Q4 2022 Intact Financial Corp Earnings Call
Speaker 1: Good morning ladies and gentlemen and welcome to the INTACT Financial Corporation Q4 2022 Results Conference Call. At this time, all lines are in a listed only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call, you require immediate assistance.
Speaker 2: please press star zero for the operator. This call is being recorded on February 8, 2023, and I would like to turn the conference over to Shubha Khan, Vice President Investor Relations. Please go ahead. Thank you, CISB. Good morning, everyone, and thank you for joining the call today. A link to our live webcast and published information for this call is posted on our website at intactfc.com under the Investors tab. As usual, before we start, please refer to slide two for cautionary language regarding the use of forward-looking statement, which form part of this morning's remarks. And slide three for a note on the use of non- GAAP financial measures.
Speaker 3: and important notes on adjustments, terms, and definitions used in this presentation. With me today we have our CEO Charles Brindamore, our CFO Louis Marcotte.
Speaker 4: 2022 was an important year in In-Tax journey. This was the first full year following completion of the landmark RS acquisition. And we made big strides towards fully integrating the acquired business. At the same time, we maintain our focus on performance with solid results despite elevated catastrophe losses and inflation pressures. We delivered net operating income per share of $3 and 34 for the fourth quarter and $11 and 88 cents for the full year.
Speaker 5: Excluding strategic exits, premium growth was 5% in the quarter, a point higher than in Q3.
Speaker 6: A sign of momentum building as markets are firm or firming across most lines of business.
Speaker 7: Our results are testament to the resilience of our business. We move into 2023 with positive top and bottom line momentum and a strong balance sheet. This enables us again to raise our quarterly dividend by 10 cents, the 18 consecutive annual increase. Let me now provide a bit of color on the results and outlook by line of business starting right here in Canada.
Speaker 8: In personal property, this business continues to demonstrate great resilience in the face of increasingly frequent and severe weather events.
Speaker 9: The combined ratio was 76.9% in the quarter, 90.1% for the full year, and as averaged sub90 over the last 5 and now 10 years.
Speaker 10: Weather and sharply higher reinsurance costs are driving hard market conditions.
Speaker 11: We expect rating increases to remain in the high single digit range.
Speaker 12: and keep pace with Lost Cause Trends.
Speaker 13: In personal auto, premiums grew 2% year over year, a three-point improvement compared with the third quarter.
Speaker 14: The top line momentum was a function of both our early rate actions.
Speaker 15: as well as firming market conditions.
Speaker 16: Retention levels were strong and the pressure on new business volume moderated.
Speaker 17: We expect that our competitive position will further improve as the market continues to reflect inflation in its pricing.
Speaker 18: Our underwriting discipline resulted in a combined ratio of 95.8% in the quarter.
Speaker 19: This included nearly 1.5 points of adverse seasonal weather as well as 1 point of non-occurring loss adjustment expenses.
Speaker 20: The favorable impact from prior years was solid at 7th point, slightly above what we expected.
Speaker 21: But as I've mentioned before, prudence from the past is paying off, but the current accident here is also prudent.
Speaker 22: So we continue to look at both current and prior years combined when we assess the performance.
Speaker 23: and prior years combined when we assess the performance of this segment.
Speaker 24: There are a number of reasons why we're comfortable with our Sub 95 guidance.
Speaker 25: from a cost perspective.
Speaker 26: from a cost perspective, inflation pressures are easing.
Speaker 27: The increase in claims severity was 11% 2 points lower than in 2-3.
Speaker 28: We expect the deceleration to continue in the coming months.
Speaker 29: Then on the frequency front, the number of accidents continues to be benign relative to pre-pandemic levels, even though it was up from the prior year.
Speaker 30: Our run rate assumes frequency will gradually increase in the coming months.
Speaker 31: And finally, written rates and entered values increased by close to 9 points in aggregate by December .
Speaker 32: While only five points has been earned in 2-4.
So when I look at our starting point and integrate these observations.
I feel strongly about our sub95 trajectory.
And obviously we're comfortable growing in this environment.
Growth continues to be supported by our rate actions in hard market conditions. The combined ratio was solid at 87.9% reflecting our profitability actions over time. Looking at the industry, we see hard market conditions continuing given rising reinsurance costs, elevated cat-level losses, and inflation pressures.
Our business remains well positioned to deliver a sustainable low 90s or better performance.
Moving now to our UKI business, the combined ratio was 104 in the quarter 97 for the full year.
In personal lines, premium decreased by a modest 3% in Q4.
after adjusting for the sale of our Middle Eastern business.
The decrease primarily reflects our continued pricing discipline in a competitive market.
The full year combined ratio of 106.2%
included six points of cats more than anticipated as well as increased subsidence claims following a very dry summer.
Adjusted for elevated weather-related losses, the run rate performance of this business remains in the high 90s despite inflation pressures.
Market conditions have started to firm.
We expect this to continue in 2023 supporting further rate increases.
In commercial lines in that region, underlying premium growth was 9% in the quarter.
after adjusting for business exits.
We continue to benefit from hard market conditions which are supporting high single-digit rate increases.
The full-year combined ratio of 90.4% reflected the underlying strength of the platform.
and preventing market conditions. We expect to operate this business in the low 90s over the next 12 months.
Despite challenges in the fourth quarter, our UK and I business remains on solid footing overall.
At closing, we indicated that it would take approximately two years.
to fully evaluate our propositions across the UK and I portfolio and take the action necessary to drive out performance.
And while that timeline remains, we've already taken significant steps by exiting over $500 million of business with a combined ratio above 110%.
The earnings power of that business is currently improving.
Are you as commercial business that have heard premium growth of 18% in 2022?
excluding the impact of exited lines. This was driven by the high-end acquisition, strong growth and high-performing businesses, and rate increases in hard-market conditions across most lines.
The full year combine ratio was strong at 88.2%.
reflecting our continued profitability actions.
