Q3 2024 Intact Financial Corp Earnings Call
and welcome to the intact financial cooperation Q3 2024 Results Conference Call. At this time, all lines are on listen to me more.
Following the presentation, we will conduct a question in an answer session. And if at any time during this call, you require immediate assistance, please press star zero for the operator.
Also noted that this call has been recorded on November 6, 2024.
Speaker Change: and now I would like to turn the conference over to Jeff Korn, Senior Vice President and Chief Investor Relations Officer.
Speaker Change: Please go ahead.
Jeff Korn: Thank you, all right. Hello everyone and thank you for joining the call to discuss our third quarter financial results.
Jeff Korn: A link to our live webcast and materials for this call have been posted on a website at intactfc.com under the investors' tab.
Jeff Korn: Before we start, please refer to slide two for cautionary language regarding the use of forward looking statements, which forms part of this morning's remarks.
Jeff Korn: and slide three for note on the use of non-gap financial measures in important notes on adjustments, terms, and definitions used in this presentation. To discuss our results today, I have with me our CEO Charles Brindamour, our CFO Louis Marcotte.
Jeff Korn: Patrick Barbell.
Jeff Korn: Vice President and Chief Operating Officer, Darren Godfrey, Executive Vice President and Chief Underwriting Officer for Global Specialty Lines.
Jeff Korn: Guillaume Lamy, Senior Vice President, Personal Lines, and Ken Anderson, Executive Vice President and CFO of UKNI. We will begin with a pair of remarks followed by Q&A and with that I will turn the call over to Charles.
Charles: Good morning everyone. Thank you for joining us today.
Charles: This summer, many of our customers were impacted by numerous severe weather events, especially here in Canada.
Charles: Our teams were on the ground within the first hours of these events and continue to play a crucial role in getting customers back on track.
Jeff Korn: In fact,
Jeff Korn: Hundreds of employees answered calls 24-7 and three out of four clients were able to open a claim within a few seconds.
Jeff Korn: We quickly created five drive-thru health centers to expedite the claims process, which allowed us to appraise nearly 11,000 vehicles to date.
Jeff Korn: We deployed all of our resources across Canada, including on-site and wildfire defense systems.
Jeff Korn: to help customers in affected areas and participate in rebuilding efforts.
Jeff Korn: As a result, we already closed almost 60% of approximately 50,000 claims related to the four most severe events.
Jeff Korn: Our expertise is in helping people navigate difficult situations, and this is when our teams are at their best.
Jeff Korn: These moments underscore the importance of why we exist, helping people, businesses and society prosper in good times and be resilient in bad times.
Jeff Korn: As for our third quarter results, our resilience was in full display.
Jeff Korn: Yesterday evening, we announced net operating income per share of $1.01 and an operating ROE of 15.8%.
Jeff Korn: Our book value per share stood at $91.00, up
Jeff Korn: Three quarters, three percent, quarter over quarter.
Jeff Korn: And finally, our capital position remains strong, with a total capital margin of $2.6 billion.
Jeff Korn: Our growth momentum continued with premiums increasing 6% year over year once you remove noise from the UK exits and acquisitions.
Jeff Korn: Our combined ratio of 104% included 22 points of cat losses, 17 points higher than expected.
Jeff Korn: excluding excess cats, our combined ratio was 87%, a three points improvement over last year.
Jeff Korn: Given our profitability position, we're keen to grow in all of our segments.
Jeff Korn: Let's now look at each of our lines of business, starting with Canada. In personal auto, premiums were up 12% year-over-year, driven by rates and customer growth.
Jeff Korn: The combined ratio stood at 97.6, with more than 4 points of excess calf losses, mainly due to the Calgary Hill Sore.
Jeff Korn: I just think for this, our combined ratio is well in line with our sub-95 guidance.
Jeff Korn: From an industry perspective, profitability remains challenged. As a result, hard market conditions are expected to persist over the next 12 months.
Jeff Korn: Moving now to personal property.
Jeff Korn: Premiums were up 8%, reflecting rates and customer growth. The combined ratio of 147.5% included 72 points of cash losses in the quarter.
