully fund buybacks up to the approved amount under our current program.

The strength of our results over the past year has led to an operating ROE of 16, 6% and book value per share grew 32% year over year with the RSA integration on track strong momentum across our businesses and a robust balance sheet, we are well positioned to capture the opportunities in front of us and continued.

Delivering mid teens operating Roe.

We remain firmly focused on executing our strategic priorities and then driving outperformance this year and beyond.

With that I'll give it back to sugar.

Thank you Louis.

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 receive a follow ups. So on us we're ready to take questions now.

Thank you Mr Khan, ladies and gentlemen, we will now conduct the question and answer session. If you'd like to ask a question Press Star then the number one on your telephone keypad that you'd like to withdraw your question Press Star two.

On a speaker phone please lift the handset before pressing any keys.

Please for your first question. Your first question comes from Paul Holden with CIBC. Please go ahead.

Thank you good morning, good morning.

Charles.

Charles on your in your prepared remarks referred to perhaps Nu.

Economic headwinds or at least the potential for <unk>.

I guess, what I wanted to ask as we think about the strong organic growth youre, putting up across multiple geographies to what extent might that come at risk. If these do these economic headwinds to materialize.

I think Paul.

If you look back in time.

The overall performance of the organization, including its growth.

As not been overly sensitive to the economic environment.

I mean.

There is the insurance cycles that overly economic environment.

The fact that we're quick to price what we are seeing the fact that we're outperforming is meant that overtime the aggregate performance and the growth of the organization has not been overly.

Overly correlated to the environment in which we're operating there is lots of growth opportunities in the markets, where we're operating now.

Either as a function of the state of the market as you can see for instance in the U S. As you can see.

In commercial lines, and then you have a number of elements in the toolbox, Paul such as new products new presence.

In parts of the UK, where I think there are growth opportunities as well as specialty lines. So.

I think the point I was making is that despite the headwind you can clearly see resilience and in periods of turbulence I would say that we're sort of on the front foot trying to capture the opportunities in the marketplace, we need to be on top of inflation, which I think we are.

But there is a lot of organic growth a fortunate. These in my mind, even if we saw.

GDP contracting would be my my perspective keep in mind. Some insureds are going up. These are a portion of these for us and I think risk is going up globally as well and I think that these are also.

Fortunate for us risk is booming, but risk is our business. So I think growth is not something we're concerned about and the earnings momentum is very clear in the results. This morning.

Thank you for that.

Question is related to personal property and you can I.

Obviously impacting the quarter from Cat losses, and then you have these reforms taking place I guess, what I'm curious about is there anything in the reforms.

Good.

Your ability to reprice that product.

Over time in light of Cat losses.

No.

Not at all in fact, if there is one thing.

I'd say that what I love about the UK market in personal lines is your ability to react very quickly.

Pricing is much greater than it is in the Canadian context. So.

The team is certainly on the front foot.

In the UK pricing for inflation and on a monthly basis would a fair bit of rigor. We spent a fair bit of time on that and rolling out.

The new segmentation tools this fall and this spring again, it's actually from.

From a regulatory point of view.

The move that the regulators have done is a good one which is to make sure that your levels of prices between new business and renewal are largely in line, which makes complete sense to us.

But in terms of your ability to price up or down or in terms of expanding your segmentation. It's much easier to do in the U K than it is in the Canadian marketplace actually.

That's great. Thank you I'll leave it there thanks.

Okay.

Thank you. Your next question comes from James <unk> with National Bank Financial. Please go ahead.

Yes. Thanks.

I guess I'll start in <unk>.

Personal auto and.

It looks at where it appears that inflation risks that we're seeing in the U S. Still remain muted here in Canada, and so I'm not looking for an explanation again of the structural differences in Canada versus the U S to get a good job last quarter.

But is there anything that.

That has shifted or changed incrementally in that in any of the drivers of inflation from from from the Q4 conference call to today.

Okay.

Thanks.

Jamie I mean inflation is clearly something we're on top of and we've been on top of inflation for a number of years.

And maybe Patrick not that many changes a few changes will put the spotlight on that I think it towards while going over the key elements of the product in Canada, I think it's worth talking about the difference with the U S. Because.

People ask the question still even though we've talked about it last quarter as you say.

