Q3 2022 Intact Financial Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the intact Financial Corporation Q3 2022 results.
During the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for a question.
Anyone has any difficulties during the conference. Please press star zero for the operator at any time I would like to remind everyone that this call is being recorded on Wednesday November nine 2022.
I would now like to turn the conference over tissue Buckhorn, Vice President of Investor Relations. Please go ahead.
Thank you Joanna and 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 on 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 our CEO Charles has been to Mark.
CFO Lee mascot, I think bubble executive Vice President and Chief operating Officer, Darren Godfrey Executive Vice President Global specialty lines, and Ken Anderson Executive Vice President and CFO .
We will begin with prepared remarks, followed by Q&A.
I will turn the call to trials.
Okay.
Good morning, everyone and thank you for joining us today.
In late September Hurricanes, Fiona and yen caused widespread devastation.
In Atlantic, Canada, and the Southern U S.
We acted quickly and decisively.
Fiona the strongest hurricane in Canadian history deserved a robust response, given our deep presence India planet.
We've mobilized beyond our people in the region.
Over 100 distribution and claims staff and other parts of Canada to ensure service remains very strong as we come to help our customers.
Drone operators were brought in from Western Canada for damage appraisal.
Onside added one is red stuff to their local team to help with emergency repairs.
Overall, we are better equipped than ever before to deliver on our purpose to help people businesses and society do well in good times and be resilient in bad times.
Despite severe weather events inflation headwinds and capital markets volatility, we delivered solid results yes.
Yesterday evening, we announced net operating income per share of $2 70 for the third quarter.
Underlying top line growth was 4% after adjusting for the impact of exited lines.
The overall combined ratio was 92, 6%, reflecting cost pressures in personal lines and very strong underwriting performance in commercial and specialty lines.
Let's look at each of our lines of business, starting with Canada.
Personal auto premiums were largely flat year over year.
Les Paul see shopping by customers in a muted rate environment as well as our rate increases ahead of competitors.
On new business volumes.
We expect our competitive position to improve as the market reflects inflation in its pricing.
Our focus on profitability resulted in a combined ratio of 93%.
We achieved this despite 13% claims inflation in the quarter.
This is a testament to our pricing strategy, our supply chain actions, our prudence in our reserving and the fact that frequency remains below historical average.
I'm also encouraged by early signs that inflationary pressures are actually easing.
Car prices were flat to down in September relative to August the <unk>.
Cost of OEM parts were stable quarter over quarter and improved parts availability is reducing gradually repair times, resulting in less upward pressure on rental costs.
As I've said on previous calls we've been proactively managing cost pressures for some time now.
Rates have been moving higher since early Q2 in aggregate written rates and insured values increased close to six points by September .
And this will increase to around nine points by the end of the year.
We expect premium increases to cover the loss cost inflation, we're anticipating.
That's why I very much look at the underlying performance and prior year development in aggregate.
With the actions taken so far.
Expect our personal auto business to run at a sub 95 combined ratio over the next 12 months.
Meanwhile, the environment is evolving as we anticipated.
We expect industry premium growth climb to the mid single digit range due to inflation and changing driving patterns.
In personal property premiums grew 7% against the backdrop of firm market conditions.
And bind ratio of 98, 4% included 16 points of cats.
Mostly due to the impact of Hurricane Fiona.
Whether an inflation are continuing to support rate increases at a high single digit level.
As a result, our expectation continues to be that even in bad times.
This business will operate sub 95 level on a full year basis.
In commercial lines premiums grew 4% strong rate momentum in a hard market was partially upset by lower new business volumes in non specialty lines.
Very healthy combined ratio of 87, 9% reflected continued rate increases and profitability actions.
We expect market conditions to remain favorable due to the elevated cat losses inflation pressures and reinsurance costs as a result, our commercial lines of business remains well placed to sustain low ninety's or better performance.
Moving to our UK business, which delivered a combined ratio of 93, 5%.
In personal lines premiums decreased by 13%, mainly due to the sale of RSA its middle East business.
Combined ratio of 105 five included seven points of reserve strengthening this was primarily for elevated subsidence claims after an unusually dry UK summer as well as inflation pressure.
The underlying performance of this business remains in the high nineties after allowing for seasonality.
We continue to prioritize bottom line performance and are maintaining pricing discipline in a competitive market.
We expect market conditions to begin firming due to inflation. This remains our most difficult marketplace that said, we have less than 8% of our business in this segment.
In commercial lines premium growth was roughly 9%.
After adjusting for the impact of our middle East exit and actions to optimize our delegated business in the U K.
We continue to benefit from hard market conditions, which are supporting high single digit rate increases.
Combined ratio was very strong at 85%, reflecting our continued profitability action.
The business continues to perform well with rates tracking ahead of loss cost trends.
I am pleased with the overall performance of the UK business, but we remain very focused on taking actions required to drive sustainable outperformance in personal lines.
Our U S commercial business once again grew at a double digit pace. Thanks to continued focus on expanding profitable lines and favorable market conditions.
The combined ratio of 95% reflected solid rate increases over the past 12 months.
As well as our exit from the public entities business.
We remain well placed to deliver low ninety's or better performance in the U S.
Turning to our strategic initiatives I am pleased that the RSC integration remains very much on track.
In Canada more than 95% of policies outside of affinity and specialty businesses have been converted to <unk> systems and products.
All RSC claims are now being handled by impact adjustors and increasingly within our supply chain.
Close to 70% of legal files are being handled by the in house legal team.
In addition to driving part of our combined ratio performance. This ensures a consistent customer experience and it's no surprise, therefore that retention levels continue to be consistent with or better than RSA as historical experience.
On the distribution side, we competed six broker acquisitions across the country in Q3.