Jeff Korn: The underlying current year loss ratio was strong with an improvement of six points year over year.
Jeff Korn: We expect the impact of the catastrophes over the last few years.
Jeff Korn: will sustain hard market conditions for at least the next 12 months.
Jeff Korn: We're continuously evolving our value proposition to make sure it helps our customers face the impact of climate change and delivers sustainable long-term performance.
Jeff Korn: Our product is constructed around perils and price based on a model that assumes the planet warms by 3 to 5 degrees Celsius by the end of the century.
Jeff Korn: Leveraging Advanced AI Models to Optimize Risk Selection.
Jeff Korn: On the supply chain front, we tripled the onsite business in the last four years.
Jeff Korn: giving it a national footprint with over 40 branches.
Jeff Korn: On risk control, we're investing in prevention and are actively working with governments and regulators on climate resiliency.
Jeff Korn: Our personal property business has shown long-term resiliency with a 5 and 10 year average combined ratio of 90% including this quarter.
Jeff Korn: We aim to deliver a sub-95 combined ratio even with severe weather, and we expect to end the year close to this goal.
Jeff Korn: In commercial lines, top line growth was 2% in the quarter.
Jeff Korn: We focus on the SME and mid-market segment, which continues to perform well, with rates in the middle single digit.
Jeff Korn: range. And this was tempered by continued competition within large accounts.
Jeff Korn: Looking forward, we expect mid-single-digit premium growth for the industry over the next 12 months.
Jeff Korn: The combined ratio of 94-4 included 19 points of excess CAT losses.
Jeff Korn: with a partial upset from strong favorable PYD.
Jeff Korn: The underlying current year loss ratio was strong, with an improvement of almost 5 points.
Jeff Korn: year-over-year.
Jeff Korn: We remain well positioned to deliver a low 90s or better combined ratio in this segment.
Jeff Korn: Moving now to our UK and I business.
Jeff Korn: Premium growth was 28% in the quarter, mainly due to the direct line transaction.
Jeff Korn: Organic growth was muted, reflecting pressure in large accounts upset by rates still being in the mid-single digits on average.
Jeff Korn: The combined ratio is solid in the UK at 91.9% and in line with our target of low 90s performance in 2024. Overall, I'm very pleased with the speed of our progress in the UK.
Jeff Korn: We are focused on continuing to improve service and broadening our broker relationships while investing in technology and integrating the DLG acquisition.
Jeff Korn: In the U.S., premium growth was 4%, with our most profitable lines growing in the upper single digits.
Jeff Korn: Overall, we expect industry premium growth to be mid to high single digits over the next 12 months.
Jeff Korn: The combined ratio is strong at 87.4% in the quarter.
Jeff Korn: making it the fifth quarter in a row that our performance was below 90%.
Jeff Korn: and we continue to demonstrate our performance.
Jeff Korn: We remain well positioned to continue to run this business in the low 90s or better.
Jeff Korn: Turning to our strategic initiatives, let me highlight some important milestones that I've heard over the past few months that align very well with our strategic roadmap.
Jeff Korn: With respect to increasing digital engagement...
Jeff Korn: We have real positive momentum from our ongoing investments on the digital as well as the branding front.
Jeff Korn: Impact is the most well-known insurer in Canada, a position now held for over four consecutive years.
Jeff Korn: And by capitalizing on increased shopping traffic, our web influence quotes were up 83% year over year.
Jeff Korn: This led to strong premium growth particularly in our direct distribution business that are direct. In addition, of the almost 50,000 claims from the four most severe weather events, over 40% were reported digitally.
Jeff Korn: Taking action to remain a leader in pricing and segmentation is a core element of our strategic roadmap. We're accelerating the deployment of AI models in all of our segments.
Jeff Korn: For example, in Canadian Commercial Lines.
Jeff Korn: Nearly two-thirds of our products now leverage machine learning or pricing.
Jeff Korn: Claims and supply chain is another key pillar in driving sustainable outperformance.
