Q3 2023 Intact Financial Corporation Earnings Call
Good morning, ladies and gentlemen, and welcome to the intact Financial Corporation Q3 2023. The results at this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session and if at any time. During this call do you require them you did assistance. Please press star zero for the operator.
Note. The call is being recorded on November eight 2023, and I would like to turn the conference over to Szuba Kohn Vice President Investor Relations. Please go ahead.
Thank you <unk> Hello, everyone and thank you for joining the call to discuss our third quarter financial results a link to a live webcast and materials for this call have been posted on our website and in fact that C dot com under the investors tab.
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.
To discuss our results today I have with me our CEO Charles has been to more our CFO Louis Marcotte.
Pink bubble executive Vice President and Chief operating Officer, Darren Godfrey Executive Vice President Global specialty lines, Yamana need senior Vice President of personal lines, and Ken Anderson Executive Vice President and CFO you can die.
We will begin with prepared remarks, followed by Q&A with that I'll turn the call over to Charles.
Thanks Sheila.
Good morning, everyone and thanks for joining us today.
Canadians across the country were once again faced with severe storms floods and wildfires in the third quarter.
As always our teams played an essential role in getting customers back on track.
And it is precisely in these moments that we're able to put our purpose into action and.
And help people businesses and society.
Be resilient in bad times.
Against this backdrop, our business once again demonstrated remarkable resilience.
Yesterday evening, we announced net operating income per share of $2 10 for the quarter, Despite elevated cat losses.
Our on discounted combined ratio was 98, 3% in.
And included 12 points of cat losses, roughly eight points higher than expected.
That said, we were able to deliver an operating ROE of 12, 2%. Despite a three point impact from cats.
I'm also encouraged by strong topline momentum across our platform.
Premium growth in the quarter stood at 8%, excluding strategic exits largely driven by rate actions across all lines of business.
As well as improving unit growth and personal lines.
Let's now look at each of our lines of business starting with Canada.
In personal auto growth and profitability are developing largely as we expected.
Premium growth accelerated to 9% in this quarter.
<unk> three points from the preceding quarter.
Any full 10 points from a year ago.
This was driven by high single digit rate increases as well as unit growth, which has benefited from our improved competitive position.
The combined ratio of 95, 4% in the quarter was well within guidance that you consider a two point negative impact from excess cat losses and industry pools.
Inflation pressures continued to moderate slowing to mid single digit range in Q3.
This was running at 8% only a quarter ago and peaked at 13% in Q3 last year.
In the quarter the improvement was primarily due to normalizing vehicle prices as well as lower repair cost supported by our integrated supply chain.
At the same time earned rates in insured values increased 8% in aggregate during the quarter.
Facing inflation in driving an improvement in the current accident year loss ratio.
Going forward, we expect rate increases to continue covering inflation and.
And remain comfortable with our sub 95 guidance for this business.
Moving now to personal property.
Premium growth was 7%, mostly driven by our rate actions and supportive market conditions.
The combined ratio of 124%.
Included 34 points of cats in excess of expectations.
Adjusted for excess Cats. The result was otherwise consistent put our strong track record in this business.
Including this year.
Our combined ratio as average sub <unk> over the last decade.
We believe we've been rewarded for the volatility in this segment and.
And we remain well positioned in the current environment.
Elevated severe weather activity and ongoing inflation pressures are also expected to sustain hard market conditions.
Rates in insured values in aggregate will reached a low double digit range by year end.
And I expect that our pricing and product actions as well as claims expertise and supply chain capabilities.
We will allow us to sustain our strong track record over time.
In commercial lines in Canada topline growth of 7% was driven by our rate actions and hard market conditions as well as strong retention.
The combined ratio of 92, 7% included 13 points of Cat losses.
Nearly three times the expected level.
But underlying performance was strong as a result of our profitability actions over time.
This business remains well positioned to deliver sustainable low ninety's or better performance.
Moving now to our <unk> business, where we delivered a solid combined ratio of 92 five in the quarter.
In commercial lines underlying premium growth was 8%.
We continue to benefit from hard market conditions, which are supporting mid to high single digit rate increases, particularly in specialty lines.
The combined ratio of 96% reflected strong underlying performance, which offset an unusually high level of adverse prior year development.
We will explain in his remarks.
On October 26, we successfully closed the acquisition of direct lines brokered commercial lines operation.
Doubling down on how we're outperforming commercial lines business in the UK.
The transaction enhances the growth profile and profitability of the UK ni platform.
Which is now better positioned to sustain low ninety's performance.
In personal lines premiums grew 13% adjusted for the impact of our U K motor market exit earlier this year.
This was driven by rate actions in a clearly firming market.
Which also helped drive the combined ratio of 96, 6%. We continue to expect the business to Denver Upper 90 as performance in the near term.
As we announced in early September we're evaluating strategic options for the UK personal lines business, including a possible sale.