This helped broker linked surpassed $3 billion of premiums early in the quarter as.
As we said at Investor Day in September .
Our ambition is to grow this business to $5 billion by 2025.
There's a lot of room for us to consolidate in a highly fragmented market through disciplined capital deployment.
And finally, we further enhanced our supply chain capabilities during the quarter. We opened six new partner operated in Tech service centers.
Pending our network to 13 locations.
Increased volume through our growing network of dedicated service centers is reducing cycle times and containing repair costs.
As we set our sights to 2023 and beyond there is really strong momentum right across our business <unk>.
Despite inflation pressures, we've delivered low ninety's under writing performance so far this year.
And growth continues to be solid, particularly in commercial lines.
With a robust balance sheet.
Disciplined underwriting and Drs integration firmly on track, we are well positioned to grow net operating income per share by 10% per year and outperform the industry ROE by at least 500 basis points.
Is that I will turn the call over to our CFO Louis Marcotte.
Thanks, Charles and good morning, everyone.
We reported solid results this quarter with all segments delivering combined ratio was in the low to mid nineties, despite inflationary pressures and significant weather events.
Investment and distribution income remained strong and operating ROE for the last 12 months is 15%.
Given the challenging environment, we are in I'm quite happy with these results.
The overall combined ratio of 92, 6% was one three points higher than last year with improved performances across all of our commercial lines tempered by the impact of weather and inflation on our personal lines results.
Cat losses in the quarter were $229 million, driven largely by Hurricanes, Fiona and Ian.
In aggregate this level of losses is broadly in line with our expectations for the third quarter.
I will provide an update at year end on our annual CAD guidance, taking into consideration the outcome of our January one reinsurance renewals.
Favorable prior year development was broadly unchanged from last year and remains healthy at two 9%. This is in line with our current guidance of 1% to 3% over the long term and towards the upper end of this range in the short term.
Net investment income increased by 21% year over year, reflecting higher yields captured in a rising interest rate environment.
We expect investment income for the full year to be approximately $885 million $20 million higher than our guidance and the prior quarter due to higher yields on our fixed income portfolio.
Distribution income grew 6% to $111 million, which includes a contribution from Highland insurance, our newly acquired U S based <unk> otherwise.
Otherwise growth was somewhat muted due to lower variable commissions relative to last year's elevated levels.
On a full year basis, we expect distribution income for 2022 to be around $435 million, an increase of 20% over last year.
Now, let's turn to our underwriting results starting with Canada.
In personal auto the underlying loss ratio increased by nine six points compared to a very strong 62, 5% last year.
Though up modestly from the prior year frequency remains below pre pandemic levels.
However, we continue to price for higher frequency than we observe today.
Society is still adjusting to new driving patterns.
The significant increase in severity is not a surprise given the inflationary pressures.
A combined ratio of 90, 293% demonstrate that our pricing and claims actions are working.
The results also include close to five points of favorable prior year development.
Which reflects our reserving prudently.
This prudence in our reserving will penalize our current accident year results, which is why it is important to look at our underwriting results in aggregate, including prior year development.
Now given our prudence in pricing and reserving I am confident we will be able to operate this business at sub 95 combined ratio over the next 12 months adjusting for seasonality.
In personal property. The 98, 4% combined ratio reflected 15 six points of cat losses, that's almost five points higher than expected.
The underlying loss ratio increased in the quarter by seven one points compared to a benign Q3 2021, primarily.
Driven by higher weather related losses.
That being said the business has delivered 90 694, 6% year to date with most of the cat season normally being behind us.
Yes, we are on track to perform at a sub 95 for the full year.
In commercial lines. The combined ratio was strong at 87, 9%. Despite two points of cats higher than expected in the quarter, mainly in respect to Erik again Fiona.
While we are seeing inflation in this line of business. This is more than offset by higher rates.
The overall expense ratio in Canada improved by one six points driven mainly by lower variable commissions across all lines of business.
At around 30% year to date the expense ratio was broadly in line with expectations.
Turning now to the U K and I, which delivered an overall result of 93, 5%.
Personal lines combined ratio of 105, 5% reflects what was a challenging quarter for the industry.
Underlying losses were elevated due to a weather related phenomenon in the UK and no one is subsidence.
This is going to occur in certain parts of the country following unusually hot and dry summers.
It can lead to land movements on their homes potentially leading to cracks or other damage to parts of the structure.
Subsidence added around four five points to our Q3 loss ratio.
In addition to this and as expected inflation pressures put around two five points of strain on the results as we moved one update our current year reserves to reflect recent trends.
In commercial lines. The combined ratio was very strong at 85%, reflecting the line large losses in the U K and solid prior year development cat losses of three five points were in line with expectations overall I am pleased with the progress being made on our profitability action plan, which is showing in the results.
In our U S business, the combined ratio was strong at 95%.
This included three points of cat losses, primarily related to hurricane Ian.
The underlying loss ratio improved by two one points as we benefited from a more favorable business mix, including our exit from public entities overall.
Overall, the U S is running in the right zone as we continue to see the benefits of our profitability actions.
Our global specialty lines business is performing well across all regions.
Year to date premiums are up 13% at $4 $2 billion with a combined ratio of 85, 9%.
Such momentum we are confident we have the platform to achieve our ambitions of growing this business to $10 billion in premiums by 2030 and running at a sub 90 combined ratio.
A quick word on the RSA integration I announced at our recent Investor day that we now expect to achieve at least $350 million in annual synergies by mid 2020 for $100 million more than our initial guidance. This reflects a mix of expense synergies additional value created through investment and tax optimization.
As well as the impact of our loss ratio improvement actions.
Our annualized run rate currently stands at around $235 million.
Moving now to the balance sheet. It was another volatile quarter for capital markets as equities suffered further losses and interest rates continue to rise amid global economic uncertainty.