Jeff Korn: Unsight, which has an average cycle time of about 50 days less than the rest of our network, handled two-thirds of all the intact claims from the southern Ontario floods.
Jeff Korn: and our Impact Service Centers.
Jeff Korn: Shabby 30% faster cycle time and eight point higher net promoter score handled an influx of claims from the Calgary Hill store
Jeff Korn: And beyond helping our customers, we're investing in our communities to build resilience. We continue to work with cities across Canada, over a hundred to date, to support local prevention initiatives.
Jeff Korn: Through the Impact Centre on Climate Adaptation, we've reached close to 3.5 million Canadians with practical resilience advice.
Jeff Korn: And we've engaged directly with mayors and fire chiefs in the 20 most at-risk municipalities when it comes to forest fires. As we've said many times before, climate is a societal challenge, not just an insurance one.
Jeff Korn: So without a doubt, Q3 was a challenging quarter for many.
Jeff Korn: But the incredible work done by our teams in helping to support our customers in their time of need further reinforces our value proposition.
Jeff Korn: Looking ahead, our global platform provides substantial organic growth opportunities and with a strong balance sheet.
Jeff Korn: We're really well positioned to execute on our strategy and achieve our NOIPS growth objective and ROEL performance objective in the coming decade. With that, I'll turn the call over to our CFO, Louis Marcotte.
Louis Marcotte: Thanks Charles and good morning everyone. Our third quarter results showed the resiliency of our platform with a dollar one of net operating income per share and an operating ROE of 15.8 percent.
Jeff Korn: We delivered very strong underlying results across all lines of business and geographies.
Jeff Korn: We also benefited from our diversified sources of earnings, with both investment and distribution income growing in the double digits, and providing approximately $2.30 of net operating income per share. This means we were able to absorb $5 of catastrophe losses and still report a profit.
Jeff Korn: Let me take some time to go over these catastrophes. In the third quarter, we had $1.2 billion of net cat losses or $1.7 billion on a gross basis.
Jeff Korn: This was mainly due to the unusually severe weather events impacting three of the four most densely populated areas in Canada.
Jeff Korn: As usual, we will release our cat loss guidance for 2025, along with our Q4 results, which will take into account our science-based climate modeling,
Jeff Korn: Change in exposures, inflation, and obviously recent experience.
Jeff Korn: We will also consider tools at our disposal to mitigate the impact of climate change.
Jeff Korn: We are confident that it will not hamper our ability to continue to grow our operating earnings in line with our track record.
Jeff Korn: Let me talk about the strength of our underlying business.
Jeff Korn: Strong favorable prior year development of 5.7% was driven by healthy development across all lines of business and included one point impact from prudent reserving from last year's cat losses.
Jeff Korn: Canada commercial was elevated at 14%, but it is important to note that the PYD in this line has historically been strong, typically ranging between 6 and 8%.
Jeff Korn: Going forward, we still expect favorable development between 2% and 4% on a consolidated basis.
Jeff Korn: The overall expense ratio of 32.5% was comparable to last year, even with our growing investments in technology as well as marketing. The year-to-date ratio of 33.6% was in line with our full-year expectation of 33 to 34%.
Jeff Korn: Operating net investment income increased by 13% to $394 million in the quarter as we captured higher reinvestment yields over the last 12 months. We remain on track to meet our guidance of more than 1.5 billion dollars in 2024.
Jeff Korn: While interest rates trajectory is unclear, we still expect to grow investment income over the next year, although at a slower pace.
Jeff Korn: This is due to our strong book yield and increasing our common equity exposure closer to our 10% target by year end.
Jeff Korn: Distribution income increased by 14% to $132 million, led by solid performance from BrokerLink. This was on the back of broker acquisitions, solid organic growth, and margin improvements.
Jeff Korn: We remain on track to meet our guidance of at least 10% growth in distribution income in 2024.
Jeff Korn: Our operating effective tax rate was low at 4% as it was impacted by the sources and geography of earnings that are taxed at different rates.
Jeff Korn: The underlying losses in our Canadian segment drove our tax rate lower in the quarter, which would have been approximately 22% on a normalized basis.