The business continues to perform very well with rates tracking ahead of lost cost trends.
We're well-positioned to deliver sustainable low-90s performance or better in the U.S.
Turning to our strategic initiatives, the RSA integration remains very much on track.
In Canada, policy conversion is progressing well, and retention is tracking in line with RSC's historical experience.
On the digital front, our mobile apps saw over 4.5 million visits by customers in the Fort Quarter.
More than half of all online transactions are now completed.
via our mobile app, which is driving greater UBI uptake and digital engagement.
And finally, we continued to enhance our AI capabilities during the year.
The intact data lab team has grown to over 500 professionals, underscoring our ambition to be the leading AI shop in the insurance world.
To date, the lab has delivered nearly 300 models that have in aggregate yielded almost 100 million of run rate underwriting benefits.
As I said at the outset,
2022 was an important year for Intact. We made excellent progress in integrating RSC and advancing our strategy and the performance was strong despite
year for intact. We made excellent progress in integrating RSC and advancing our strategy and the performance was strong despite heavy headwinds.
This is thanks to the strength and dedication of our people.
And in fact, we're very focused on making sure we have the very best people.
We're working hard to ensure they're proud of what they do.
and feel like they're part of the winning team. And again this year, our efforts are recognized as we were named a Best Employer in Canada for the seventh consecutive year and in the US now for the fourth year running.
Our sites are now firmly on 2023 and beyond. The business overall is operating at a low 90's combined ratio.
and the outlook for investment and distribution income is strong. We're well positioned to deliver again this year on our objectives to grow net operating income per share by 10% and willy over time.
and to outperform the industry are we by 500 basis points every year.
With that, I'll turn the call over to our CFO .
And we met cut.
Thanks Charles and good morning everyone.
While 2022 was the first full year in a largely post-COVID world, our industry has never the less been faced with a number of other challenges.
Inflation and severe weather chief amongst them.
but there was also tight labor markets and capital markets volatility.
In that context, I'm pleased to report solid results for both the quarter and the full year.
The overall combined ratio for Q4 was 91.5%.
despite inflationary pressures and challenging weather conditions in Canada and the UK.
Our Canadian and US businesses delivered sub90 combined ratios, and investment and distribution earnings were strong.
On a full year basis, the combined ratio was solid at 91.6%, further underscoring the strength and resilience of our platform.
Cat losses in the quarter were $167 million, driven largely by windstorms in Canada and severe winter weather in the UK.
This figure is higher than the $143 million estimate we announced in early January , reflecting a number of late claims notifications and higher costs per claim than expected in respect of the UK freeze event.
This takes total cat losses for the year to $826 million above our $600 million expectation.
With these results in mind, we are increasing our annual cat guidance to $700 million.
We expect approximately 70% of losses to occur in Canada and approximately 25% in the UK and I.
Within Canada, approximately two-thirds of losses are expected in personal lines.
The increase to our guidance is driven by a combination of growth and inflation,
higher cap losses, and the impact of reinsurance renewals.
We expect the overall earnings impact to be offset by rate actions.
much of which we have put through last year in anticipation of higher insurance costs.
Favourable prior year development was healthy at 3.8% for both the quarter and the full year largely in line with expectations.
Net investment income increased by 27% in the quarter, reflecting higher yields and higher turnover.
For 2023, we expect investment income to be approximately $1.1 billion as we continue to take advantage of current market rates.
Distribution income was $93 million in the quarter, taking annual earnings to $437 million. This is a 21% increase over last year, reflecting accretive acquisitions, organic growth, and a solid contribution from onside.
Looking ahead to 2023, we expect to grow distribution earnings by at least 10%.
Now let's turn to our underwriting results, starting with Canada.
In personal auto, the combined ratio increased by 8.3 points.
compared to a low 87.5% last year.
Severity increased as expected given inflationary pressures, but these pressures have eased a bit compared to Q3.
Frequency increased year over year by almost five points.
This was due to more driving compared to a partially locked down quarter last year, as well as worse than normal weather.
Prior year development was strong in the quarter at around seven points, reflecting our reserving prudence over the years.
While this is slightly higher than expected, we expect prior year development to remain strong as we continue to reserve cautiously.
Finally, we are seeing the positive impact of our written rates as they are starting to earn through.
The impact will increase further in 2023 with earned rates accelerating from mid to high single digits as they catch up to current written rate levels.
With inflation decelerating, we expect a positive impact on results going forward.
Our guidance remains sub-95 for this business. Keeping in mind, there will be normal seasonality and results, particularly in Q1.
In personal property, another solid quarter with a 76.9% combined ratio.
2.6 points better than last year due to lower cat losses.
The underlying loss ratio increased in a quarter by 3.9 points compared to a benign Q4 2021, primarily driven by higher large losses.
In commercial lines, the combined ratio was solid at 89%, despite six points of CATS in the quarter, which mainly reflected further development of losses from Hurricane Fiona.
Both specialty lines and regular commercial lines contributed to a strong underlying result.
Favourable prior year development was healthy at 3.4% though 3. slower than last year, reflecting the lumpy nature of large claims development.
The overall expense ratio in Canada was 29.7%, around a point lower than last year due to lower variable conditions.
General expenses were up in the quarter, largely due to timing of expenses between quarters and higher variable compensation tied to outperformance.
Turning it now to the UK and I, in personal lines the results include over 20 points of cat losses.
which is 19 points more than expected.
Almost all of these losses related to prolonged subzero temperatures in December , which resulted in burst pipes in thousands of homes across the UK.
In addition, there were a number of non-cat large losses and inflationary pressures continued to weigh on both motor and home.
In commercial lines, the combined ratio was a solid 92.8%, driven by the continued strong performance of our regions and specialty businesses.
At 90.4 for the full year, and with market conditions remaining favorable, this business is well positioned for profitable growth.