We're making very good progress and expect to provide details in the coming weeks.
In the U S. Our business grew 13% in Q3, driven by our rate actions and strong contribution from last year's Highland acquisition.
The combined ratio of 88, 5% reflected rate actions over time and strong growth in our most profitable lines.
While conditions in certain segments have softened the market overall remains heart, particularly in special property, our builders' risk business unit as well as ocean Marine in the next 12 months market conditions in most lines are expected to remain hard.
Given higher reinsurance costs elevated cat losses, and inflation, we remain well positioned to continue delivering low ninety's performance or better in the U S.
Looking at our global specialty lines overall.
Premiums grew 11% with a combined ratio of 88% for the quarter perf.
Performance was especially strong in the U S and the UK.
Through our continuous focus on profitable growth.
Together with our investments in pricing sophistication.
We expect to generate sustainable sub 90 combined ratio overtime.
Turning to our strategic initiatives, we continue to invest in our business to transform our competitive advantages and maintain.
Our strong outperformance.
We strengthened our supply chain capabilities in the quarter again opening three new and tax service centers and bringing the number of total locations to 27.
In addition to improving customer experience.
These centers reduced cycle times by up to 30%.
Supporting our sub 95 guidance in personal auto.
We also bolstered our data and AI capabilities by expanding machine learning to our pricing models in commercial property and deployed new predictive pricing models for specialty lines across.
All of our operations on.
On the climate front.
Have a strong track record with a 10 year average combined ratio sub <unk> and personal prop.
Our most cat exposed lines.
We've achieved this by facing and to changes in weather patterns, well over a decade ago.
Transforming our business and turning the change into an opportunity.
This involved pricing.
Product design data expansion as well as transforming our claims operation and building our supply chain.
And I believe we are well positioned prospectively.
In the spirit of productivity given the intensity of this summer.
We've tested our value proposition to make sure we can grow profitably and sustainably in this segment.
And maintain the track record of the last decade.
And to do that with the latest climate science.
We've modeled the implications of global warming, reaching well north of three degrees.
Double the aspirational target set by policymakers.
And based on our work so far.
Concern about our ability to maintain strong growth and underwriting margins over the next decade, consistent with our track record of the past decade.
And the more immediate term I feel a lot of resilience across our business as well as strong growth momentum. This.
Despite unusually elevated severe weather activity.
<unk> delivered mid Ninety's underwriting performance, so far this year and an operating ROE north of 12.
And with hard market conditions across all lines.
Growth and profitability outlook is favorable as.
As we look ahead to 'twenty four I am confident we will continue to grow our net operating income per share by 10% per year over time and outperform the industry ROE by at least 500 basis points and with that I'll turn the call over to our CFO, who will not cut.
Thanks, Charles and good morning, everyone. Our third quarter results showed excellent underlying performances across all lines of business and I am pleased to see the top line momentum in personal lines.
Growing income from our investment portfolio and reliable income from our distribution assets helped drive a healthy operating Roe of 12%.
In the context of the unusual unusually challenging operating environment over the last six to 12 months. These results demonstrate not only the resilience of our operations, but also our ability to deliver profitable growth going forward.
Cat losses in the quarter were $611 million or nearly 12 points of net underwriting revenue, primarily due to a mix of wildfires floods and hailstorms across Canada.
As Charles said earlier, we are updating our models with the latest data collected from our claims activities and combining them with science based predictions.
It's still early but we are confident in our ability to mitigate the impact of climate change using all the tools at our disposal, even when using very conservative assumptions.
With that in mind, we see changing weather is a challenge, but also as a topline growth opportunity as people businesses and communities have a growing need for protection and restoration.
In this environment, we believe we can maintain our track record and continue to deliver mid teens operating Roe.
This will be reflected in our updated GAAP guidance, which we will provide in February 2024, along with our Q4 earnings release.
Favorable prior year development remains healthy at three 6% for the quarter, but slightly lower than in recent quarters, primarily due to adverse development in our U K business.
Few specific large claims impacted our UK commercial lines in the quarter.
But prior year development remained favorable on a year to date basis, which is probably the best way to see how this business is performing.
And you can't I personal lines, there was adverse development on claims related to the freeze event of December last year as well as on some subsidence claims.
That said, we remain comfortable with our reserving position in both portfolios and do not see unfavorable development in the UK this quarter as indicative of a trend.
For IFC as a whole the overall level of prior year development continues to reflect our prudent approach to reserving and we expect <unk> to be in the two 2% to 4% range over the near to medium term.
The consolidated expense ratio was 32, 9% in Q3 down modestly from last year due to declining variable commissions with an offsetting impact on distribution income.
The year to date ratio of 33, 7% was right in line with our expectations that is in the 33% to 34% range.
Operating net investment income increased by 50% in the quarter, driven by higher portfolio turnover and higher rates captured over the past 12 months.