Jeff Korn: Looking ahead, we continue to expect our operating effective tax rate to be around 22 to 23 percent.
Jeff Korn: And in the context of this challenging operating environment, we delivered an operating ROE of 15.8% in line with our five-year historical average, which is impressive given the severe weather conditions.
Jeff Korn: Turning to our balance sheet, our financial position remains strong. We have strong capital ratios across all jurisdictions, including a healthy MCT of 192% in Canada.
Jeff Korn: Our total capital margins stood strong at $2.6 billion due to a combination of solid investment and distribution income, as well as favorable market movements.
Jeff Korn: We also ended the quarter with an adjusted debt-to-total capital ratio of 28.3% in line with our target. We are in good position to absorb volatility and capture opportunities as they may emerge.
Jeff Korn: Book value per share grew 3% in the quarter and was 17% higher than last year. The increase from Q2 reflected solid earnings as well as market related gains in our bond portfolio.
Jeff Korn: Our balance sheet strength and operational resilience are also being recognized by rating agencies. Last month, Moody's upgraded our financial strength rating by one notch to AA3.
Jeff Korn: Finally, I want to take the time to thank our teams for their dedication to delivering second-to-none service to our customers every day.
Jeff Korn: With our robust platform, exceptional talent pool, and a clear strategic roadmap, I am confident we can continue to achieve our long-term target of 10% net NOIPS growth and ROEL performance versus industry of at least 500 basis points.
Speaker Change: With that, I'll give it back to Jeff.
Jeff Korn: Thank you, Louis. In order to give everyone a chance to participate in the Q&A, we would ask that you limit yourself to two questions per person. You can certainly requeue for follow-ups and we'll do our best to accommodate if there is time at the end. So Eric, we're ready to take questions now.
Eric: Thank you.
Speaker Change: Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request.
Jeff Korn: And if you'd like to withdraw from the question queue, please press star followed by two.
Jeff Korn: And if on speakerphone, you'll need to lift the hands up before you press, before pressing any key.
Speaker Change: Your first question comes from the line of Jane Gowen with National Bank Financial.
Speaker Change: Please go ahead.
Jane Gowen: Thank you.
Jane Gowen: First question, just wanted to start in personal auto and Ontario regulatory environment. I guess it seems like there's some proposals to potentially remove accident benefits from private insurance. Maybe you can sort of just talk through potential impacts from that proposal and any other commentary on the regulatory environment in Ontario specifically.
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Speaker Change: Very good. Maybe Guillaume, you can share your perspective, you've been close to that.
Guillaume Lamy: Yeah, so we've been dealing with the government over the past couple of years advocating for reforms that offer customers more choice and personalized product.
Speaker Change: In Budget 2024, we saw movement on the auto reform file, particularly around optionality.
Guillaume Lamy: mandatory accident coverage will continue for the medical and rehabilitation cost coverage. Other benefits like income replacement, caregiver or housekeeping will become optional which will provide a customer with more choice especially with their coverage on their water plant. So, we are testing for that on July 1st, 2026 and that gives quite a bit of time for the industry
Speaker Change: and to react with who we're advocating for that vote, so I'm quite happy you did.
Speaker Change: With that being said, overall we're supportive of the change in Ontario.
Speaker Change: and budget announced on Tuesday…
Speaker Change: and discussion on the details surrounding the implementation, mostly to ensure that the new product is simple to understand for customers, and that the offer is somewhat uniform across the industry, so as the distribution is easier that way.
Speaker Change: Good. Thank you, Guillaume. I think good job on the part of the Ontario government as far as we're concerned, taking action and environment for the cost equation.
Speaker Change: It's pretty good. It's the best moment to work on product reform and we need to keep an eye on BI, obviously, inflation, but accident benefit is in a very good space, so good work on their part.
Speaker Change: and second question just flipping over to the UK and in Ireland and a couple of the notes in the strategic roadmap there can you
Speaker Change: Can you talk through maybe the timeline for Guidewire to be fully implemented, if it's not already, and then what you potentially expect from perhaps a claims savings perspective on that front, and maybe a little bit more detail about what one commercial program is for the DLG business.