In our U.S. segment, the combined ratio was strong at 85.1% with the underlying loss ratio improved by 7.2 points thanks to our profitability actions and favorable market conditions.
Growth in this business is skewed towards our highest performing lines.
which tells me that we have been successful at managing the business mix.
I'm encouraged by what this means for this business going forward and our ability to deliver a sustainable low-90s or better combined ratio.
Looking at our global specialty lines business in aggregate.
Premiums grew by 12% over the year to $5.5 billion, while delivering a combined ratio of 86.2%.
Our US business is not the only one to perform well. Specialty lines in Canada and the UK delivered combined ratios in the 80s.
In 2022, all driven by our continuous effort on profitable growth and outperformance supported by good market conditions.
With regards to the RSA integration, we estimate annual synergies to have hit a run rate of $260 million, and we remain well on track to achieve our revised target of at least $350 million by mid-2024.
We also recorded an additional $58 million of tax recovery is this quarter in the UK, which drove a reduction in the effective tax rate.
The gain is driven by a more positive outlook on profitability in the UK from both underwriting and investment income.
This outlook allows us to recognize more tax loss recoveries from the pool of unrecognized losses which have been accumulated over time by RSA.
There are north of $3 billion of such losses of fall in the UK and Ireland as at December 31st.
We have not reported these recoveries as run rate synergies given their lumpy nature, but they are part of the value created by the acquisition.
We are certainly aiming to capture more of these losses in the future.
With regards to value creation, over the full year, RSA contributed 16% accretion to NOIPS and we're confident of this rising to 20% by 2024.
Overall, the IRR for the transaction remains over 20%.
Moving now to the balance sheet where our financial position continues to be strong despite the macroeconomic environment.
We close a quarter with total capital margin of $2.4 billion and a debt to total capital ratio of 21%.
Book value per share grew 2% quarter over quarter as solid earnings and gains in our investment portfolio more than offset large market market losses in our UK pension plans.
Given our outlook on earnings growth and the strength of our balance sheet, we once again raise our dividends.
This time 10%, which represents a 10-year cager of 10%.
We are also renewing our Shared Buyback program in February on the same terms as the existing program.
While this extends our flexibility to purchase additional shares, we will continue to be disciplined in this regard.
As we wrap up another successful year in a challenging environment, we are already laser-focused on making 2023 even better, including a smooth transition to IFRS 17.
While this will bring a number of changes to our key reporting metrics.
These are mostly geography changes within our results.
And as such, we'll have no significant impact on our net operating earnings over time.
I encourage you to refer to our MDNA, which hopefully provides a helpful summary.
Overall, as we look forward to 2023, there is much to be positive about.
We start the year in a strong position despite recent headwinds.
Our earnings resilience is evident and our balance sheet is strong. With the platform we have in place, a clear roadmap and an opportunistic mindset, I'm confident we will continue to outperform over the next year and beyond.
With that, I'll give it back to Shubha.
Thank you, Luis, 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-cue for follow-ups. So, CZV, we're ready to take questions now. Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch on the phone. You will then hear a three-tone prompt acknowledging your request.
And if you would like to withdraw from the question cue, please press star followed by two. And if using a speaker phone, you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions.
And your first question will be from Paul Holden at CIBC. Please go ahead.
Thank you. So just want to make sure I hear you correctly on personal auto and I don't think your message has changed that much, but the way I'm sort of thinking about 2023 is slowing claims inflation as you've talked about and then accelerating premiums earned the employee's interest in
and maybe sort of a net benefit of something like two to four points.
And then with higher than normal, PYD released higher than your Ford guidance on PYD, maybe being a drag of two to three points next year. So I think about that as a very simple math that basically gets me to a 2023 combined ratio that's roughly flat versus...
2022 like I mean missing anything there is that is that is that kind of what your guidance is pointing to broadly
I think you're reading.
is good Paul and I think that's a good way to unpack the trajectory.
of personal automobile or guidance has not changed. It is sub 95. A less Patrick to give you some color maybe on some of the elements that you have laid out. But I think directly, I would agree with how you analyze that. Go ahead Patrick.
Yeah, I agree totally. If I look at the 958, see a combined ratio of Q4, there was as we said about 2.5 points between...
weather seasonality and the one-time adjustment on expenses.
The PYD was likely hired and expected, but that's under as we said earlier that we...
We don't look in isolation. We had a prudent reserving approach since the beginning of the pandemic because of uncertainty and we continue to do so because there is still uncertainty around where the inflation would go exactly. We've seen very good signs of reduction in inflation, from the 13% in Q3 to 11% in Q4.
Q4 and the drivers of that reduction are as we expected. So on car parts, on market values, we see this...
and this is slowing down. So overall, I think the...
This is very much aligned to maybe...
nuances I would bring is
If you look at the full year, I'm not sure that we expect the PYD to...
go down by two or three points next year necessarily even continue to reserve prudently in the current.
On the other end though, our pricing assumption assumes that there would also be a bit of an increase in price.
in frequency year over year.
given
There was a ramp up in there or your parts of the year and I'll probably assume that it was continued to migrate towards normal even if over the past three quarters it was very flat.
So, overall these two are the slight nuances, but overall...
very much aligned with my car. Yeah, I think PYD.
not too far off I guess from what we're seeing here to date.
in my mind, you know, provided frequency in the past does not start.
that are re-raising obviously, but they're actually right, Paul. Thanks for the question. Good read.
Okay, thank you for that. And then second question is related to the UK and I business. I guess the personal lines in particular, you know, 121 combined ratio for the quarter, 106 for the year. I think even it's in your commentary to exclude tax losses, it's still kind of generating a
below target combined ratio.