That being said our balance sheet is well positioned to absorb these impacts and our book value per share was down only 2% since last quarter.
This reflects the high quality nature of our portfolio as well as a gradual derisking of our investment portfolio and pension plans in the current environment, we remain underweight equities compared to our long term target asset allocation.
Our total capital margin at Q3 remained strong at $2 $5 billion. This includes capital that will be used to repay in part our U S senior notes of $275 million maturing today.
Our adjusted debt to total capital ratio at quarter end after allowing for the net impact of today's debt repayments is 21% slightly higher than at Q2 <unk>.
And our long term target, but it reflects the impact of recent market movements.
Shortly after quarter end, we further de risked our Canadian pension plans by purchasing annuities in respect of approximately $400 million.
Of liabilities.
We now have annuities covering over one third of our Canadian defined benefit obligations, removing all market and longevity risks from these liabilities.
In the U K pension plans that fared well against fared well during the significant market volatility seen recently.
At Q3, there remains a healthy accounting surplus of close to $900 million.
On our balance sheet the.
The significant increase in interest rates provided an opportunity for us to continue our pension Derisking journey. We are currently evaluating all options, including purchasing annuities.
The strength of our performance over the last 12 months, despite market volatility and elevated cat losses has led to an adjusted ROE of 22, 5%.
When I look at our performance relative to the industry over the first half of 2022 I can see we are well on our way to achieving our outperformance objective of 500 basis points, but the hard work doesn't stop here, we remain focused on continuing to deliver for the remainder of the year and beyond with.
With the teams and the platform we have in place and the resilience of our earnings potential economic headwinds I am confident we can continue to create value for our shareholders.
I'll give it back to Sheila.
Thank you Louis.
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. So Joanna we're ready to take questions now.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone you will hear Watson, Tom front acknowledging your request.
If you are using a speaker phone please lift the handset before pressing any keys.
First question comes from Geoff Kwan with RBC capital markets. Please go ahead.
Hi, guys. Good morning. My first question was just given what's going on with the economic environment and high interest rates high inflation and whatnot.
Yet P&C.
Pretty much most of your business lines are remaining and hard market conditions.
Are you seeing any early signs of things like customers.
<unk> insurance coverages are increasing deductibles to lower premiums or even from regulators in auto pushing back on rate increase request.
Okay.
Jeff Good morning, Thanks for your question.
I would say no we don't see that in fact, what we've observed.
In the past 'twenty.
24 months is a little shopping very strong retention little shopping I think the first thing we're looking for here.
Is is the new business pipeline, driven by traffic and shopping to replenish.
And that's the first sign we're looking for when it comes to coverage at this stage or regulatory behavior.
No change in that regard very strong relationships with regulators. It's fact.
<unk> and.
And I'm not concerned about that at this stage.
Okay and just my second question just the comments you had around auto and the sub 95% combined ratio over the next 12 months just wanted to clarify.
Less than 95% adjusting for seasonality over the entire period or is it also do you expect that for every quarter over that over.
Over that time period, if I can kind of sneak in a related question what kind of what gives you comfort that you can get that sort of combined ratio performance and not have it be like the kind of roughly 100% combined ratios you had back in 2017 2018, when the physical damage with the key issue.
Yeah.
I mean part of the answer Jeff is that we've been trying to tackle inflation in physical damage. Since then and so theres a number of trends that we've been focused on.
In that regard, but to answer your question directly sub 95 is the level at which will operate the business in the coming 12 months.
Seasonality is uneven by quarter I'd point out that the first quarter it tends to be the higher seasonality quarter by roughly four points, but.
Underlying performance in our mind is sub 95.
Why am I confident.
Our pricing position is it's one I think we've been on inflation for a number of quarter our rate.
Segmentation strategy same thing very robust action from a supply chain point of view not only based on the practices that we've had historically from a supply chain management, but also because we've cranked up supply chain management initiatives as you might have picked up.
In our remarks, then I would add the fact that you know.
We've been very cautious.
And reserving in the past, but you know.
For a very long period of time, but in particular in the past two to three years, because there were lots of moving pieces our position relative to the industry is very very clear.
The degree of caution is it's higher than that.
That gives me very good confidence that we will operate in that zone for the foreseeable future now.
Thank you have a.
Very specific lens also on inflation may be you can see what you are seeing these days.
From an inflation point of view and how it feeds into the outlook.
That we've laid out.
Sure and maybe I can give you an update on what created the acceleration during Q3 and Y and some of the things we're saying.
This is a tempering.
In the more recent months, so as you'll recall in prior quarters, we're splitting the claims cost in personal auto in three big categories. This 40% coming from injuries and liability, 30% on car repairs and 30% on total losses, including SaaS on the first 40% of injuries no change from prior.
Waters, we've seen no inflation on that part and Thats one of the main area, where we're prudent in reserving and we continue to do so on the current <unk>.
Accident here.
So no no change on the long tail. The next bucket representing another 30% of the claims cost is repairable.
The rate of inflation in Q3 was similar to Q2 in the mid teens. There are a couple of moving pieces.
In the remarks, we've mentioned the fact that the parts the availability of parts is now better than that.
Allowed us to catch up on delayed repairs. So it reduced the pressure on rental on one side, but how did that a little bit of pressure on labor overall similar rates on that 30%. So the main acceleration we've seen in Q3 actually came from the last 30%, which is the settlement of those.
Losses in this area.
The market values.
We're up significantly in Q3 and reached close to 30% compared to Q3 last year that being said when we look at it month to month September and October we've seen two months in a row of sequential decrease in market values and Canada evidenced both by CPI.
As well as our internal results.
It's very.