For the full year, we continue to expect investment income to be approximately $1 3 billion. We expect this tailwind to continue into 2024 and I am happy to share that we expect investment income to grow to around $1 5 billion for 2024, assuming normal portfolio turnover and stable rates.
Distribution income was $116 million in the quarter up 3% as contributions from recent acquisitions and onside were offset by lower variable commissions as I discussed earlier.
The pace of acquisitions has been slower to start this year as we have been disciplined in a hot M&A market.
Nevertheless, the pipeline remains strong and the pace of acquisitions is picking up.
In Q3, we closed seven transactions, representing nearly $200 million of premiums and subsequent to quarter end broker lien completed its largest acquisition to date in Western Canada.
As a result, we expect growth in Q4 distribution income to be strong, resulting in growth of around 10% for the second half of this year.
Looking at 2024 and beyond we expect growth to continue at around that level.
Finance costs and other operating expenses amounted to $97 million in the quarter up 10% year over year, largely as a result of higher interest rates on short term debt.
Overall net operating income per share of $2 10 was down 68 cents from last year, but that's after absorbing $1 60 of additional cat losses, a testament to the strength of our underlying results.
In addition earnings per share was <unk> 83.
After reflecting unfavorable market movements rising rates restructuring costs related to our UK motor exit and.
The adverse development on exited portfolios.
As you know it's been a busy year for us, particularly with respect to the UK business after exiting motor in Q1 and Derisking. The pension plan in Q2, we have now doubled down on the attractive commercial lines segment by acquiring direct lines broker distributed commercial lines business.
Clearly a good strategic fit but I also like the financials IRR above 15% immediate book immediate book value per share accretion of 2% and slightly positive to net operating income per share in 2024.
Though small for IFC as a whole it is meaningful for our UK operations. We expect the transaction will generate 100 million pounds in additional net operating earnings in five years, which represents a mid teens operating Roe.
For the UK and I quite a change from the business we acquired in 2020.
Moving now to the balance sheet overall, our financial position continues to be strong with total capital margin of $2 8 billion at quarter end. This reflects capital issuances in September to fund the UK commercial lines acquisition.
The adjusted debt to total capital ratio stood at 22, 7% and approximately 24% on a pro forma basis, reflecting the closing of the direct line transaction subsequent subsequent to quarter end.
We expect the ratio to return to our long term target of 20% in the next 12 months to 24 months through ongoing capital generation.
I am pleased that the strength of our balance sheet and the resilience of our operations are also being recognized by rating agencies.
<unk> recently upgraded our financial strength ratings by one notch to <unk>, while Moody's improved its outlook for IFC to positive from stable.
It's been a tough year for our book value per share so far although it grew 1% in the quarter and challenging circumstance circumstances.
Injectors from the start of the year was tempered by elevated cat losses unfavorable capital markets, including rising rates and the impact of the pension buy in.
These were offset by otherwise solid operating earnings and a successful equity issuance to support the UK commercial lines acquisition.
Good news is that our earnings power is not adversely impacted by any of these headwinds on the contrary industry conditions are supportive topline momentum is strong investment income continues to grow and distribution results should deliver double digit growth.
<unk> behave as we expect I see our business delivering solid ROE next year and that will reenergize, our book value per share growth trajectory.
In summary, I am proud of the strength demonstrated by the business this quarter, which weathered a multitude of cat events, while at the same time delivering on key strategic objectives and driving profitable growth in all segments.
Given the strength of our platforms. The incredible talent, we have across geographies and guided by our clear strategic roadmap I am confident that we can return to a 10% net operating income per share growth trajectory as soon as next year.
With that I'll give it back to <unk>.
Thank you Louis.
Where does it give everyone a chance to participate in the Q&A. We would ask you to limit yourselves to two questions per person you can certainly re queue for follow ups and we will do our best to accommodate if there's time at the end.
Sylvia we are ready to take questions now.
Thank you, ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by one on your Touchtone phone.
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I have a question.
And your first question will be from Paul Holden CIBC. Please go ahead.
Good morning.
First question on personal auto and maybe you can just highlight sort of what the earn.
Premium rates are coming in at versus the written and versus claims inflation and if the results are what X factor I E. What you guided to last quarter and you've done a already a sub 95% combined year to date like why shouldn't it be something even better in the next 12 months.
Jan do you want to share your perspective.
Yes, so results in the quarter were 95 four for personal auto.
About two points that we called out on cat.
And industry pools, so that brings that well within well within guidance so from a rates perspective.
<unk> rates stayed elevated.
High single digits similar to the last couple of quarters.
And what we've seen is the earn rates accelerating and also reaching high single digit during the quarter from an inflation perspective, we've seen that decrease quite steadily I think Charles mentioned in his opening remarks that it went from 13 last year.
Last quarter and mid single digit this quarter. So we're seeing with the rates at eight.
The earn rate.
Inflation in the mid single digits.
Improvement Dara and margin expansion as the two lines.
So we see that in the current accident year about the point on that.