Speaker Change: Very good. Thank you for your three questions, Jason.
Speaker Change: and then Ken, maybe you can give a perspective on one commercial. I'd say, and you can see that in the results, Jamie, the...
Speaker Change: Also, but it's multi-layered transformation, you know, from values, leadership, system, how we define success.
Speaker Change: the integration.
Speaker Change: The supply chain strategy, etc. But I must admit we're further than where I thought we would be at this stage.
Speaker Change: So Patrick, why don't you share your perspective on technology?
Patrick: Great. So there's a lot of investment on technology right now in the UK.
Speaker Change: Implementing guidewire for claims has been...
Speaker Change: The first area focused right after the acquisition. We're well on our way. In fact, we're deployed pretty much on most lines. There remains just the
Speaker Change: A few areas for specialty lines, but
Speaker Change: We're well advanced in the deployment what guy wire brings from a claims perspective is the ability to have harmonized Processes better controls on indemnity and but the big part from a strategy perspective is to internalize The work just like we've done
Speaker Change: in Canada. You know, the outperformance, the hourly outperformance, about two-thirds come from risk selection.
Speaker Change: pricing and claims expertise in supply chain and we have our own map very clear for the coming year to build the same advantage in the UK and the system is an enabler for us to do that.
Speaker Change: And do you want to share a perspective and maybe just point just one point to make and it talks maybe to the
Speaker Change: the role that can is playing in the UK. We're investing in technology in that perimeter massively way more than investments that were made there historically north of 100 billion pounds.
Speaker Change: That's baked in the performance that you see which is already in the low 90s
Speaker Change: and you can think that the UK business from an ROE point of view is approaching the mid-teen range at this stage. So three years in, we think we're in a good shape. Ken? Sure, so one commercial, Jayme,
Ken Anderson: So what we've done is we've taken in the direct line portfolio into our systems side-by-side with our existing RSA commercial lines portfolio.
Speaker Change: and the one commercial endeavor will essentially bring together now those two propositions and face off into the market with a single proposition.
Speaker Change: In terms of product and price and facing off into the into the brokers with a single distribution footprint.
Speaker Change: We think that that's going to, you know, be very impactful. We're moving now to a number three position in the commercial lines, the domestic commercial lines market.
Speaker Change: as well as we move into 2025. So the first endeavor was to take the business into our systems, which we've done, protect the business, we've talked about.
Speaker Change: Having a hundred million more premium from DLG than we originally anticipated. Now it's about bringing the offer together and leveraging the footprint and the distribution opportunity moving forward.
Speaker Change: Thank you, Jim.
Speaker Change: The next question comes from the line of Tom McKinnon with BMO Capital Markets, please go ahead.
Tom McKinnon: Yeah, thanks. First question is with respect to what you're seeing as we embark on reinsurance pricing. What are you seeing there? Is this strictly going to be pass-through? Does this sort of keep hard markets continuing to be firm? And how do you see, you know, their
Speaker Change: for next year being priced in and then perhaps passed through to further rate hikes for consumers. So yeah with respect to that and then I have a follow-up. Thanks.
Speaker Change: Perfect. So maybe, Louis, you can tackle the reinsurance question.
Speaker Change: And Guillaume, you can tackle the rate environment question.
Speaker Change: I think the ranchers are doing quite well, if you want my opinion, but I'll ask Louis to share his perspective.
Louis Marcotte: results historically have been very good with the CAT program we put in place.
Louis Marcotte: and you'll remember it's meant to tackle tail risk, not quarterly volatility. So going into this season, no changes expected on the strategy. We expect good market conditions and not a huge change to the cost of the program.
Louis Marcotte: and maybe from pricing perspectives.
Speaker Change: Unless you have a follow-up on reinsurance, we'll go to the right environment, which was your
Speaker Change: The other part of your question, yeah, yeah, great. Continue. Sorry.
Speaker Change: Yeah, so from a pricing front, so Q3 cat activity, as we said, included four major events impacting Canada.