Consistent with what we've observed in the U S 95, now five months in a row. So overall no inflation on long tail mid teens on repairs close to 30% on total losses. That's what gives 13% overall in fact in Q3, but the signs of decrease in market values that cuts the parts that are.
<unk> and the availability of parts that is improving suggest that inflation that peaked in Q3, but could remain high for a few more quarters.
Thanks, Patrick and I think Jeff you want to take a holistic picture here its important to keep in mind that frequency.
Still below.
Long term levels and that's why that's also why you're seeing that sort of performance and that reinforces the.
The outlook that we've given.
For auto if you step back.
I mean for me.
There's four things that I'm looking at to capitalize on <unk>.
Because of inflation no inflation is stuff for for everyone I get that I think our job is to make sure that we have.
A good value prop for our customers and then we protect the business, but then turn our eyes towards the fortunate piece that this environment drives I can point just from.
And insurance, so our underwriting point of view towards four things first.
This is driving competitors to move on rates and move closer to our rate position, which should improve.
Our ability to grow the business and we're comfortable growing because quite frankly, if you look at the underwriting performance of the organization I think we want more of that.
Second.
I think that as rate moves you will likely see shopping increase and as our relative market position improve we should be doing well and we should leverage the two best known brands in the Canadian marketplace, which are intact insurance and better third.
Of all.
I expect distribution and come to be very healthy.
<unk> inflation flows true premium and finally I do think that this helps support hard market conditions.
For longer would be my perspective, and these are all factors that in both relative and absolute terms work for us if you move away from the underwriting business.
And the distribution business.
Is fuelling interest rate moving up Youre seeing what it means from a P&L point of view I think has been very clear and this has created derisking opportunities tough environment no doubt about it lots of pressure point, if you generate mid teens operating ROE in this environment.
I think it says a lot about the resilience of the platform.
That's helpful. Great. Thanks Kelly.
Pleasure.
Yeah.
Yeah.
I think there are no more questions.
[laughter].
Okay.
Sure Budd there must be more questions.
There are.
Yeah.
Operator.
Yeah.
Yeah.
Yeah.
Yes.
Operator, we are ready for the next question.
Okay.
Bear with us while we move to the next.
Question.
Okay.
Okay.
Okay.
Yeah.
Jeff are you still on the line.
Yes can you hear me or.
Yes, yeah. Good so we're just looking for the upgrader.
Okay.
Okay.
Jeff If you have a follow up question you can ask them now while we wait for the next.
Color.
Yes.
Okay.
I did have a question on the <unk>, but I don't know if thats going to get too boring.
Yes.
It might be better than those sound at all Jeff.
Okay.
Julien I might ask this question on the call.
Yes, I guess, if there's no questions right now and maybe if I can ask another one just on the subsidence issue or just trying to I guess better understand.
How that kind.
It kind of gets factored in on pricing is it a separate coverage debt.
Policyholders have to pay for and how is the nature of in terms of.
When you get those sort of claims coming in and how significant could those costs be in.
Just trying to think about framing it going forward in terms of.
The expectation of how common decision and the potential impact.
Ken maybe you want to pick this up quickly.
Yes sure.
And in terms of.
And coverage Jeff. This is something that is included as part of home coverage.
Not an optional updated cover and not one.
And that can be removed from a regulatory perspective in <unk>.
Terms of it.
That being common.
I would say.
Comment is Louie outlined it really driven by extremely hot and dry conditions that impact just certain parts of the country in the UK.
And indeed, it was a quite a dry.
Hot summer in the U K this year that leads to that drawing out of the soil.
Which will impact.
On potentially impact on foundations, causing cracks in walls.
And in foundations.
Lee as well.
In terms of average cost.
Looking at between 10, and 20000 pounds on average in terms of claims cost associated with us.
In the meantime.
Sure well I don't know if you if the operator is back but my advice would be to keep the flow going is that the sell side analyst E mail questions to <unk>, and we will repeat the questions and take them on that basis.
Your next question will be from Brian Meredith UBS. Please go ahead.
Yeah.
Can you hear me.
Oh, yes, good morning, Brian .
Yes.
Great what your cyber insurance policy like.
No.
Yes.
So I guess a couple of questions here first I'm, just curious Charles going back to personal auto insurance.
When you talked about the kind of pricing environment, right now and what youre pushing through what is your assumption going forward from a severity perspective, you're assuming that the severities are going to stay at these pretty high elevated levels I mean, youre, saying that inflation is already starting to come down.
Assuming there's going to be a moderation in inflation and perhaps is that one of the reasons youre kind of seeing some elevated underlying loss ratios just because you really hadn't anticipated.
Level of inflation that we were going to see.
Patrick maybe you want to give your perspective on that I don't want to unpack every assumption, we're making in pricing, but to provide a bit of context.
It would be helpful for Brian .
Yes, Brian So I think Q3 was the acceleration in Q3 was higher than what we were anticipating we had seen at the end of Q2, an acceleration starting in the month of June in particular, so we knew it would be likely higher in Q3 than it was in Q2.
I guess, the extra inflation, we've seen compared to our expectation in Q3 was largely offset by.
We were anticipating.
More increase in frequency during the quarter and that's in fact, it is stabilizing pretty much over the last three quarters.
Going forward, there's a couple of things there is the signals we've seen so far on market values that price of OEM, the availability that should reduce.
Reduced quarter over quarter inflation, we get from here, but also as we get into.
Q1, and then into next year this is over.
Inflation will be measured over that.
The period that it accelerated this year as well so when you compare the rates that are flowing through the expectation on some continued increase in frequency and our projection overall, we're confident in the sub 95.
Going forward for the 12 months.
Great. Thank you.
Youre right and I think Brian a couple of points that I would like to make the first thing is the loss cost assumptions reflected in pricing.