When we reflect booth.
And we're pretty comfortable with.
With that.
Going forward, we expect our rates to cover inflation.
<unk> will allow us to continue to deliver.
Solid underwriting results now.
Your question or the second part of your question was.
Around expansion.
I think there is there is a few factors that we're keeping an eye on like short tail.
<unk>.
Is stabilizing.
That being said there is still volatility around lockdown. So we are remaining prudent there.
Our rate strategy is pretty robust expect as I mentioned to cover inflation, but there we remain dependent on regulators and have we seen.
Some market.
Alberta, there is a bit of outliers, there, but most regulators are.
Our rationale.
So I would say that that's why we're confident at this point with <unk> hundred 95.
But not seeing a reason to get lower than that.
Specifically to your first question at this stage correct me if I'm wrong yield there was about a point spread between written.
And earn.
Which.
Earn itself in the coming period, we like the operating environment and at this stage you're seeing the growth has really picked up and personal automobile and so we want to capitalize.
On that but feel good about the performance of that segment.
Understood. Thank you.
And then second question is related to personal property and the use of reinsurance.
A couple of disclosures you how does this quarter kind of caught my attention 20 cat events. This year that were below your reinsurance threshold.
Also called out only for cat events in the last 10 years would've reached the retention thresholds. So the obvious question reading that I think to myself as well.
Why not lower the retention thresholds.
Some of it is earnings volatility and to make the book value growth, maybe more consistent from year to year.
Okay.
Paul I think we're using reinsurance.
For tail event.
Because we are comfortable with our pricing in terms of the direct business.
Time to time.
We look at the pricing.
Or reinsurance solutions that would limit volatility.
But quite frankly, we prefer to keep the margin and if you look at personal prop.
We're seeing sub 90 is it's actually 89 ish.
With these results.
On September 23.
We prefer to keep the margin.
At this stage.
Clear as we look out in the next 10 years.
Alternatives.
To share risk will be looked into.
But if we can run that business in that zone, which we think we can.
Which generates return on capital, which in my mind start put to two.
I think we want to keep most of that for US, we'll just need to explain volatility for quarter to quarter, but it's been a great business.
The last.
Decades.
Got it okay. Those are my two thank you.
Thank you.
Next question will be from James <unk> of National Bank Financial. Please go ahead.
Good morning. Thanks.
Thanks.
Wanted to ask a question on that distribution and an expense ratio.
With distribution growth, obviously, a little more tepid this quarter can you quantify.
I'll use the term drag from variable commissions and distribution and then how did how does that tie into the expense ratio as well and.
Yes, My view would be you would prefer to have lower variable commissions through distribution with the offset that your expense ratio looks better, but maybe walk through some of those moving parts and what you what you would rather see on an ongoing basis.
So.
The drag just to answer the first part James the drag was roughly four points in the quarter.
So if you take the actual growth of three.
Plus a drag before there is underlying growth of 7%.
And we've tried to explain that around I will say a bit late M&A.
Yes.
Our activity later in the year, that's the way, it's going to grow in Q4.
So that's roughly the drag the relationship with the expense ratio.
I would say was somewhat directional in nature, not theyre not directly linked it's a bit tricky to but the commission ratio.
We'd be linked to that it is ready to not like.
We don't mathematically put them together the timing is not always perfect.
In the end.
And the scale is not the same either because the distribution income as a portion of our broker right. While we pay commissions to all the brokers on the distributed business.
So.
That's really the relationship between the two there's more benefit if we would have a lower overall expense or commission ratio because of the scale.
But we actually like to see our at the offset coming from our brokers returning some of that margin back to us through the distribution income.
I think it's well said, we so high level.
Directionally you're right.
And if you look at our net commission.
<unk> down a bit and a portion of that is the fact that variable commission might have come down a bit.
Directionally.
Hitting the distribution income the other way.
One should not took out one quarter.
But at the trajectory.
And I think he was very clear about that trajectory, which is.
10 ish percent for the second half of 'twenty three.
Greg.
Okay great.
Second question I think Louis you talked about.
<unk> Roe.
Generating mid teens ROE at this point that I might have missed some of the color around that comment but.
Can you break down the drivers.
The drivers of that mid teens ROE in the U K platform.
Where you are today, and then I guess, what that looked like three years ago, I guess on the acquisition of RSA.
Sure. So firstly my comment is really talking is forward looking as we are repositioning the business towards a.
Great.
<unk>, a commercial lines focused area so.
Not necessarily today, but it's what we have in plan that's going to drive us there. So it's the additional earnings plus the capital base that we have been able to rationalize over time through different actions.
But we're we're reducing the overall capital level deployed in the U K to be able to.
Optimize it and then additional earnings power from the repositioning towards commercial lines will drive towards that mid teens ROE and the improvement of overall underwriting performance across the board Ken I don't know if there's more color you want to add there no I mean, as we've said in relation to the.