And then maybe it's worthwhile spending a bit of time on what we're actually doing about it and practice and there have been and Patrick can share their perspective, but.

Patrick why don't you share your perspective.

Thanks, Tim for the question.

Just briefly mentioning the breakdown of the cuts in auto 40% is coming from injuries liabilities, 30% from <unk>.

Total losses, including theft.

Which is about 5% and then to 30% of car repairs. So the total severity in Q1 was just under 5% you'll remember it was 4% in Q4, so a bit of an uptick there, but no real change in the main.

Indicators of inflation that 40% of injuries and liabilities still shows no increase in severity same as Q4, if I look at.

Total losses, the repair part of the total.

Loss outside of theft same as Q4, so yes, an increase in the market value of cars, but we still see that fully offset by the.

Recoveries, we get from salvage.

<unk> is on the rise same in Q1 as in Q4. It creates one of one point of total increase in severity.

All of that the remainder is coming from the 30% of car repairs.

If I look at labor the cost of parts.

The <unk> increase in Q1 at the same level as in Q4, So no change there. The one additional thing we've seen is longer delays to get OEM parts and thats created a bit of an uptick on on the cost of rentals, while the cars aren't being repaired and.

And this is what has created that close to one point of additional uptick.

In Q1, but all the other indicators are still in line with what we discussed in prior quarters. This is fully reflected in our pricing and we are.

Some key competitive advantages in the supply chain that we pushed forward.

To mitigate the impact on our costs.

Does that then maybe.

A bit of an update on what we're doing from pricing risk selection point of view.

Two.

Make the most of this environment.

Yes. So in terms of pricing, we are reacting quickly to inflation and make sure. It's reflected in our pricing as we did in the past a few years ago. When we adjusted our rates to account for the new technologies and card that we're increasing <unk> per cut so we're really close to that.

Steam and really disciplined to react in our pricing to adjust for inflation.

So I think we are well positioned from a pricing point of view in terms of risks.

Thanks, Shannon and underwriting actions, we're putting in place some measures that are specific to new trends, we see and I think test is a good example of this so as a as an example, we've put in place a program to pay for installation of some tracking device.

I risk vehicles and target area, so that would improve the customer and insurance outcomes even if.

Is an increasing factories, so on both fronts pricing and underwriting I think we are well positioned to database information and we're ready to react to react if inflation were to accelerate yes, no I think it would see.

Very good point.

It's important to keep in mind that.

We've been cautious from a reserving point of view.

As well.

So we're keeping an eye on that there are big differences with the U S and I think some are indeed structural Jamie some though are driven by.

Our competitive advantages and the and the supply chain, we've talked in the past about injuries being a difference.

The fact that we sell salvage.

The other big difference is that if you go back to.

How we think about claims and our role in society. We are there to get people back on track and what it means in practice is that we are managing 100% of the claims ourselves we're using.

Our supply chain, we're not.

A quick to do a cash settlement, we much rather get people back.

On track and take care of the repairs and I think that's a massive difference.

How we operate and the rest of the industry and the U S, which is probably in the 50% range in terms of.

Of cash settlement.

Patrick maybe just a few points on what we're doing from a supply chain management too.

To mitigate.

The inflation pressure that others might be seeing.

You mentioned that.

The fact that we don't have a ton of cash settlements that's all.

How's us to leverage really are relying network. So 70% of all the car repairs that we are doing are done through our preferred network, which means that we get visibility on their capacity, we get involved in the supply of parts and <unk>.

And get a better outcome from a cost perspective as well as.

Our customer service.

Aspect.

We also leverage AI and data we have been doing that within claims for many years and in periods.

Like this it means that we have deployed models to the Frontlines and claims that allowed them to take much better decisions on on declaring a car total loss or repairing yet and where to guide our clients in the process minimizing costs like storage rental and towing.

As important.

Yes, you mentioned the salvage recoveries.

This is due to the fact as well that we use more recycled parts in Canada and the U S. Partly because of that lower use of cash settlements and that is structural in nature. We've seen it very much correlated to the increase in the market values of cars that we have observed in the past few quarters. So we we think this is.

Oh.

Really structural within our business.

Thanks.

Okay. Thank you for the comprehensive answer there.

My second question.

<unk> is is on the capital code and proceeds are now in.