Speaker Change: three out of the most
Louis Marcotte: populated cities in the country, two events reaching reinsurance. So really, a very high return period event. For example, the center of those events is a few kilometers north or south, it's a vastly different story. So it happened, we're not discounting it. But that's why we say it's a high return period event. So
Louis Marcotte: from a pricing perspective what that means rates are already in the double digit and we'll be scaling that up slightly reflecting the recent cat emergence
Louis Marcotte: You also recall from last year and our analysis on climate based on the worst case global warming scenario of three to five degrees
Speaker Change: That showed that Twitter losses, which make up only 40% of our losses, will increase by 50% by 2040.
Louis Marcotte: So what that means over a 15 years horizon, the impact on rates is manageable at slightly more than 1%. And that trend is already fully reflected in pricing.
Louis Marcotte: But really rates are not our only tools in addressing the impact of climate change So that's why we're also turning on non-rate levers to manage the volatility like risk selection, product prevention, supply chain, and stakeholder education
Speaker Change: Thank you Guillaume. Bottom line, Tom, I think our perspective is there's capacity in reinsurance and it's a constructive marketplace.
Louis Marcotte: and the primary rate environment is a hard one in our mind with double-digit.
Louis Marcotte: rate increases for the coming 12 months.
Louis Marcotte: You want to follow up, I think.
Speaker Change: commercial lines favorable reserve development they're probably bigger than what most were expecting
Speaker Change: You talk about some favorable development in the long tail lines, can you maybe just elaborate a little bit more color, you know, what are these lines, is this surety, what are you seeing here, what years?
Speaker Change: is the favorable development pertaining to. Any color there, that'd be great. Thanks.
Speaker Change: Yeah, I think, Don, that's right, a bit higher than what it's been historically. We want us to keep in mind that our track record in commercial lines
Speaker Change: You know, it's in the upper single-digit range in terms of PYD. So high PYD, higher than historical, but aligned with pretty healthy, favorable reserve development. Louis, I don't know if you want to provide additional color for them.
Louis Marcotte: Well, so it's at 14, it's 5.7 points higher than last year. So clearly a big spike. Two factors, the prior year development on cats.
Louis Marcotte: and the other one is, as you mentioned, the long tail lines. So, we don't get into the details or specifics in terms of years or lines. I think what we're trying to say here is we've been prudent on the balance sheet and our reserving. Some of this is coming back. It will fluctuate by line of business, by quarter.
Louis Marcotte: So, we're not surprised here that you might see a spike like this one, and particularly in Canadian commercial where it's been fairly healthy PYD historically, and then with last year's cats, you would expect.
Speaker Change: Some kind of bump up. And we've been expressing prudence in our balance sheet for a number of quarters. So this is coming back now. And to me, not a surprise, it is a quarterly
Speaker Change: and what we're hinting to is a higher in the near term, higher end of that range in the near term, but we don't get into the specifics of lines of business because it varies.
Speaker Change: that things might not turn out as as we anticipated favorably. When it comes to the commercial lines PYD
Speaker Change: The mix between auto, if you want color, commercial auto and commercial PNC is like 20% auto, 80% PNC, so it's very much...
Louis Marcotte: PNC driven. We're very happy with our performance there and it clearly shows in what were very strong results.
Louis Marcotte: Delegates.
Louis Marcotte: sort of multi-year favorable development, so it's pretty much across the board.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Brian Meredith with UBS Financial
Brian Meredith: Yes, thank you.
Brian Meredith: Yeah, thank you. Charles, just kind of adding on that a little bit. In the U.S., we continue to get a little bit more companies talking more and more about the tort inflation and impact we're seeing on reserves, you know, down here and just pressure on.
Louis Marcotte: on margins. Are you seeing that in your U.S. operations in particular in some more recent accident years and maybe your perspective on that?
Louis Marcotte: Yeah.
Speaker Change: Yeah.
Speaker Change: When we've entered the U.S., Brian, we've exited lines where we felt pricing would be tough. Lines with long tails and much variability around the tail and that puts us, I think, in a very good position and I'll let Darren provide perspective on duration and so on.