Direct line brokered commercial acquisition when you put that together with our.
Existing commercial specialty lines business.
Driving for a 92% combined ratio in 2024, coupled with the investment income that the UK platform is generating.
Divided by the capital base at work in the UK, you're we're aiming to be in that mid teen zone in 2024, and we're already in the teens.
And I think if we look at the repositioning that both Ken and we are talking about what I see here is a better anchoring around mid teens.
Better growth less risk and Thats why strategically this move makes a lot of sense.
Thank you very much.
Thank you next question will be from Doug Young at Vishal Bank capital markets. Please go ahead.
Good morning, Doug.
Good morning.
My eye twitching, a little bit when I hear about Canadian personal auto and adverse pool impacts because of history.
So I apologize for maybe digging into the weeds on this one but can you talk a bit about.
What happened.
In personal auto around the pool is like.
Can you quantify what the negative impact was yes is there an issue with any of the pools in Ontario and Alberta.
Just hoping to get a little bit more detail on that.
Yes.
No issues directly you shouldnt see much of an impact there it changes from quarter to quarter deal will give you his perspective on that.
Yes pools, where were about one point.
Here than expected this quarter.
Driven by really the assumed results so what we assume from the industry pools as they adjust reserve level.
Mostly on that Karen.
The current year.
Reflecting the trends in the market, so I think pools bring volatility from quarter to quarter on.
On a year to date basis.
It's pretty immaterial and no cause for concerns and we do have visibility on what's coming.
In Q4, although not final.
And we expect it to be material as well so.
Really material <unk>.
Immaterial, yes exactly.
So we don't expect it to be an issue going forward.
And again this year if you look at the year in total it's not an issue no Luisa do you want to add any color here well I'm, one who thought we should call. This out simply because we're so specific on our guidance of sub 95. It happens this quarter, we're printing a bit above and the pool has happened to be a bit of a headwind in the quarter, which we had not anticipated.
In our in our guidance and that's why we're calling it out a bit the same with the excess cash. So there's no issue behind it it's purely to compared to our guidance and explain what drove it slightly away from the printed number but thats. It yes, I think two or even a year to date.
No nothing there.
Okay. So theres no adverse reserve development issues or reserved vishal.
It should be okay.
And then my second question I think I've asked this in the past.
Yes.
<unk> lines is something that we just keep an eye on.
The underwriting loss year.
Which is not in your operating numbers has been growing and I kind of get what you're doing but how long does it take to kind of run this off or is this just something that exited.
Exited lines losses are always going to average give or take between $20 million to $30 million per quarter, just just trying to figure out how to kind of think about that.
I mean.
There's been a lot of heavy lifting in terms of repositioning portfolio would think of a few lines that were shut down in the U S.
And a number of moves that we've done.
Here in the U K.
And so.
As we plan forward.
There should not be dragged because of exited lines.
Would be my perspective and Thats.
How we plan.
So I don't know Luis do you want to add color there.
I think youre absolutely right. The idea is not to have a drag but one has to recognize the actions we've been taking in the actual exiting I will say right now the big ticket is the motor exit earlier in the year.
We are still earning premium deadlines.
It was a bit neutral in this quarter from an exited lines point of view, but it still means we're going to be earning premium over I think another three four quarters. So.
That's probably the best way to measure it and.
In terms of the length and then afterwards, we expect those numbers to migrate toward zero now.
The numbers you are quoting at 20% to 30 per quarter seem elevated unless we've just recently exited the line like we have in motor exit.
I don't think it will stay.
Zero, all the time, but it's much smaller numbers that yes that should not be yes.
Meaningful to the results.
Maybe I can ask it this way like lets say you don't put anything further index deadlines like is this a three year to get to zero is it two years ago.
So it should be much stuff should be much shorter than that.
Because what is closed or theres nothing enforced.
You should be reserved adequately and see no noise.
Keep in mind.
The lines of business, we have shutdown in the U S, where long tail lines, where we felt pricing was really tough.
That's why it's a bit more volatile.
And then when you have a line that you exit take motor in the UK.
That still hasnt enforced.
Then of course.
The combined ratio on the unearned premium of that line will hit the bottom line, but.
As we look at our plan prospectively this should not be.
Structural at all in fact that should be managed to zero.
I appreciate the color. Thank you.
Thank you next question will be from Tom Mackinnon at BMO capital markets. Please go ahead.
Yes, thanks very much good morning.
Maybe just starting question just with respect to your thoughts.
On Alberta here, they've got a freeze for 2023.
Caps for 2024.
How should we be thinking about that impacting any of your personal auto business or the.
Your desire to do business in the province.
Good question.
John.
Look at cap is better than a freeze.
But.
At the end in a highly competitive industry, where segmentation is the name of the game. The best deal for customers is when people can segment as much as they want.
So this is temporary and.
And the cap is better than a freeze, but none of those things are better for our customers at the end of the day. That's my take on it I'll ask him to share his perspective.