Our R&D loss costs. So it's a function of severity, it's one thing.
Frequency is the other thing and then how your mix is actually shifting all of that go into it.
Into the the result and the.
Despite the bump in Q3.
I feel like our pricing assumptions are in very good shape, given the current environment. The second thing I want to point out and I made that point in my remarks.
And I think it's an important point is there is caution when we look at the current accident year.
In other words.
Not reflecting the full benefit of the drop in frequency and long tail lines of business why because we want to be very prudent in relationship with the loss cost in long tail lines of business. So far so good the environment has been quite muted thanks to in part of the.
The work we've been doing on this front, thanks to the announced legal work, but also thanks to the reforms that regulators have put in place in the past few years now.
We're prudent.
That's how we operate it is baked in the current accident year performance. So in my mind.
One should not look at our results ignore <unk>.
Because <unk> is a reflection of the proven prudent we've had in the past few years and and as a result, I think you need to look at both together what you can do what you want but I am certainly looking at the combination of both when I look at the underwriting.
Underlying performance at the moment.
Makes sense and then Charles My second question is.
Given the hard market, we're seeing in commercial insurance.
Specialty and Canadian commercial lines.
Given the level of profitability running guide I'm, a little surprised that your premium growth is as low as it is in Canada and I am assuming some global specialty is going into that I would've thought that you would see double digit premium growth, particularly with the economic activity.
Pricing going on.
Yes.
<unk>.
Darrin will give you a perspective.
Our top line and flow I would say just one thing to keep in mind.
Brian is that we are in year two of an integration and.
And it's normal that in year, two you have a bit of pressure from.
You're the second year of the.
<unk> of the integration, but beyond that let's talk about the market dynamics and then what we're seeing darrin.
Yes, so thanks, Joe So Brian when we look at the top line and I look at it from both the retention and from a new business standpoint.
Retention is holding relatively strong at very high levels, when I look at the impact portfolio roughly around 90%.
Same with on the new business side, our bind ratios remain high even as we continued to adjust rates relative to the market conditions. The bind ratios remain high similar to what we talked about from a personal line standpoint, our unit growth is flat and that's primarily driven through a decrease in completed quotes.
Compared to last year as I said, a bind ratios are holding strong and so it's very much driven by a lower number of submissions and it's roughly 30% lower than pre pandemic levels.
An additional drag I would say in the quarter and this talks to <unk> point about the integration work that we're doing on the RSA portfolio.
Do have a number of profitability actions in play as we integrate the portfolio.
While the the premium retention on the resi portfolio is very consistent with historical levels. It is sort of three to four points lower than what we anticipated when we look at the <unk> portfolio and I would highlight three things that is impacting that retention. One is on the SME portfolio, we are taking.
Some very strong rating action due to underlying profitability challenge. So the retention is taking a bit of a hit there.
As you well know our management of earthquake <unk> has been quite evident across the us and we're applying that same rigor.
To the Midmarket portfolio, and really driving higher earthquake deductibles in BC and then lastly.
We exited.
Quite a large program.
In specialty lines due to some underlying profitability concerns.
Each of those spring those three things is contributing to a little bit of that top line pressure now as shelf said from a commercial line standpoint, we are at the Thailand all of the integrations. So we do expect in the coming quarters that we probably will remain largely rate driven in the short term and then lastly, I would say, even though we have some of these.
Short term pressures, we're really looking to bolster our service levels to make sure that we do capture all the opportunities that are available to us.
And making sure that we stay diligent from a ratings and from our risk selection from a market environment standpoint.
These comments would apply both across all of our geographies market continues to be quite hard, but in commercial and specialty lines.
Keeping pace and maintaining that strong momentum from a rate standpoint, and in fact from a Canadian standpoint, we'll look to see probably rates move a little bit higher in Q4.
Given some of the pressures that we're seeing there so no abatement in terms of the market environment and it's a good market to operate in and we're comfortable in terms of our expectations of low ninety's or better moving forward.
Perfect. Thank you.
Thank you next question will be from James <unk> of National Bank. Please go ahead.
Good morning, good morning.
I wanted to just get a little bit more color on what youre seeing from the reinsurance renewal.
You talked about holding back on cat guidance as a result.
The Jan one renewal season, and just wanted to get a little bit of color or perspective on what youre, what youre seeing what youre thinking perhaps on that.
On rates on capacity.
For Europe , we record here.
Sure well, maybe I'll ask Darren if you once he is very close to the file so that when you want to give you a perspective, yes. Thanks Jamie.
Jamie as you all know as the reinsurance market.
We're already in a hard market environment in the reinsurance and that very much.
Laid out through the first half of this year, primarily driven to the continued reduction in the property cat capacity, obviously reinsurers continue to focus on their own underwriting profitability and ultimately concerns about trends including climate.
Now, obviously hurricane Ian changes that dynamic even further.
We believe that the market will hearten further in one one.
From an <unk> tax standpoint, it's too early to say to properly evaluate what that will mean.
Both in terms of reinsurer appetite pricing and retention impacts however.
We're more than comfortable offsetting any potential increase and or lack of capacity by optimizing our retention and co participation while remaining obviously within our own risk appetite.
However, highlight three things that we think that we're well positioned to navigate through which will be a tough one one renewal first of all our actions in managing our BC earthquake exposures, obviously, including the run off of CNS. So this will reduce our 2023 limit requirements in <unk>.
<unk> greatly.
U S cat limit.
We're the market pressure actually is the greatest at the moment is in the U S and it's relatively small relative to our Canadian and UK European limit requirements and Thats very much evident by also when you look at our exposure to hurricane Ian.
Is quite minimal at best and then lastly, our cat program in its entirety has been quite profitable for reinsurance over the years. Unlike many sequence in a number of other territories I think the the thing to remember here. Though is this just is one of many factors that will continue to drive a hard market.