Speaker Change: We've been very focused on
Speaker Change: Severity Inflation
Speaker Change: in liability for many years, in part because frequencies have been
Speaker Change: I've been moving and so you've heard us talk about lots of moving pieces we've therefore taken a very cautious stance so we are seeing inflation
Speaker Change: But we're not surprised by the level of inflammation we're seeing and that's therefore baked in either in our footprint or in the prices that we're charging.
Speaker Change: Darren, maybe you can provide a bit of color for Brian. Yeah, sure. Thanks, Shubha. Yeah, so when you look at the composition of our U.S. portfolio, Brian,
Speaker Change: versus our peers, our casualty exposure is less than average.
Speaker Change: Obviously, we have a little bit heavier property book, but also when you think through.
Speaker Change: Our non-PNC exposure, Purity for example, we were obviously not exposed as much from a social inflation standpoint.
Speaker Change: When we look at the liability book itself and the duration of our reserves, today we sit at around about 2.4 years.
Speaker Change: and that compares to the average in the industry of about 3.1. So that is a material gap between the average duration of our reserves. Now as Charles said that's a function of not both the reserving action we've taken historically but also the exits.
Speaker Change: of a number of lines where really social inflation pressures existed at the time of exit. So that it very much is the makeup of the book. I think from an exit line standpoint, as you've seen,
Speaker Change: They've performed as expected in 2024 with no impact on our non-operating results.
Speaker Change: Obviously, we've been very active from a claims management standpoint in our runoff portfolio.
Speaker Change: together with obviously as you know the significant reserve charges that we've taken in a number of years post the exit in those particular lines. As Charles said in the ongoing lines
Speaker Change: We continue to take strong rate actions. You think about our auto liability, you think about umbrella. We're very active in terms of pushing significant double digit rating increases there. So we're well positioned from a rate standpoint. And obviously broadly,
Speaker Change: We're taking a very prudent position obviously on the current accident year as well as the prior accident year. So again, as we said balance sheet remains strong both on the ongoing and on the exit lines.
Speaker Change: and we're comfortable with the position that we see today. See, Brian, the problem with inflation and liability is that when you realize there's inflation...
Speaker Change: It touches many accidenteers and that's why you're seeing these rebound and these reactions
Speaker Change: My second question Charles, it was noteworthy in your discussion of marketing additions in the UK that's gone from a firm to a moderating
Speaker Change: Yeah.
Speaker Change: Yes, not that much change. In fact, in the pricing environment in the UK, I'll ask our local expert, Ken Anderson, to share his perspective on the market and also come back at the end.
Ken Anderson: So Brian, I think, you know, all in we're achieving mid-single digit race on average. I think, you know, there's two elements
Ken Anderson: I would say in Main Street commercial lines, you know, conditions remain favourable. We're seeing mid-single, single-digit rate increases in the mid-market commercial and the SME book, in fact, is achieving over single-digit rate increases.
Ken Anderson: Slightly different.
Ken Anderson: on the specialty line side. There we're seeing a bit more moderation on the back of substantial rate increases over the past couple of years. That's similar to North America that Darren talked about.
Ken Anderson: and we've seen that increased competition on large accounts.
Speaker Change: at Renewal, and that trend continued in the third quarter.
Speaker Change: as we're seeing more accounts being shopped around. So overall, we would expect that market to remain constructive, firm conditions in commercial, a bit of moderation in specialty, all in that mid-single-digit rate.
Speaker Change: Yeah, I think that's right. The thing that we've seen specifically in terms of change is large accounts. We've been flagging now for probably nine months that there was more competition in large accounts. And in the last quarter, in the London market business in particular, large accounts.
Speaker Change: We've seen a deceleration from, you know, low single digit sort of rates to basically very little rates. And that's why we've changed the word. But in aggregate, we're pretty much in the mid single digit.
Speaker Change: zone, and I find these conditions to be very constructive, especially in the context of the NIG integration.
Speaker Change: The next question comes in line of Doug Young with Disarming.