So we said in the past.
Baird.
5%.
C <unk>.
17% personal auto and looking back at the year, we've been able to maintain quite a good quality portfolio. Despite the restrictions.
And players due to our early rate actions.
Good segmentation and strong underwriting guidelines. So our book is still pretty solid.
So there is two things.
And the last measures that the government announced I think we mentioned refreeze essentially replaced by a rate cap at CPI, that's affecting vast majority of drivers.
It's intended to be temporary.
So that's good.
At the industry level is going to continue to create sub.
Subsidy.
That's never.
Additive outcome for our customer.
What's encouraging however is that the government has recognized that things needs to be done to address the root cause of the issue to really cost reforms.
And the long term solutions that are being looked at BARDA governments are largely in line with what we've been advocating as a company to contain the cost so.
That's good.
Im.
Secondly, I think government granting moratorium for a regulator to address profitability, that's not new in the market that our regulators at similar authority.
But details on how its applicable are still pending so we'll follow that closely but industry of though was unprofitable in the last decade.
We've had as in fact strong out performance and Thats allowed us to return.
Almost $100 million $86 million in relief the customer during the pandemic.
So we believe more intervention doesn't necessarily send a good message to the industry and we've already seen actually reduced availability in the market, even though in the last couple of weeks with some competitors.
Moving on a few things.
I think thats great.
And I think here Tom.
We will work with the government to get to the right place.
It is really important we've been working with the government I firstly.
Been involved since the early 2000, we have close to 3000 employees in the province, we want to make sure the government.
Works for customers and our ability to grow our business there it's important for us.
Yeah. Okay. Thanks, and follow up question is I think you made some comments about <unk>.
A mid teens ROE look outlook.
Then I think you also said that depending on how cats behave I mean thats the biggest challenge here.
And I think the last cat guidance had been around 700 units significantly higher than that in 2023.
Is there anything that you can provide.
With respect to cats or do we just have to wait until what you say for you or your.
Your guidance for the year when we look at when you announced Q4 results because I think that's important for us to try to determine going forward.
And how cats might sit with respect to this end.
Yeah.
Your guess is as good as ours, but if there is any.
Anything you can provide in the meantime that would be helpful.
So.
Tom.
You look at the operating environment.
You look at the underlying performance of the business.
Well, David the CAD guidance at the next earnings call I think as we've done.
Last year.
Our perspective is we're in a very good environment to generate.
Mid teens ROE next year.
No doubt and this.
In our mind and will update the guidance in Q4, but there.
Based on the work we've done to date, we've done a lot of work.
Feel pretty good about what will what will be able to generate in this environment. We I don't know if there's more you want to provide there I was trying to address one key issue here is is the long term Roe.
Actually impaired by the cat losses, and our belief is not as note and we're doing the work right now and we'll update our findings in Q4.
With the earnings release, but that's a very important point for us we see that we think we have everything we need in hand to tackle.
The climate change that.
We are observing and that's being predicted.
So that was the the first one and then we're.
We're actually doing the work right now planning.
Year next year and the notion of if cats behave is really saying if they come in terms of where we expect yes, we feel very comfortable we will be delivering mid teens Roe.
The coming year, so that those were the two messages the confidence in next year and then the long term erosion of ROE because of increasing several years weather events. So we don't see long term erosion.
One if you look at.
The cat load in this quarter.
Been at that level three times in 30 years.
So it's within the realm of what can happen.
Got it.
It's a rare occurance to a certain extent then I think you look at the track record it's priced in.
<unk> from quarter to quarter.
We're being rewarded for taking the risk.
I think what gives me.
Confidence.
Tom is that.
We said, okay. Our track record is strong.
Value proposition has generated very good performance.
If the world.
Warms up by three to five degrees.
Which is twice.
What policymakers would like to see happen.
We've done an in depth Harold by apparel Province by Province modeling analysis for the next 15 years.
Yes.
To express the confidence we've been expressing during the skull and I'll ask.
Who's been spearheading this effort to give you a bit of a perspective on.
<unk>.
The work we've done there and some of the key concur.
Conclusions and I'll come back after go ahead.
Thanks, Yeah, so we've been looking at.
Literature available on climate change really looking at a few scenarios and focusing on 2040 horizon why 2040.
I think our product pricing can be change on an annual basis. So we wanted something long enough to be representative of that.
Trend.
But short enough to.
Being.
Within the realm of the control that we have on pricing and product so.
First thing we did was look at our starting point.
And looking at our business. It is important to note that less than 40% of our losses.
Our weather related that means that there is another 60% that should not be in.
Factored by climate change and I think Bob.
But things like electrical fire test.
Tess plumbing liability claims so that's 60%.
A fire loss cost.
So on the 40% of <unk> that are impacted.
We believe two things will happen under this scenario that Charles mentioned that kind of three to five degree warming scenario. So one.