Is there anything structurally related to the regulatory pricing reforms or otherwise that would prevent you from?
rectifying that situation, bring it down more into the target zone. And if no, maybe you can give us some more specifics on what exactly the action plan is to produce a better combined ratio in UK personal life. And I'm talking, I guess I'm talking mostly just one of these specifics on the property side more than more than I know.
into the target zone. And if no, maybe you can give us some more specifics on what exactly the action plan is to produce a better combined ratio in UK personal life. And I'm talking, I guess I'm talking mostly, just want to be specific on the property side more than, more than, no. OK.
Good question, Paul. I think if you strip excessive cat urine, the upper 90s and purse lines, you know, if I put all purse lines together, that's not good enough, obviously. Our work is not done.
And you know, I'd point to three areas of improvement. One is rates.
And I'd point to three areas of improvement. One is rates. So rates are flowing through the system.
Two, very important.
Pricing risk selection sophistication.
And three.
making sure we're playing in the right part of the market.
And there, our work is certainly not done on these elements. And as I've mentioned,
Within 24 months of closing, we'll finalize where the footprint is, but we're not done. Ken, who is in the UK, can give you additional perspective? Yeah, no very much aligned with that. You know, the 2023 overall combined at 106, as you say.
You know, there's about six points of elevated cast in there. There's also about two points of subsidence claims in the home market. So you just for those two you are indeed in that upper 90s zone. And we continue to hold the line on rates to deal with the inflation. The markets in the early part of 22 was.
slope to move. We've started to see some signs in the fourth quarter of rates picking up. But we, you know, there's more rates needed in the market in 23. That's clear. We're certainly pushing that. That may bring pressure on units and with the cost base that we have. So all in.
That upper 90 zone is kind of the zone of performance that we see in the near term. And then the actions that Charles mentioned are indeed the ones that are being pushed, you know, tilting that portfolio towards the direct and away from the partnerships where the economics don't stack up.
the pricing sophistication, bringing some of the intact capabilities and deploying them in the UK market and then also in terms of technology and increasing...
digital and technology footprint on the home and pet business in particular in the latter part of 20...
Thanks, Ken. And then a month of your question, Paul, was are there rigour to reconstruct to bring improvement in the portfolio? And I would say UK market is really tough. But one thing that is good in my mind is you can turn on a dime when it comes to pricing, either in...
and the amount of price you're taking in terms of risk at risk of addiction.
The UK trust competitive behavior, in fact more so than the Canadian regulatory system. So when it comes to pricing and risk selection, no barriers to improvement.
That's helpful. Thank you for your time.
Thank you for your time. Welcome.
Next question will be from Jeff Kwan at RBC Capital Markets. Please go ahead.
question. Hi. Good morning. I just wanted to clarify. I think was Ken's comment because my question was going to be like in the UK personal line space like what? He would be a success or would be good results in terms of Combined online support this is just
from Ken's comments. It sounded like upper 90s in the near term. Is kind of the goal is that correct or did I get that incorrect?
Well, upper 90s is not the goal. I think upper 90s is what you can expect to see in 2023 because pricing risk selection takes some time. The work we're doing in claims will take some time and we're not going to run an upper 90s business in the UK per slides.
absolutely not. But in 2023, we're in the second year of the integration that's maybe what one can expect given inflation, given the state of the market.
Absolutely, the commitments to mid-90s performance in the mid to longer term is very much the aim of the 2023.
performance in the mid to longer term is very much the aim of the 2023.
Right, okay, now that's where I was talking about the 2023, not your actual mark in terms of goal. And my second question is going back on auto in terms of the claims inflation from Louis Comments. The improvement Q4 versus Q3, was that the rate of inflation was coming down or are we actually seeing some of the actual claims costs? So? I'm engineer and from Durfield, I am doing financial fluctuation a little bit about the bucks college it is.
actually net net reducing? And then also, is there any comments on are the same trends playing out so far in Q1?
So, Q3 year on year was 13.
Q4 year on year is 11. I'll let Patrick provide some color.
Yeah, Jeff, as we mentioned in prior quarters, if I break it down, there's 40% of the costs that's coming from liability and injuries, 30% on car repairs, and 30% on total losses including.
Deft, uninterasoned liability no change from prior quarters, we see no inflation year on year on that, so that's no change between Q.
on a repairable losses, the car parts themselves have been flat.
between Q3 and Q4, but they've been more available, so we've seen a little bit of easing on the pressure on rental costs or repairables.
But no increase between Q3 and Q4 in parts, which is an improvement from the trends we were saying before.
On the total losses, the market value has flattened as well.
indices are the index of market value, which is the main driver of the custom total losses.
is also flat between Q3 and Q4 with slight reduction last time.
So that's very aligned with what we've seen in the US. And because the domain, and it turns out, is higher when we compare the Iran year, that has created about five points reduction in...
aligned with what was seen in the US. And because the domain, and it turns out, is higher when we compare the year on year, that has created about five points reduction in the inflation rate.
into four versus Q3 and that's the main cause of the reduction. These two items when you look at availability of parts.
The car parts prices themselves being flat and the index of market value starting to slow down are good signs that this will continue in the same direction coming forward.
And I think that Rick, you know, Jeff was trying to figure out what happened in Q1. We've had a chance to take a look at January , even though it's a few days fresh. It is in the same direction, so a slight reduction again over...
What we've done in December . Slight deceleration from Q4. OK, great, thank you.
Thank you. Next question will be from Doug Young at Desjardins Capital Markets. Please go ahead.
Hey, Doug.
Good morning. Sorry about this, but I'm going to stick with personal auto for my first question. And I guess you know, lost cost trends is outpacing earned rate and you saw that last year. Is this something that's going to reverse in Q1? Is that the message that I heard or is this something that's more back-ass of 2023 and then?
Just to clarify what I think of a sub 95% combined ratio, you talk about seasonally adjusted and I get Q1 is going to be higher and Q2 is going to be lower. But there's no other adjustments when we think of sub 95%. So when I think of like the 95.8% that you recorded this quarter, like that's the number we should be looking to be sub 95%. And that includes prior reserve developments and whatnot just
Get some clarity on that as well.
on that as well.