In your back pocket.

1.15 billion.

And then there is also the capital margin of $2 6 billion.

I was wondering if you could.

It gives a bit of color on how much dry powder, you would say you have today and the.

And the ability and resources, both financially and from a management team perspective too.

To execute transactions.

Sure. So on the proceeds of $1 2 billion has been received and more than our back pocket. It's in our bank accounts and we've already used it to repay debt as we suggested in earlier quarters. So of the one point too we had targeted 600 to bring us back to 2% to 20% debt to total cap so that.

Was executed we also redeemed a tier one note that was outstanding in the U K in the quarter for a net cost of around $300 million there and the remainder is available. So that's 300 and then of the two six capital margin. We estimate that there is probably two to 300 here that has that is available.

For deployment. So the two together you are in the $600 million range and then once you play all the debt reductions and what remains in terms of debt capacity should we want to do a transaction or deploy capital, we think theres a $1 billion of capacity that we've basically created with the.

The application of the proceeds so that takes us in the 1516 range to come back to way.

<unk> ratio that we typically see on a on a transaction so that's a bit.

Where we are on capital.

Yes, I think Jamie.

Going to management capacity to deploy capital and then create value deploying it.

I would say there is no doubt.

That the.

Louis Gagnon and his team in Canada is very much focused for the next.

Four five months.

Two.

Complete the integration of the RSC business, that's the first point.

And then if you look at distribution, both in Canada and in the U S. There's a lot of bandwidth to deploy capital in distribution today and we're doing it.

Then if you look at Mike <unk>.

In global specialty lines, but in particular in the U S.

The performance of the U S business.

Is excellent from my point of view.

The rigor and the improvement in sophistication.

And pricing.

Is excellent we've shown outperformance in the U S and I would say we are ready and we have the bandwidth to deploy capital should we find.

Hey, good up fortunate team.

In the U S and so I'd say right now in terms of capital deployment. There's a good degree of readiness readiness and a number of areas and I would say four five months from now.

Broadly speaking the North American platform will be ready to step up if there's a good opportunity that presents itself pretty much anywhere we operate.

Thank you very much.

Okay.

Thank you. Your next question comes from Geoff Kwan with RBC capital markets. Please go ahead.

Hi, Good morning, just wanted to start on the U K personal side, you talked about being disciplined in this kind of thing I guess it dude premium growth would you need to see to be more active underwriting new business and also are you seeing any attrition.

In that segment from customers switching to competitors, if they are being maybe a little bit more aggressive on rate.

Yeah.

Thanks, Jeff I'll ask.

Tend to give a bit of a perspective, and then I'll share I guess, what we need to see to be more on the front foot in the U K.

Sure So I mean.

As we know the reform.

Came into effect on Jan first impacting both home and motor.

From a motor perspective, which is about 1% of overall IFC premium.

Seen the market lower rates in 2021, and hence the reform on Jan first we've seen about.

<unk> mid single digit market decrease.

But given the inflation pressures, we would expect there to be some catch up on rates and the remainder of 2022 and <unk>.

And home insurance.

Less than 5% of IFC volume.

There, we have a profitable back book, which we're aiming to protect and we're taking moderate rate reductions on renewals, there and of course, raising new business rates.

We're seeing good retention on the whole and albeit slightly down compared to the pre reform levels, which we expected.

So to get a gauge I guess on 2022.

P&I personal lines topline I think a good starting point is what we reported for Q3 and Q4 and 2021 times to now remember we've exited the middle East and which represents about 8% of the UK and so we need to remove SaaS sedan.

That base.

We would see the reform impacting by about four points on topline in personal lines in the U K on a full year basis.

The approach we've been taking.

It's been very much focused on pricing discipline and pricing adequacy. So therefore in terms of margin as the reforms are playing out we don't see we see a negligible impact on underwriting profits.

Ken and Jeff.

There's three things I want to see before we can be on the front foot.

And growing the UK personal lines portfolio. The first one is I wanted to make sure that the inflation is actually fully baked in in our price position in all the lines of business in which we operate.

Pretty confident it is the case, but as you know in the U K the inflation.

Is changing somewhat greater clip than in the rest of the world.

The second thing I want to see.

Is.

Advancing further.