Well into 2023 and as I talked about on a question now from Brian before gives us very strong momentum on the REIT standpoint into 'twenty three.
Thanks, Darrin and I think Jamie.
<unk> to keep in mind also that ceded premium to direct premium here is roughly 10% and so I feel like.
Our dependence on reinsurance.
In relative terms less than than many of our peers and.
I think given the underlying performance of the business the exposure management, we're looking at this environment.
And looking forward to see what the outcome, but in relative terms, we should do well.
Great. Thank you.
Second question just on the <unk>.
The ROE outlook for the industry and the slides, you're suggesting high single digits for.
For your industry across all geographies weighted average and.
Recent performance has been.
Our outperformance has been in the six 5% plus range on that.
Against the industry, just your perspectives thoughts on <unk>.
Sustaining that 7% outperformance or is it something that we should think of more in the traditional quad 500 basis points range.
Where do you where do you land in your.
Guiding to greater outperformance.
Well we.
I don't know if you want to provide your perspective happy to do it as well, but why don't you start.
Sure. So obviously, we're doing extremely well so far this year.
Performance has been very very strong.
When we look out into the future.
There are opportunities, but there are challenges as well and we do see.
This reversion towards the high high single digit in the overall industry that we try to track.
So obviously, we're we feel confident that 500, we can exceed.
But going.
We're committing much higher than that at this point I think would be would be.
A bit too ambitious honestly so for us maintaining that 500 in the future is really what we're focused on and eliminating all the elements or obstacles that would impede that kind of outperformance is our key focus. So when you hear us talking about some elements of drag on ROE and trying to get them removed.
Really what.
We're focused on and that obviously includes the performance of the business. So I was just to be clear, yes, just to be clear right. We're not changing the guidance on or the objective on our ROE outperformance now keep in mind that.
Prudence in our reserving for.
Our combined ratio up performance point of view has been a headwind.
Yeah.
In the last two years.
And we're entering in a phase of the market.
Where I do expect combined ratio up performance to improve.
If you are ahead of others from a pricing point of view. If you are ahead of others from a reserving point of view I do expect that combined ratio outperformance will improve and that should flow to our outperformance.
Outperformance.
Thank you.
Thank you next question will be from Tom Mackinnon at BMO capital. Please go ahead.
Yes, thanks very much just ask another question on personal auto.
28% of your business that consumes about 95% of the questions.
<unk>.
Just in terms of.
For people, who say that.
I agree with you that we should be looking at the underlying loss ratio and adding back any favorable prior year development.
But for those who say things are going to revert with respect to your personal auto book back to 2018 2019 levels just as we.
As a.
Frequency it gets back to normal I guess.
Yeah.
I look back then you had combined ratios of 198 in personal auto and you had even.
Even if you look at the underlying loss ratio and yet.
Add back any favorable reserve development youre at that numbers like in the $75 76 range.
And now Youre running like lower than that I think youre running at about 65 to 67 over the last couple of quarters and you've got a better combined.
Our ratio so.
What.
What is different between now and 2018 in 2019, and what would you tell investors that are concerned that youre going to move back to.
Where you were in 2018 in 2019 with respect to personal auto underwriting profitability.
Yes, I think Tom the first thing I would say is that if you look at 2018 in 2019.
And like those two or three years.
Post 2016, Youre looking pretty much at.
The worst years of the track record okay.
And.
You will remember at that time these were tough moments from a personal automobile performance point of view because.
In late 2016.
Early 2017.
We realize that there was a steep trend.
In long tail lines of business.
We took at that time, a very sharp turn.
From both a pricing and from a reserving point of view and you'll see that in 2018 for instance.
We shrunk our portfolio by 4% because we move way ahead of the market.
And took corrective measures that's why you've seen.
<unk> seen that very rarely in our history.
A couple of years of adverse development. This was.
A a very rapid reaction to what we were observing.
Thanks.
Changed there I've been reforms there was catch up at that time, we are not pricing at the.
At the upper Ninety's I think we're just looking at two years that.
Were years, where inflation.
Picked up.
That led to reforms and.
Pricing actions et cetera. So I don't think this is a good reference point further we're not pricing at these levels.
Obviously, we're trying to be in the zone that we're operating.
At the moment and therefore, if one wants to take a look at the history I don't think 2018 and 19 as the reference I think 2018 in 2019 to me is the is the exception I would say the prudent you've seen on long tail lines in the past two to three years is precisely to <unk>.
Having to react the way we did in 17 and 18.
Okay. That's good and so you would anticipate that if we were to look at the trend of underlying loss ratio just adding back the <unk>, which is basically coming back to the closer to the loss ratio.
Trend should continue because youre talking about sub 95 over the next 12 months.
Just like you had in the third quarter is so.
Yes, I think if you take an underlying and underlying performance and you make abstraction of the seasonality you might see in Q1.
I'd say that the guidance, we've given which is sub 95.
Which to me 90 trees very much smack.
In that.
We expect to be in that zone for the next 12 months keep in mind there is seasonality in Q1.
Okay and as a follow up question.
There seem to be some elevated other operating expenses in the quarter.
Corporate costs, and others or something like that this numbers seem to be running.
Maybe around 25 or 30 and it was like maybe 45 in the quarter is there some sort of anomaly there that happened in that in the quarter and how should we be thinking about that number going forward.
Why don't you tackle this one.
Yes, I will.
Included in this line in our results now are the central costs. Those are the the cost of group individuals who are managing the entire company. We grouped them together they are not recharged out to all the businesses and I would expect those to run in the 20% to 25 quarterly run rate.
Quarterly run rate basis.
Other than that there are.