This quarter, so Q4 is a higher seasonality quarter. I think we've pointed out that A there is seasonality and B there was even more winter than what the seasonality we would have expected soon. So you add right there.
point and a half. Their Q1 is a high seasonal quarter so we need to keep that in mind. Our guidance is indeed a run rate X season LT type guidance. I'll let Patrick comment on last course because there's an element.
in your question though that is what you assume when you price as well. Let's go ahead Patrick.
So Lasca and premium, maybe I could cover the two because that's what we see crossing past a little bit right now when we look at the coming quarters. So on the Lasca side, the frequency was flat for three quarters.
in a row compared to prior year because Q4 in 21 as we pointed out was still a bit locked down. There is a year on your increase of about five points but it hasn't moved for three quarters. We expect in our pricing that that might continue to...
or start to migrate closer to.
to prevent them. That's one of the things in Alaska. On the other end though, the inflation from 13 to 11, we expect that will continue to go down at about that place for four-and-a-half
On the premium side, rate on rates were around 5% at the middle of the year. It's peak that 9% in December . Only 5 of it is earned. And if you look at the next 2 quarters, it will be earned at the 7% rate level in Q1 and get to the high teens.
On the premium side, rate rates were around 5% at the middle of the year. It's peak at 9% in December . Only 5 of it is earned. And if you look at the next 2 quarters, it will be earned at the 7% rate level in Q1 and get to the high teens by the summer.
So you see these Lasca trend crossing with the rates starting to be...
higher in the coming quarters than the actual lost customer.
So it seems like that cross is going to happen about mid year. So this is like the.
Back half of the years when we should see earn premium outpacing lost cost trends.
Is that right? Am I reading that rightly?
Yes, but the expectation if you strip seasonality is that this business is running now sub 95 To be here, okay, there will be gradual improvement as you describe as those two lines cross, but keep in mind
that from a pricing at a QC point of view and from a pricing point of view the frequency we're seeing.
is actually
lower than what we're pricing for and lower than what we're reserving for
You put all that together.
and you get to our guidance.
So sub 95 throughout X is out okay, but clearly a different
combined ratio pattern in the second half than in the first half, because those two lines will cross sometime in the...
Okay, and I just listening to discussion on the UK personal property market, if I go back many, many years, and I don't know the dates, but I mean, Canadian personal property was an issue back in the day. And it took you I forget it took you 5 years to go through the
you know, the pricing segmentation to really kind of fix that business. Is that like, is that what we should be expecting for the UK personal line business? Is this like a five year fix? Is this something that I know 2023 can't, you know, it doesn't sound like we're going to see drastic improvement, but is this something in 2024, 2025 where you do expect that to hit the mid?
Midpoint to that or is it a longer tail?
Yeah, I think, so Doug, if I think about personal property because it's a very good example in my mind.
This was a major revamp of what we did. I'll take you back 10 years ago.
where we change the product.
We changed the pricing algorithm.
We changed the claims supply chain management and how we manage claims, invested in prevention.
And that took a few years indeed. But when I look at it in retrospective,
I look at the last 10 years combined ratio in personal prop 89.9 if I exclude
2022 11 years 90% combined you know five years 87% Combined you know with volatility with cash so when you do a major overall it takes some time but it It pays up like it's not just superficial fixing here and there
in the UK.
Because I think there's heavy lifting we're doing at the moment, the piece that is quite different from when we improved home insurance.
Because I think there's heavy lifting we're doing at the moment, the piece that is quite different from when we improve home insurance is we didn't change the footprint of home insurance.
we changed what we did, you know, pretty much we're all Canadians.
at all levels of the value prop. In the UK, we have not concluded that we want to play.
in all the segments where we are today and that's the bit that can move the needle a bit faster
then changing rate algorithm technology, et cetera. That being said, you know, it'll take some time, and that's why to the earlier question, the guidance is upper 90s for 2023, but that's not how we measure success.
Anything you want to add?
..
Good thing in the direct business, you're much more in control of your overall combined ratio of outcome versus in the partnership side of the business which
is the majority currently of the PL business that we have you're less in control of the combined ratio.
that tilt will take a bit of time. But that is the ruse to...
one of the important reasons.
It's too bad for a good point. We have a number of partnerships. Some of them we've exited. Others were in the process of negotiations where we're not happy with the...
economics, that can take some time to run, but otherwise I think our perspective is upper 90s this year, sub95 over time, lots of work left to be done in the coming months. Appreciate the color. Thank you.
Thank you. Next question will be from John Aiken at Barclays. Please go ahead.
Good morning. I'm sticking with the UK and I just for a moment, a lot of discussion around the combined ratios, but I was looking at even when you strip out the Middle East divestiture, volumes are down on the UK and I personal side of the equation. And I get...
you know, that you're trying to right size the business going through. But with all of the factors that you're putting into play for the combined ratio, should we expect volumes to continue to trend down in 2020, 2023, particularly if you're renegotiating some of these partnerships? Or should we actually see an inflection point at some point in 2023, or is that 24 or later?
to respond on rates and therefore the top line pressure has been there. As we move into 2023, I would say overall mid-single digit growth is the zone for personal lines. But again, we will maintain the discipline and a lot of the outcome.
will it be determined by how the market...
and what the market pushes in terms of rate. Yeah, I think, you know, it's a good thing that it is a small portion of the IFC business because...
In the context of the work we're doing to improve PL now, we're not really looking at the top line. I'll be very clear. It's all about improving the bottom line and the market does whatever it wants. We have some work to do there and could be mid-single digit.
But if the market doesn't move, it'll be less than that because we'll lose some more units and that's just the way it'll be.
I understand, thank you. And my following, if I may, Louis in terms of distribution income, guidance, 10%, that you expect to do better than, but when we take a look at the growth that we've seen over the last little while, it's been hovering 20% or above.