Exercise, whereby we're rationalizing the footprint and where we play in personal lines.

And the third thing and the most important one.

To be able to grow in that market.

Is that we up our game from a risk selection point of view.

And we've deployed a number of things in the field last fall we've taken advantage of the reforms to deploy a few improvements in risk selection got a big agenda on that in 2022, but for me until.

I am convinced that the science is in the field and we're not.

At risk of being selected against will be very cautious in growing that portfolio.

Thanks, that's helpful and just my second question, which is.

You talked about in the quarter.

Looking to reduce earthquake exposure in part one gate in CNS and in the U S exiting the public candidates.

Are there other business lines that you are looking at either Rehabbing right now or things that might be moving on to a watch list.

So I.

I would say that if.

If I start with the U S.

There's not that many areas in the U S. At the moment, where I would say there is a red flag quite frankly, and I think public entities was.

What's at the top of the list and we've shut it down in the quarter.

All the other lines of business are sustainable profitable and in that position.

Ralph.

I think the Canadian platform.

Broadly speaking is an excellent.

<unk> as well.

Our focus is very much on UK personal lines at the moment and making sure that the relationships we have with distributors.

Economically sound for us as a firm and our position in the tree product lines as I've mentioned.

On a footing, where we think we can earn.

A reasonable return on the capital we're putting in the UK what are we paid for that capital or not in the acquisition is a secondary debate thats not so much about what our financially it makes sense, it's far more about strategically does it make sense and I would say that's our number one area of focus at the moment.

But there is not that.

That many hotspots I mean, theres strong strong momentum across the platform. I think you are quite involved with me in and trying to pre identify so to speak where things can go wrong, what else would you add.

No I think it's really within the lines of business that remains in the UK and I focusing on.

Distribution models and agreements that we feel we can get the upside from our actions and pricing and segmentation. So.

I think yes.

Yes, I don't see anything else no thats it.

A very high degree of strong performance across the platform.

Okay, great. Thank you.

Thank you. Your next question comes from Tom Mackinnon with BMO. Please go ahead.

Yes.

And thanks for taking my questions.

Let's start with the expense ratio I think the guide here is for 2022 overall to be one point and tire than what we see in first quarter of 2022.

But what about if we look forward to 2023, presumably you get a few more synergies coming in.

Would we look at 2023 as being probably flat at best compared to 2020.

Two in terms of the expense ratio.

Or.

Would it be higher.

As a result of possibly higher commissions or something like that so any color on that is appreciated.

So on the commissions front.

That goes higher I would assume it would be with variable commissions driven by better underwriting results. So there would be sort of an offset here at this point that's not the.

The premise I would work with.

Would say Directionally I would expect an improvement.

Don't be silly, a huge move only needle mover.

But directionally I would expect.

Move downwards, but would I put half a point there maybe.

Not necessarily more keep in mind, we are reinvesting in technology.

So this is what we haven't fully.

Determine those plans for next year, but directionally clearly, we want to harvest the synergies and leverage the size of the group and the scale to it.

Do you see the ratio, yes, and I think the on synergies, we just talked about $125 million run rate, which is half of what.

We.

<unk> talked about when we close the deal there is a fair bit of tailwind on this front I would say in synergies our metro realizing a bit sooner than what.

We anticipated and so I certainly feel good about that and it's definitely a tailwind for the expense ratio overtime.

Some of them already in the loss ratio as well so it's not the full amount that is expenses, but it is a tailwind and I think we're in good shape there.

Okay. Thanks.

If I look in Canada personal auto the underlying loss ratio up about five points year over year now we've got certainly different market here in terms of degree of which we're in a pandemic but.

To what degree is the seasonality in the first quarter of 2022 worse I mean, it seemed to be a tougher winter.

For driving did that play into it as well and then.

As a follow on on that one if you look at your <unk>.

Lower end of mid nineties for the year in personal auto.

How much <unk> is in that and what would make that thing that number higher or lower than you would have anticipated.

And any thoughts on 2023 as well so.

You could tackle that one please that's great.

Yes, why don't you take a shot at that and then I'll give a perspective on <unk>.

Perfect.

Looking at Q1 person on the line underlying.