Intercompany adjustments that are booked in that line as well, which basically neutralizes intercompany transactions between the underwriting business and the distribution business.
That's purely I will say accounting adjustments, but they do tend to bring a bit of noise. So that line quarter over quarter. So in this specific quarter above the run rate that I just mentioned two elements one is a.
An adjustment for long term compensation, which is driven by the share price and so that's been booked in this quarter.
For about 10 ish million.
Those will happen once in a while and the philosophy behind the behind it for US is the underwriting results should not be penalized. If you want because the share price is actually trading a bit of additional comp expense. So that's one item here and the other one is intercompany eliminations. There isn't there is a bump up around 10 million.
There too.
Sure.
Just timing.
Profit recognition between the underwriting in the distribution business. So I think those are two one is it clearly a one off and the other one is something that neutralizes over the year, but they have increased the amount for this quarter.
Okay. So net net it was probably about 10 or $15 million higher in the quarter than the normal run rate and that.
I don't know six or seven okay. Thanks, so much that's great. Thank.
Thank you.
Thank you next question will be from Paul Holden CIBC. Please go ahead.
Thank you I'll just limit myself to one question on the interest of time.
I'm wondering given all the dislocations we're seeing.
And the bond market, if that's opening up some opportunities to.
To accelerate.
Reinvestment of your portfolio either in the higher yielding sovereign or maybe there are some interesting opportunities with.
With credit spreads blowing out as.
As well so any any.
Any thoughts there would be helpful.
Thanks, Paul.
Last week to share his perspective, but.
I understand the interest uptime is important that being said we've added a coverage gap at the start of this call. So I'm happy to take the questions. So that we have a proper earnings call. So let me why don't you.
Why don't you pick up that question.
Yes, absolutely so of course, there are opportunities with rising rates.
What I would take into consideration here.
The current reinvestment yield is roughly 200 basis points higher than the book yield.
That is something that can be captured if.
If I were to make an assumption here, because we would not turn the entire portfolio.
At once it turns generally over seven or eight years, so I think a reasonable assumption is.
One eighth.
The portfolio turning over and then adding it to the current run rate would be one way to CDI upside. If there are opportunities in here, we're careful between the balance of the non operating impact of gains and losses from selling a bond at a loss.
For more yield.
If we balance that out.
The investment team will try to capture as much as they can and they have been very successful in the past year with capturing some of those yields. So there is upside clearly in investment income going forward.
The conditions were in right now and the gap that 200 basis points gap is very significant it was reversed at the end of last year you might remember so clearly there is still within the investment income.
Fine.
Yes, but I think to be clear Paul.
We're at the bottom end of our risk appetite and we're not reaching out.
For risk in this environment, even though there might be a fortunate piece there I think where we're running the asset side.
Beyond our long term.
It makes policy I think it's important for us to protect the capital margin.
See the Derisking a fortunate these as opposed to reaching for risk on the asset side in this environment.
Got it that's fair that's helpful.
You convince me and ask a second one so quite well.
Just wanted to get a better understanding with the.
Jen.
Premium mix over the last few years.
To what extent, if any let's call it.
Economic sensitivity.
To your business has changed it on sort of throw them surety as an example of a business line that I think it's more pro cyclical and through acquisitions growing in that line.
Maybe address the surety, specifically and if theres any other kind of specialty lines that you would hope.
So similarly characterize.
Paul we're out of time.
Darren.
Darren do you want to take Paul's question.
In terms of mix of business, yes, absolutely. Thanks for the question Paul one of the things that we've done recently is really look back at the recession in 2008 and look to see both how our portfolio performed but also how the industry performed and at that time, we had quite a bit of resilience.
<unk> in our portfolio and if I compare al portfolio today Tabak, then it's even further diversified rare.
Relative to 2009, when we look at topline during the last recession.
It really wasn't a lot of movement either from a retention all from a new business standpoint.
And similar to the Bottomline as well too.
Even with the slower economic activity, we'd really didn't see.
A dramatic shift in terms of bottom line performance, obviously for maturity standpoint.
There's two things that play at the moment, one is very much benefit benefiting from the inflationary environment from a top line standpoint, but obviously from a reserve and in terms of our current loss ratio picks.
Consistent with our other lines of business, we're taking a very prudent position, reflecting a little bit of economic headwinds there as well too. So generally I mean, the team is arguably conservative group.
Both north and south of the border, which is exactly what we want to see in our surety team managing the economics extremely well.
So we're quite comfortable in terms of the position that that portfolio is in obviously looking to take advantage of any opportunities that vial themselves, but continue to be quite prudent in terms of the way we manage our surety book beyond surety not a lot of sort of economic potential headwinds that you got to think through obviously.
Lower economic activity can also turn to lower exposure risk as well too from a casualty standpoint so.
So there are some some pluses and minuses through some economic stresses, but generally the book is well diversified from a geographic standpoint, well diversified from a product mix and short and long tail as well too. So we're quite comfortable moving forward, even if we do feel a little bit of headwind into 2023.
So Paul a couple of points.
Darrin is right I think that from our CLS slash SL point of view.
Very good diversification footprint, but our philosophy and if you were to look under the Hood.
Where.
Pushing the mix changes, where we feel rate adequacy is the greatest that's how we manage the business, we know risk by risk.
The extent of the adequacy of <unk>.
We know the adequacy at the line level.
We manage the business with adequacy in mind at the risk level and Thats, where we are we're focusing to shift the mix within in line of business.
In <unk> I would say same thing I mean, we've been managing.
The mix.
Based on the expected profit per customer that is the number one tool that shifts the mix as opposed to one segment versus another in aggregate.
If you look at the home insurance business, which has been transformed in the last decade. This is where the bulk of the growth has been coming from.
And the performance there has been really strong. So we obviously one more of that in a world where our cost of living is going up.