The drop down in the guidance, I know, 2022 benefited from acquisitions, but should we infer from this that capital deployment opportunities and distribution are starting to slow? Or are you just being overly cautious and we could see well above 10% if you're actually able to execute some opportunity?
that it would be additional. So we may end up higher because you know the market is still very good and we think there's going to be more opportunities coming but the guidance doesn't go for potential transactions in the future. It really is based on what we have already signed.
and then the rest is upside to the guidance. But, just to be clear, the market is still very good and we're certainly willing to deploy more capital in that space, no doubt.
Great, thanks Louie, I'll recoup. Thank you.
Yeah, thanks very much and good morning. It's a question with respect to the increase in the cat guide. Does it reflect, you don't necessarily see a lot of business. I think you retain like, you know, in the high 90s and some of the lines.
mid to high 90s and others. So is this increasing cat guide just a reflection of hey we got 2022 wrong you know we started at 600 and it was over 800 so we're just going to change the guidance now
you know the way weather is for 2023 or have you actually changed your approach to reinsurance? Are you retaining any more and is that driving this change in the CAD guide? Yeah, so a few items here on this front. So on the 1-1 renewals which are part of the
but the cost of it and the fact that we increased retention in the three countries we operate in has actually will drive a bit more cat losses that drive part of that $100 million. So there are three elements as I said earlier.
The fact that we've grown more premiums and there's inflation, that's about a third of it. A third is the renewals, the impact of the renewals. And the last part is the increased cat losses we've seen historically. So those are the three buckets that drove the $100 million increase.
And then our view here is this was largely anticipated and has been priced in already. Therefore the impact on earnings is de minimis. You are right to say that we don't see very much the overall CAT program is a small single digit, low single digit, version of neturn premium.
The impact here is I would count it in basis points overall. So I hope that's helpful. You haven't really changed your guidance for top-line growth in commercial lines quarter over quarter, yet there is an increase in the cats and you're saying you're pricing for it.
So I would have expected your top line for expectation for commercial two have changed. Now that you're trying to price in these higher re-insurance costs, at least on a quarter or a quarter basis or am I just being too cute here.
No, no, no. You're not being too cute, but I'll tell you what the story is. So first, it's a good opportunity, I think, to recognize the foresight of the reinsurance team, whom after the July renewal said, okay, guys, we need to get ready for a step up in cost and an increase in retention, and we said, let's do it.
This notion that we would face a hard-range rent renewal on 1-1 was identified months ago by Benoit and Stephen Heteridge, who runs Rene Trance. And that was very much baked in our thought process as we built our action plans for 2020.
and then in the 100 million per se the increase in retention which is primarily at the bottom of the Canadian program is worth about 35 million so a third of the 100 million is increase in retention.
Okay thanks and just a quick one with respect to the deferred tax asset move. It seems to reflect your outlook for improving performance in UK and international and I'm assuming that this change in the DTA would have looked past two years. Now you talked about having
two years to fully evaluate your business in UK and I. So what does the move in deferred tax assets say with respect to your time frame to fully evaluate this business?
Go ahead, very good question. So the outlook is more positive and you'll understand we were comparing to a year ago essentially when we made our first, well of course our RSA business was already doing a DPA, but this is really the first year afterwards where we have our own outlook.
And we have a bit more credibility in terms of the results, and that allowed us to recognize more tax loss recoveries. The estimate is based on a five-year projection, and with the fact that our underwriting is improving the investment income is improving, and we have more credibility, we were able to increase the DTTA asset.
If there were changes to the structure going forward, we would have to adjust.
So it gets a bit tricky as to what the impact of those changes would be on the taxable income, but we would reflect them as soon as they are known and we'd adjust accordingly. But at this point, it's sort of a, I'll call it a going concern plan, five years out.
with what our best expectations are earning both on underwriting and investment income.
patients are earning sports on underwriting and investment income, driving it.
So I think, you know, I boil it down to two things really. One is the guidance from a combined ratio point of view, I don't change much, but I think when people look at our ability to...
generate that in earnings, it's gone up, therefore the DTA recognition takes that into account. Second one, which is not related to the guidance we've given, which is combined ratio driven in nature as the investment income potential. Put those two things together and that's how you.
But not therefore the DTA recognition takes that into account. Second one, which is not related to the guidance we've given, which is combined, we should remain in nature's investment and confidential. Put those two things together and that's how you are right there.
Okay, and the two year time frame sounds like you are a little more optimistic now.
Well, the two-year timeframe is the strategic discussion Charles talked about earlier. On the tax front, it's really a five-year out and again I said it doesn't take into account I would say potential changes to the structure. It would be really as we are today looking forward with the improvements we expect to make.
Yeah, okay, thanks. Thank you. Next question will be from Mario Mendelsoh at PD Securities. Please go ahead.
Good morning. If we could stick with you on your investment income guidance, the 1.1 billion is actually a little less than what the Q4 annualized would be. I know it's marginally less. But given the new money yield, I think you said a 4.5% is a fair bit higher than your book yield.
Why are you not building in some improvement in the overall realized yield over the next 12 months? Because it would appear that you're not in your $1.1 billion dollar gut.
So the first issue, try to use a run rate, you're right, it's a bit shy because the 279 of Q4 probably has 10 to 15 million of I would call lumpy non-
It might recur, but it's more lumpy and therefore difficult to put in a fixed run rate, but otherwise that's about the only amount and that's why it's a bit shy of it. Then our estimate for next year is based on current rates, where the book stands today, and then the turnover with a normal turnover next year, and the turnover accelerates.
we can generate more, it feels go up more, we can generate more, but we're on a book heal as we are today, plus, normal turnover going into the future.
So just so we're clear, the 1.1 billion does include normal turnover? Yes.
And wouldn't the normal turnover in and of itself increase your realized yield?
You would and we've put some of that in the estimate.
But it's not a huge that at that pace. It's not a very big keep in mind. We've traded quite a bit in Q4 already.