This ratio Youre right I think we need to remember is that looking at the absolute number Q1 is a quarter, where we see unfavorable seasonality in personal auto due to winter time, So thats looking at the overall number and of course, when comparing to last year combined ratio and we see a bit doesn't increase it's driven by.

An increase in frequency mainly from two drivers there. The first one is you mentioned the winter weather was a bit higher than expectation this year versus last year investors historical level as well as EBITDA has increased driving and due to the pandemic versus the last quarter. So those are the two main.

Drivers of the increase year over year and on top of it Q1 is it binary that is unfavorable from a seasonality point of view.

And let me just take T Y D and I'll talk about <unk> for auto, but I'll talk about <unk> more broadly.

Yes, because there is a tendency sometimes to exclude <unk> and then talk about the rest of the results and I think we have to be careful.

To do that quite frankly, because for me <unk> is a complement to current accident year and let me explain.

What I mean by that if you are in a period, whereby there was a fair bit of dislocation.

So this locations would include.

Shifts in profiled because of M&A would include reforms are would include other big events such as pandemic.

Inflation and other trends.

Tom you are in that curious if you'll understand that.

When there are swings you actually take a cautious approach and the cautious approach you take starts with the current accident year.

Youll play it more cautiously in booking the ABR for the current accident year.

And you'll definitely keep an eye on the prior accident year as well now when you see a year, where there's more prior accident year than there was in the past you can implicitly assume.

That the last time you book the current accident year, you were cautious and if youre still in a period of dislocation like we are now that we're also cautious from a current accident to your point of view I do think it's tricky to strip the <unk> D&C. The underlying current accident year is deteriorating because quite frankly those too.

Things are part of the same.

Equation and I would said the moment.

We're cautious because there are many moving pieces.

There is a fair bit of dislocation that caution turned out to play in our favor.

In the past year, certainly my expectation is that it will likely be the case in the in the near to midterm as well and so I would be careful I guess to strip those two things I certainly look at our results with two things I look at current accident year and <unk> together and then I read.

Focus on rate adequacy, and Thats kind of how we're managing the business as opposed to stripping at <unk> I think it's important to understand so if you look at auto specifically.

At least when I look at auto.

Q1 last year, you had a couple of points of <unk>.

This time around you have four ish points of <unk>.

<unk>.

Yes.

I would say it is a reflection of what we've talked about in the past independent make that were lots of moving pieces.

As Patrick mentioned earlier, 40% of the.

<unk> cost equation is injuries.

So we took a fairly cautious.

Cautious stance on injuries and I think that this is sort of what.

We're seeing now in the system and we're very much still in.

That position, we're also cautious on.

On inflation.

And so all else being equal.

I do expect the healthy level of <unk> in that segment.

In the near to midterm and that's why we're guiding towards the upper end of our overall range.

Certainly.

In the near to mid term.

You mean do you mean, when you said upper upper end I thought you said the lower end of the mid nineties.

None of the sorry, the upper <unk> range and the lower end of our mid nineties.

And what accident years was this <unk>.

Applicable to was it largely just last year or was it any kind of prior years there were some in the commercial lines too so.

Anything to add to that.

It's pretty much spread.

Tom.

Clearly the most recent years are always the most influential on your <unk>.

Because this is where you go from greater uncertainty to certainty faster because there are more recent but I don't know Patrick.

In auto in particular, it's mostly the two years of Covid. The prudence that we've taken there there was a bit of pre reforms that we had some reforms.

In Canada in both Ontario, and Alberta, there was a bit of pre reforms, but it's mainly the.

The development of the patterns of the claims during the two years that makes us a bit.

Gave us.

Positive or favorable development, but.

But in commercial so we have very strong opioid in commercial for two years in a row historically commercial has been a strong <unk> busy.

Business were slightly above historical averages, but I don't think theres something specific or specifically to point to why it's elevated.

We're sort of expecting <unk> share there.

It's been two good years here and I think to connect the pandemic environment has helped.

But.

I think that's right I mean, if you look at commercial lines in Canada.

We've been cautious on the current accident year, because theres been a lot of things happening in the past few years.

And so far so good the other thing is we've seen growth in specialty lines in Canada small segments with not as much credibility as the main lines of business. So clearly again took a cautious stance from a reserving point of view and I think.

That it's materializing in <unk> now so I certainly don't see this as noise, Tom when I look at the quarter or the performance of the organization right now for me, it's part of the underlying performance.