Weather losses will increase by around 50% between now and 2014.
So 50% might seem I, but over a decade in the App and just under 40% of claims that in <unk>.
<unk> by whether it's quite manageable and aggregate and not unlike what we've observed.
In the last decade. So it is not an existential threat for us and for personal property.
Secondly, we believe that evidenced that our I return periods today will become more intense.
So that's kind of at the Canada level.
As Charles mentioned, and we looked at it by by Province by Ferro.
And things will be left differently in different parts of the country. So eastern Canada will be more impacted by wind water Western Canada will be more impacted by al and fire, but we were a bit surprised like looking at the numbers like those things kind of even out and there is no one.
That will see all of the burden.
I might change.
According to add to our modeling and analysis so.
Overall, I think we think for this.
This expected impact and can be addressed through rates.
But rates alone really shouldnt be the only tool. So we'll focus on segmentation prevention stakeholders education, like indicating municipalities and things to be more resilient.
Well really strengthen our outperformance and will also continue to evolve the product and our supply chain to manage that.
Liability.
Tom I think we've gone deep as you know we have climate expertise.
In our.
Deep climate expertise in climate modeling expertise and our operations on top of a network of scientists were working with and feel pretty good about our ability to replicate what was a sub <unk> combined ratio track record in the last decade in the next decade.
We will test and power wash that from time to time as we have now.
But there is greater demand for the product.
It's been the case over the last decade, and I think we're really well equipped to meet that demand and do it profitably as we have in the past.
Okay. Thanks, very much for that very detailed answer I appreciate it.
Okay.
Thank you next question will be from Brian Meredith UBS. Please go ahead.
Yes. Thanks, a couple for you first Charles I'm, just curious looking at the UK commercial insurance business, maybe you could talk a little bit about what are the kind of similarities and differences in that retail commercial business versus Canada, and really where can you drive a competitive edge in that marketplace similar to what you've got in Canada.
Thanks, Brian.
Indeed, if you look at the Canadian footprint.
In the SME and mid market space.
We we have the market share thats, probably north of 25% and so this is a business that we've grown up with and grown.
And some of the the edges that we have built in the Canadian <unk>.
Thanks to our very much centered on <unk>.
Pricing and risk selection, where I think we've pushed the science in that space very close to what we're doing in personal lines.
With billions of data points and add strong systems.
Pricing expertise and governance.
That is a key element of what we were exporting in the context of the U K.
Second we have broad and deep relationships with brokers and have service models to service brokers, whether it's SME or mid market.
To meet demand not only of brokers and customers and Thats a core skill set.
We have in the Canadian market in place and frankly, the direct line operation, which is tilted towards SME and our regional business, which is tilted towards mid market you bring those two companies together and the complementarity of product and customer profile is amazing.
The other thing we do in the Canadian landscape, which can be exported as the management of broker relationships.
Across the board and we don't deal just with the biggest brokers in fact, we deal with small and mid brokers across the land.
Here you look at this deal the direct line broker footprint is at the smaller end of brokers, where the RSA broker footprint is at the larger end of brokers. So again here the complementarity of the distribution footprint is excellent and we have the expertise and the Canadian.
Context to manage large number of broker relationships and provide a service and value proposition that is consistent with that and I would say these are things that Ken clearly I think be exported in this market, but then what I think our business here in the U K will have as a <unk>.
Key advantage.
Even compared to the Canadian business is the focus that we will be able to put on commercial lines, because we're rationalizing the footprint to be even more focused on on commercial lines.
That's helpful and then I guess on that topic, obviously, one of the nice advantages you also have in Canada as broker link right. So.
Which is just terrific.
That exportable to the UK.
I think Brian if you think about it.
The Genesis behind.
Broker link.
Okay.
About 15, I don't know I forget 10, plus years ago 15.
<unk> passes.
We were concerned about the risk of disruption in first lines.
And as a result identify a number of responses investing in digital and AI investing in the brands.
<unk> distribution, that's what triggered the buildup of broker Inc, which as you point out there is an amazing machine.
The trigger to build broker link was not necessarily commercial lines driven.
We're here if you look at the UK marketplace.
Personal lines is very much driven by Aggregators etcetera, and therefore, the a portion of it to do the same thing here does not really exist and in commercial lines. It's not clear to me, we need to put much capital on the table too.
To expand our distribution relationships and harvest the relationships that.
Direct client currently has with brokers and that we as RSC have with brokers as well and so while there might be transport ability, it's not clear to me that from a strategic point of view, we need to do that at this stage, we should concentrate in the next three years to really integrate those businesses and make sure that the service.
Proposition product proposition for brokers is the best in the market.
Barr Nunn.
Makes sense. Thank you.
Thank you next question will be from Mario Mendonca at TD Securities. Please go ahead.
Perhaps for Charles or Louie.
The notion that you accept some volatility in your earnings and book value from from catastrophe losses that totally makes sense thats a judgment call, but one thing that may not that I don't think thats negotiable as capital strength.