And so the amount we can turn over next year on a normal basis has a more limited impact.
Okay, that's helpful. Charles, maybe we could go back to the UK for a moment. You made you and kind of make the comments that it kind of depends on what the market will give you that competitors were slow to react to rate.
When you look at the competitive landscape, you look at the individual competitors that you face in the UK personal lines.
Is there, could we make an argument that some of those competitors, or maybe a majority of those competitors have lower return expectations?
then intact does. And as a consequence, you're always going to compete against firms that really don't need the same or have the same required hurdles that intact does. Is that statement? Is there some truth to that statement?
There is some truth to that statement, Mario. However, um...
It's important to understand.
that we're not all operating the same way. You could make that argument in Canada.
There are people, many people in the market that have lower expectations than we do.
Yet, you know, we beat them from both the top and bottom line point of view. Why? Because we price and select differently and we have a better supply chain. We're not in that position in the UK.
and therefore I don't have the same confidence we can do that in the UK. That's why we're still trying to figure out where we have a real shot at winning. But certainly, you know, when I say, A, you need to figure out if you can outperform.
Therefore, I don't have the same confidence we can do that in the UK. That's why we're still trying to figure out where we have a real shot at winning. But certainly, when I say, A, you need to figure out if you can outperform. And B,
You need to figure out if out performing generates enough return to justify leaving capital there. And to that question, and maybe that's where you're headed, it's not clear to me that the answer to that second question, even without performance, you can make enough money in all parts of the market. And that's why we're not done.
finalizing the footprint. Yeah, that's kind of where I was going. If you've got competitors that have lower return expectations and intact is not the 800 pound gorilla there, then...
It almost seems like you're pushing against the string. It's not an area where you can deliver the out performance you need to be there. That's essentially where I was going with that. Isn't that the more logical conclusion?
It almost seems like you're pushing against the string. It's not an area where you can deliver the performance you need to be there. That's essentially where I was going with that. Isn't that the more logical conclusion? I think, you know, it's not...
that straightforward, but logically speaking, I think it's fair. I'd say, Mario, that in commercial lines, we're in very strong position, and we have to keep in mind that in home, we're number three, and so are we in pet. It's either number two or number three. So definitely not the 800 pound gorilla.
And I'm not sure we're actually ensuring gorillas in pet, but we some degree of scale. I think our question mark on those two segments is what can refer to it's how they're being distributed. That's the piece where we hesitate the most at this stage. Ken, why don't you provide color? Well, in addition, I get...
then what that leaves I guess then is the motor business. That's where clearly the scale is more challenging and given the cost base and you know, we're remaining disciplined on pricing and I think the bigger question mark.
what that leaves, I guess, that is the motor business. That's where clearly the scale is more challenging and given the cost base. And we're remaining disciplined on pricing. And I think the bigger question mark is on the motor. Definitely. I think the scale.
Yeah, number three position and hold on past is not number one. It's not the same as kind of that but it is.
it is a reasonably scaled position if you can tilt to a more direct offering in terms of distribution. Exactly.
That's very helpful. Thank you.
Thank you. Next question will be from Lamar Prasad at Core Mark Securities. Please go ahead. Thanks. I apologize for going back to personal auto here, but I'm wondering if you could provide an update on the ability to push through race and personal auto just in light of the...
Alberta government freezing rates to the end of 2023. Is that something other provinces are looking at or do you think you can continue to push through higher rates as say inflation comes in higher than expected or if we can see rises more than expected?
Well, thanks for the question. I'm glad you bring up personal auto again because we love that business and we have a very strong track record there so we don't mind talking about it.
in general.
In general, regulators have been...
quite rational. I mean if you have a good case for why there's cost pressure
You can price for it. And in fact, there are some markets.
you can price for it. And in fact there are some markets, our biggest market in fact.
You don't even have to ask for permission actually to price for inflation
So it hasn't been an issue, it has not had a negative impact of any substance on performance over time. And frankly,
because the cost pressure now is on short tail lines and not on long tail lines.
It's much easier to demonstrate why rate needs to move and an aggregate You know, we think that the regulators get that and it's easy to demonstrate and that's why in 2022 we were able to Pretty much they can nine points
to cover inflation. Patrick, maybe you wanna give a bit of color on Alberta and so on. Well, similar to the rest of the country, we're very proactive early on in 2022 in taking rates. So we're starting the year in 23 in good positions, including.
The new policy of rate freeze is ill-advised in our view and will do nothing really to address the core issues that are putting pressure on rates for Albertans, if anything. It may cause significant harm as the industry will be temporarily left behind on reflecting inflation.
in the right. So while the freeze is meaningful for the Alberta market, in the context of intact that, the solution is slightly different.
Because first, we need to be clear, you know, we'll take the necessary actions to protect the profitability position in the province, and that might include the appetite regarding new business.
and our renewal and at a minimum the amount of future marketing investment.
But second, we've taken rates in advance of the market. We have good rate momentum in there. That's only 17% of our Canadian PA portfolio or 5% overall of IFC. So it doesn't have an impact on our...
outlook for the next 12 months and sub 95 combined ratio guidance. That being said, we're reiterating the fact that while it might be attractive politically, this is not very good for our burdens and for sure our team stands ready to engage with the government on better ways to improve in the long term the availability and affordability for insurance.
in Alberta. Bottom line, I think regulators are rational. The need for rates at the industry level is clear and easy to prove.
and so not concerned by regulators ability to deal with that. Alberta, it's political, it's a real bad call. I think within six months you'll have capacity issues in that market. And I think other provinces understand that when you artificially try to do stuff like that.
there's a blowback that comes back and you know that might very well be the case in Alberta.
We're I think in good position in relative terms and feel good about our ability to price for inflation and the nine points we've talked about is baked in already.