We have an offer insurance simplified true that our direct that's where I do expect to see outsized growth in this environment because shopping picks up.
There is superbly well position to capitalize on this environment, but bottom line mix for us as one customer at a time and thats driven by expected profitability, which is measured and used in the field as it is embedded in our systems.
Thanks for taking.
Both of my questions I appreciate it.
Thanks, Paul.
Next question will be from Lamar Prasad at core Mark. Please go ahead.
So you mentioned that frequency of personal auto is below long term level.
An update on trends in frequency, how far away from those long term levels and do you think will ever go back to that long term average.
Patrick do you want to give your perspective I think you have your finger on the pulse there maybe share your view.
Sure.
So the driving levels.
I've been quite.
Stable over now two or three quarters compared to pre pandemic, it's pretty much at the pre pandemic level in terms of the amount of driving number of kilometers just slightly below but fairly stable frequency is still below.
That level of <unk>.
When we observe when we look at the behaviors from our telematics tool. We can point to two main things that I think we mentioned to some extent in the past first the amount of driving or how it's distributed overtime. During the week is different than pre pandemic, we have less driving being done during morning Rush.
Our in particular and more spread throughout the day in particular as well more driving during the weekend the other element that might be helping.
The fact that the frequency is lower than the actual driving level.
Within our telematics tool there is two big indicators of potential accidents that we measure one is.
Harsh breaking the other one is fast acceleration, we've seen that both the frequency and intensity of these indicators have gone down since pre pandemic, both during rush hour and outside of rush hours is that.
New norm well it has been quite stable now for a number of months and are in our pricing. We expect that this will probably continue to migrate more towards pre pandemic levels, but we haven't seen much movement.
Over the past six months.
At this point.
And these behaviors.
The stability has been surprising in the past six to nine months, we expected.
More more.
More change, let's just say come September October and we're just not seeing it so.
Taking advantage of that for now.
Great. Thanks, and then my my second question, just sticking with personal auto I think you guys talked about pre.
Premium growth benefiting when policy shopping resumes but.
I also see it in your MD&A here that youre expecting to progress to high single digit rate increases by year end.
As the industry is only going to move up to the mid single digits. So then wouldn't premium growth at intact remained muted under that scenario, where you guys are high single digit increases in the industry with the mid.
Patrick do you want to give your perspective on that.
Yes, well in what we're seeing so far it's really their shopping behaviors.
Our units retention is strong closing ratio on the quotes for receive is actually quite good even if were.
Taking rates at.
Are ahead of the competition, it's really the quote volume.
Is that is low at the moment we.
We think that with the rate increases was just starting to see and even the rates approved and published in some of our markets that will take effect in the coming months. This should increase the shopping behavior. So we will be able to quote.
More of these of these clients, we think that we're very well positioned both from an overall rate level and from a segmentation perspective to be able to capture that opportunity so and on top of it all.
Our own rate increases will we.
Will be favorable to topline.
Yeah, and I think the other phenomenon.
If you unpack how to grow.
Business here is that.
The marketing team basically.
Earlier in 2021 said look there is the traffic and the shopping we're seeing.
Is there a muted and as a result, the cost of driving traffic.
Click and new business is going up in a way, where we recommend slowing down our investments.
Not a function.
I think of what the competitive with T is today, but I think.
As traffic picks up we will increase the marketing machine.
And we think that the combination of that and a better competitive position.
We will translate into into movement from a top line point of view.
Great. Thanks, Thanks for taking my questions.
Next question will be from Mario Mendonca at.
TD Securities. Please go ahead.
Good afternoon, Charles in the past.
Normally the company talks about ROE outperformance in the context of relative.
Relative to the industry do you keep or do you have a sort of absolute number in mind as well I sort of remember you referring to 15% plus in prior years is that still a reasonable number.
I think this says look Mario it's 500 basis points in good time and in that time.
Minimum that's what we're trying to achieve I think we're operating in the zone, where we should be in the mid teens I think that's what we're that's what we're printing at the moment the ROE is even.
Higher than that and frankly, I don't see that being meaningfully different but there is lots of external forces.
Our industry and that's why I think.
Maintaining a relative outperformance guidance is the right approach because I don't want to disappoint next year, because there is an external force that hits everybody. The thing that's important to keep in mind is.
We have shown historically then when there is a lot of headwinds in the industry, we're better positioned to absorb the headwind and we tend to expand the outperformance when you've seen the industry sub mid single digit we were not in the single digit zone, we were in the low.
Teens and for me I don't want to operate.
That zone, even in really really hard time, but I think the sort of.
Mid teens performance in the environment in which we operate is definitely where this business should run.
Let me try let me ask it a slightly different way and I appreciate your comments and I understand them if the company because.
External factors as you say starting to see the ROE drift into the low teens or maybe like 12, or 13% would you try to manage that ROE higher with capital.
Capital decisions like buybacks or something else.
Yes.
Got it.
ROE driven Mario <unk> is not a zone we're comfortable in.
To be you would take that.
Yes definitely.
Okay.
Thank you.
That's all I've got.
Alright. Thanks, Mario. Thank you next question will be from Nigel D'souza at Veritas investment Research. Please go ahead.
Okay.
Hey, Nigel.
Nigel disconnected. Please proceed.
Please proceed with.
Alright.
Thank you very much yes.
Yes. Thank you for 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.
Script will also be available on our website in the financial reports and filings section our 2022 fourth quarter and full year results are scheduled to be results were released after market close on Tuesday February 7th.
The earnings call starting at 11, a M. Eastern time on West on Wednesday February eight. Thank you again and this concludes our call for today.
Thank you. Thank you.
Ladies and gentlemen, this does indeed conclude your conference for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines and joined the rest of your day.
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