No.
What im asking is.
How do you structure, the reinsurance to make sure that while youll absorb some earnings volatility capital is never at risk.
Help me think through that alright. Thank you nailed how we think about reinsurance Mario our thought processes.
Never be on the defensive.
And that's how we think about capital and Thats, how we think about reinsurance.
You I think in my mind nailed, how we're thinking about reinsurance, but can we maybe you want to.
Add or correct me and Mario in the exercise.
Thanks, I won't try that no I think you're right and we've been focused on <unk>, because I think we can absorb.
We can absorb within the earnings we generate on the business.
The lower end of the.
The losses from Cat so.
I think it's worked out so far well.
<unk> has enabled us to capture I think the highest.
Returns, we could capture in that environment. So.
I'm not sure I would the only thing I would say Mario is that we test.
How much volatility protection.
It's worth and cost and is available.
But it's hard to convince ourselves that it's a good way to use money. That's one second the availability for volatility which is at the lower end.
As diminished over time than traditional reinsurance markets. That's why you want to keep an eye on alternative markets.
But at the end of the day it is about capital protection.
Okay, but my specific question is what structures might be and are in place now to ensure that the tails never breached.
Okay.
While the reinsurance program quite frankly, with a $250 million retention in Canada, and 125 et cetera in the UK.
In itself is we're in the we're in the earnings zone, we never get close to the <unk>.
Capital zone, even with the sort of co.
Coinsurance debt that we have even in the case of the one in 500 year earthquake.
To put things in perspective.
So the reinsurance protection is a conservative in absolute terms conservative in relative terms, but it's meant to manage tail.
And capital. So you think of a big West coast or quake, one in 500 year.
Not even a capital event based on how much reinsurance we're purchasing.
How about the scenario that we saw this quarter, where there was just so many individual cat losses, none of them, none of which hit the threshold.
Is there an aggregate cover.
That covers you in that circumstance, where there are just so many individuals that don't reach the reinsurance coverage.
So our aggregate covers.
Available.
You need to pay for them and.
As far as we're concerned pricing has been really challenging we look at that from from time to time.
And.
We will keep looking at those but these things tend to be a bit expensive.
You are covered against the one very very large individual cap or not covered against.
A significant number of individuals that don't meet the threshold is that the right way to look at it.
That's the right way to look at it and I think given our given our size.
Given the law of large numbers.
Given the fact that home insurance is less than 20% of the IFC business, given the fact that commercial crop.
Commercial liability.
Specialty lines.
First of all automobile is not overly exposed.
Two cats.
We think that.
The footprint of the organization makes it such that we shouldnt throw away.
A return just to smooth quarters.
And not that point home then I'm looking at your capital margin disclosure of the waterfall you present your MD&A.
Message I should take away from this that even in a quarter as extreme as this the net income net income was expected cats was still well in excess of excess caps. So the way to really look at it as your best line of defense against these extreme cat quarters is your profitability.
The right way to express.
It is 100% right its profitability.
Which comes from outperformance.
Which is the focus and Thats why Mario were running the business with <unk>.
Earnings growth in mind.
ROE outperformance in <unk>.
Okay, I think I think I understand the total purchasing at one one other related thing now this is not a ratio you referred to very often are or at all but it helps me in understanding your personal auto business I look at the year over year change in your net earned premium and I compare that to the year over year change in your claims.
This has been negative for so long.
Roughly turned positive now I appreciate its not a number you focus on or provide guidance on a look at but what are we seeing here. When this when this right. The difference in the two so abruptly goes from negative to positive is this simply what you've been telling us for now for a few quarters that the pricing would eventually catch up to the inflation and inflation is moderating.
Now we're seeing the benefits of all that is that all of them staying or is there something more going on.
I'd need to replicate the Mac youre done, but theyre actually I see where that's coming from and the abrupt nature of it might to a certain extent reflect the fact that in 2021 there was.
Bit less driving in a bit a bit less accidents, but directionally speaking you're right. That's what we've been talking about inflation has been coming down frequency has been <unk>.
Table, and then rates have been moving up meaningfully to to compensate for that change will do well.
We will do the math the way you do the math.
Mario just to make sure that.
The answer we're giving us is accurate, but directionally speaking that makes sense to me.
Thank you for your help principal.
Okay.
Thank you ladies and gentlemen, this is all the time, we have for questions today, and now I would like to turn the call over to Cuba.
<unk>. Please go ahead.
Thanks, everyone for joining us today.
Following the call a telephone replay will be available for one week and the webcast will be archived on our website for one year. The transcript will also be available on our website in the financial reports and filings section.
2023, Q4, and full year results are scheduled to be released after market closed on Tuesday February 13th with the earnings call starting at 11, a M. Eastern time the following day.
Thank you again and this concludes our call for today.
Thank you ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
Yes.
Okay.
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