Okay, that's helpful. My second question, I want to come back to Mary's line of questioning on the investment income. Are you guys building expectations for rate cuts?
later in 2023 which could limit market-based yields because I think Louis if I heard you correctly there's 10 to 15 million in lumpy revenues but even excluding that with normal asset growth I could so easily get over 1.1 billion so any thoughts there would be helpful
So, we have not booked any rate cuts clearly. So, yeah, I think it's a prudent guidance but not based on rate cuts.
plan or expected rate cuts next year at all.
the expected rate cuts next year at all. Okay, thank you.
Thank you. Next question will be from Nigel D'Souza at Veritas Investment Research. Please go ahead. Thank you. Good afternoon. Just a quick clarification on the comment made earlier. For personal auto, including the seasonal impact, do you expect the combined ratio to be above 95? I understand that correctly. My question is, do you expect the combined ratio to be above 95?
No, I think we're saying sub95 is what we would expect, you know, quarter after quarter after quarter.
Except that you need to take into account seasonality. So Q1 for instance there's a few points of seasonality normally if you go back in time you see that, it's a very clear pattern.
that needs to be taken into account. What we're saying is that the run rate per quarter, as we sit here today is sub 95 and should improve over time.
Got it, that's helpful. So my first question was on favorable PYD. When I look at your guidance, it looks like you're expecting a favorable impact on the IFRS 17 on the PYD metric and you're also guiding for PYD to be in the 2 to 4% range over the medium term.
So I think the midpoint of that guidance 3%, that's actually lower than the favorable PYD at 3.8% in 20.
So, would it be fair to expect the PYD to decline in subsequent quarters and trend lowers? That's the way I would think about it.
Do we want to share your perspective? I think I'll try to bucket in two here, the IFRS impact. I can first our expectation. So historically the guideline has been between one and three, but we did expect it to be stronger in the short term.
given the prudence we had baked in throughout the COVID periods. So I think that's still true and you're seeing it in the actual results with the strength of PYD. So that on an even basis, I think we'll extend, you know, at least in the next 12 months. Then because of IRFOR17,
I will summarize the impact to, that we can see today, is roughly between one or two points of favorable impact to the PYD. So I would sort of take them apart, stronger than, or in the short term, higher than expected, or higher end of the range, and then I would add between one and two points.
for the IFRS 17 conversion. Okay, that's all done. And the second question was on against working back to market based yield. You know, when I look at the increased quarter of a quarter, 50 basis points increase, even if you strip out the 50 million or so and the lumpy items, you know, based on a reinvestment yield that you know it a four and a half percent.
to market-based yield this quarter. So market-based yield has a denominator that moves with market volatility. And therefore, it's a harder one to pin down, frankly. The yields, the book yields have gone up because we trade and we secure a higher yield.
but then you've got the offset and the bond themselves, the bond value themselves. That's why we don't use that yield for guidance. We give the hard number to take away sort of the market volatility impact on the book and the market base yield that comes out of it. So we view the market base yield as the result of two things.
increasing the interest on the assets we own and then the volatility of the assets values themselves and the outcome is what we report on but from a guidance point of view we prefer to give the hard number it's our best estimate of where investment income will land next year as we stand today and we try to not to reinvent people are challenging on the run rate given the q4 numbers
And that's why we're saying there's probably 10, 15 of lumpiness in there so I wouldn't extrapolate strictly on the actual number.
But that's our best guess at today, where we stand based on current yields and where our book has been converted to current rates.
That's it for me. Thank you. Thank you. Next question will be from James Gloin at National Bank Financial. Please go ahead.
Well, I guess same kind of question just in terms of the trading impact on the investment income. You know, it looks like there was quite a bit of trading in Q4. What capacity do you have left to continue to execute trades? What kind of trades are these that are helping to really juice the interest?
The, our expectation right now is to go somewhat back to normal trading next year. And if there are opportunities where there's a trade that makes sense and doesn't, doesn't get wiped out by the realization of their loss on the non-opening earnings, we would do those trades. But you're right, we took the opportunity as markets.
move and rates move quite practically, I think the investment team sees more opportunities and therefore are much more active to trade.
And this is what has happened. I will say a second half of this year, very, very active and you've seen it in 2-4. So...
You know, today I sit here, what we look at in 2023, as normal turnover, maybe there will be opportunities and that will be positive. Tell one to the current guidance.
I sit here, what we look at in 2023 as normal turnover, maybe there will be opportunities and that will be positive till when to the current guidance, but not more than that.
Okay, got it. And the second one, just in terms of the Highland Insurance acquisition in specialty lines, just wondering if you can comment on the success of that acquisition, how much it's contributing to US commercial, but also how is it contributing to the distribution income as well? I guess it hits both sides.
Darren, why don't you talk about the strategic merits and what it's doing for us? Yeah, absolutely. Obviously, it's a transaction, as you know, that we made last year. We came online in terms of unerwriting capacity in Q4. It is a very highly specialized niche appetite that the habit of highlands.
And that's very much part of the recipe when we look at from an MGA and from an acquisition strategy standpoint. Just a reminder though that we did not purchase any reserves or any unearned premiums, so this obviously is earning out from dollar one. The MGA as you can see in the MGA there was a favorable impact obviously in growth.
in the US in Q4. That will very much obviously continue out into 2023. Performance today, obviously it's still very, very early, but it's very much in line with expectations and we'll have a positive impact on the overall performance in the US.
And therein we're keeping how much of that. We're keeping roughly 21% of the capacity out of that operation. Obviously supported by both some other direct insurers but also some re-insurers as well.
Roughly 21%. Can you talk about distribution in come? Absolutely. So in the quarter highland was actually of the 22% rise was about 2% 3% of the 22% was driven by highland. So it's a pretty significant portion of the growth in the earnings. It's 2% year to date.
which is half a year for ILAND. So it has a meaningful impact on the distribution income for the distribution earnings.
Thank you. Thank you. At this time, we have no further questions. Please proceed with closing remarks.
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