Great. Thanks for the detail.

Thank you.

Thank you. Your next question comes from Doug Young with Desjardin capital markets. Please go ahead.

Hi, Good morning, just on Canadian personal auto and property.

Just back to inflation can you quantify what you've built into your reserves and pricing related to inflation and where I'm going with this is I do understand the preferred body shop and preferred provider angle, but I also understand that these preferred shops are pushing through quite significant price increases.

And so I'm just curious as what youre seeing on that front and how often do those agreements come up is.

Is it every year that these are repriced or.

If you can give a little color with that as well.

So.

Doug it's important to understand that the inflation is taking place in the short tail lines at this stage so while we're cautious in our reserves.

This is not so much a reserving issue in the case of <unk>.

Short tail lines, and what's going on in the body shops, but that take why don't you share a bit of color with Doug.

On supply chain, yes, well.

Doug.

We price for.

Prospectively for the next 12 months, so not only is our pricing, reflecting the current observation on inflation, but also a cautious approach on where we could see additional points of pressure from a labor perspective, we have seen about two points increase versus what we would normally see.

I look at the past two years body shops labor rates have increased by about two points every year two to three points in the last two to three years and it's up about five at the moment.

These agreements are are.

Or looked at on a regular basis.

In the preferred network.

We work.

Closely with the shops to find efficiency opportunities concentration with tower volumes and we'll look at it.

Overall together. This is why it is a significant advantage for us we have many of these firms that are actually concentrated with just intact volume. So we have that good visibility on on how they operate the points of pressure D C.

We also have good capacity so if if.

Frequency was going back up.

We've seen the states, we don't expect we would face capacity pressures that we've seen in many parts of the world.

Given.

Our approach with our preferred network if that helps.

No. It does so this isn't really a reserving issue, it's more of a pricing and it doesn't seem like you're overly concerned in okay.

Thank you.

Go ahead, Doug go ahead Jos No no go ahead.

I think youre right.

Do you have.

I'd, rather hear what you have to say that what I have to say so.

Well no I think in the supply chain Doug.

Doug I mean their service and there is inflation right in service is really important.

And the sort of deals we have into making sure that our customers are ahead of the queue.

Ensure that we have access to capacity.

<unk>.

And those two things.

Are really important to keep cost in check beyond and above the deals we have on cost per seat and yes. We have deals that will get repriced over time, we have a fair bit of leverage on buying automobile parts.

And as such.

We do have a niche, but it's not just about pricing its about the speed at which repairs gets done the speed at which our customers are back on the road and that's that's a big element of our advantage and it's important element of the cost equation.

As well.

I mean, you've talked about being able to reach through to the client.

Saving the body shops on paint Pos and Unrepaired cost is that something that's unique to intact, that's giving you a bit of an advantage relative to peers because of the volume that you do.

I think that.

<unk>.

I'm not sure what peers actually is but let's pass beyond that point I think people have different.

Strategies that are far more fragmented than ours, I think ours is wall to wall and we've been working on it for 20 years.

And the good thing with supply chain management is that it's not super intellectual, it's just really hard to do and you need to keep at it for decades. If you want this to actually make a difference. The other thing is that it certainly help when your two to five times bigger than the next player in the marketplace and then when you are.

The intelligence in the field.

And you use that data to to help customers find the best body shop, and so I think that's a real massive advantage actually we're not the only one who have a supply chain management strategy, but I would.

Stack, our supply chain management strategy against the best insurers in the world.

And would not be embarrassed because in fact, we've done that a few times. So one additional data point that I would point to is in Canada. If we look at our cycle time, and we have some benchmarks that we can look at in terms of average time of rental for example, and it's a full week better than the average in Canada because of the combination of <unk>.

Factors, we just mentioned so our point Doug is that if youre not insured with US maybe you should look into it.

[laughter].

Second question, just on the U K and personal.

Personal lines had a negative <unk> <unk>. It was small, but we're not you didn't necessarily seen this with with intact and so I'm. Just curious is there is there is a particular issue that you foresee is this something that was unique to this quarter or is there something that you're trying to address there.

I think it's a quarter specific issue Ken will give you the perspective on that yes, again, we've talked a lot about the inflation I think it was.

A bit of prudence taken in the first quarter.

In the prior year provisioning.

In relation to inflation, which was about five points that was largely offset with regular favorable <unk> that came through which is why youre seeing.

A small.

Less than a point overall adverse <unk> in.

In the quarter, that's exactly right and then you could say well how can this be substantial given inflation really impacts our material in short tail and it's one type of property claim that is longer term.

In the UK.

Subsidiary guidance subsidence still have to work on the pronunciation, but we understand it anyways.

That's a one shot I think.

Perfect great. Thank you.

Thank you.

Your next question comes from Brian Meredith with UBS. Please go ahead.

Yes. Thank you a couple of them here for you first one just curious if I look at the Canadian commercial lines segment.

Underlying loss ratio up on a year over year basis, and I know you explained it is frequency driven I'm. Just curious if you could dive into a little more what exactly that was because I would have thought given the favorable market conditions. We've had for a long time, even with maybe a little bit adverse frequency you still see improvement on a year over year basis.

Yes.

Yes, Thanks, Brian I think if I look at the current accident year I would probably highlight three things for you.

First of all on frequency.

When you think about Q1 of 2000 21 billion at the sort of the bottom.

Off the curve from a frequency standpoint, so as driving gets back to closer towards pre pandemic levels.

We got a lift in frequency there, however, I would say, though that that lift in frequency.

And it's coming from smaller claims.

And again, that's obviously the opposite of what we sold is frequency was going down and change the mix of claims as well too. So we're seeing some of that reverse will take place.

Tougher winter in.

In Q1 of this year versus loss loss would be the second point and then thirdly.

A little bit of noise I would say in the quarter due to some large loss activity no underlying trends concerns.

Just noise in the quarter.

I think as shelter before you got to be careful to disconnect the current and the prior.

And when I look at the business today now again Q1 is a tougher call.

From a seasonality standpoint.

Overall performance of the portfolio that we see in Q1.

He is quite reflective of our view.

The current performance of that portfolio moving forward, so yes, a bit of deterioration in the current accident year, we've still got strong rates, earning through the portfolio but.

But I think when you look at the complete picture here that.

And that sort of operating performance is very indicative of where we see this portfolio moving forward yes.

Yes, so a portion of that Brian .

Is auto, but if you look at.

At.

On the <unk>.

<unk> side of things, we're seeing rates north of almost 10% still.

Running so we feel pretty good about that line.

That's great.

My next question Charles I'm, just curious if I think about coming into the pandemic, you're really well positioned in the personal auto space with respect to your you need to take rate versus your competition and obviously the pandemic kind of.

Put that in a different position now.

I guess my question is as we look forward here do you think you are still in that kind of relative good position from a rate perspective, so that we could eventually start to see market share gains and the reason I ask is also look at your policies in force the last couple of quarters It declined sequentially.

Sequentially and not sure if thats due to the RSA or competitive condition. So maybe a little bit on just what's going on in the personal auto business from a growth perspective.

I'll ask bill to share her perspective from a top line point of view in auto.

And come back on broader market trends up towards go ahead Ben.

So in terms of the growth in personal auto and.

And Shannon is still all in very very strong so our customer are staying with us and the challenge in growing the unit counts right now is really driven by new businesses and it's really because people are shipping much less than in the past few years.

Our rates have been tempered by the release measure in the market as well as the decrease in new cars that are sold.

This is really putting pressure on quotes.

Because even if you're well positioned from a rate perspective to attract new business. These days.

In terms of our pricing position, we still feel we are well positioned in their market place. Then the question is how can we put actions in place to attract more customers to come with us.

Yeah, and I think that Brian something that might have.

Clouded the unit count as our exit from British Columbia and personal automobile.

Last year, yes.

Yeah.

Great and we exited British Columbia, because the government.

Is the main insurer and they don't leave much room for choice or private capital.

Makes sense and then the competitive positioning of Youre, saying youre still in a pretty good spot. So eventually it will start to see that the market share has kind of come back.

Yes, I think so.

Great.

Thank you. The result of time that we have for questions I will now turn the call to Mr Khan.

Yes.

Thanks, and thanks, everyone for joining us today following the call a telephone replay will be available for one week.

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Thank you again and this concludes our call for today.

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Okay.