Speaker Change: See you later.
Doug Young: Hi, good morning. Hopefully this will be relatively quick, but yeah, it was mentioned again in the release
Doug Young: about conservatism on DLG, you know, as you rolled that book. And I think that book now is, you know, on your systems. And so can you talk a bit like just what is conservatism? Why is there conservatism? And now that it's on your systems, does that change how results kind of flow through? Unknown Speaker
Speaker Change: Doug, I think the first point was that
Speaker Change: The way we structured this deal is we didn't take the past.
Speaker Change: That's good news. There's no exposure from the past.
Speaker Change: So what you're seeing
Speaker Change: Is current accidents your performance?
Speaker Change: And as we've talked about before, you should always look at current accident year and PYD together to assess the underlying performance of our business across the board. Because there's no past here, we're building caution on the current accident year.
Speaker Change: That's all this is about but the overall performance of DLGs as a result
Speaker Change: a bit higher because of that prudence building in the current excellence year.
Speaker Change: Otherwise, it's performing well and probably better than what we thought six to nine months ago.
Speaker Change: Again, I don't know if there's anything to add, not a whole lot to add, but of course because we're not taking any exposure from the past as we build the conservatism in the current year
Speaker Change: We don't have the PYD currently to release to offset it, hence that's why it's having a slight drag.
Speaker Change: As Charles said, very pleased with the business.
Speaker Change: and you know now the remediation is starting and that's what should evolve that UK and I performance from that current
Speaker Change: 92 or thereabouts combined ratio towards the 90% level in 18 to 24 months.
Speaker Change: Yeah, I'm quite bullish about that portfolio's performance. When I look at how it's performing now,
Speaker Change: When I look at the fact that
Speaker Change: We assumed we would receive £530 million of business and we were delivered £630 million of business. It gives us room to improve performance.
Speaker Change: impacts future results as we should start to see PYRD flow through.
Speaker Change: next year.
Speaker Change: Okay, yes.
Speaker Change: Unless things deteriorate, but that's not our expectation. This should follow a pattern that's not inconsistent with what you see across the platform.
Speaker Change: Okay, and then second just hoping you gave some good color on just the competitive landscape in the UK But in Canada, you know, is it you again? It's talking about large case competition and I know it's not as big as your SME in mid-market But can you talk about what you're seeing from a competitive perspective in commercial Canada large case? And is it same worse better as it's spreading into the SME in the mid-market. You can give a little more color
Speaker Change: Darren do you want to share your perspective on Canada? Yeah Doug I mean I don't think we really see a material difference versus the last couple of quarters from a large account standpoint.
Speaker Change: We see a little bit of shifting in specialty lines, I mean obviously you've got some portfolios that have very high average premiums, so there's a bit of mix.
Speaker Change: Shubha Khan, Louis Marcotte, Charles Brindamour, Unknown Executive
Speaker Change: Not inconsistent with what we saw last quarter there. So again competition remains strong, but not I would suggest a material change
Speaker Change: Relative to last year, we're still getting rates in that mid single digit type range across the entire portfolio. Again, obviously pressure on the large account standpoint.
Speaker Change: The rates that we're achieving are not materially off where we were last quarter, so it continues to be a competitive market. But we do, obviously, given our performance, given the fact that we consider the market environment to be favorable, we continue to be keen to grow in that market.
Speaker Change: Yeah, I think the large accounts in Canada are primarily indeed in specialty lines.
Speaker Change: run by a Paul Luccarelli. The performance there is excellent. The combined ratio starts with an 8.
Speaker Change: and we're very comfortable growing in that environment, I would say, but...
Speaker Change: Paul and team are prudent, as we all are.
Speaker Change: and there's a fair bit of upside in the Canadian market despite
Speaker Change: are a strong presence. Otherwise...
Speaker Change: The bulk of the portfolio.
Speaker Change: is mid and SME, or yeah, SME and mid-market business, and that is mid-single digit at this stage.
Speaker Change: I appreciate the call. Thanks.
Speaker Change: The next question comes from the line of Stephen Bolland with Raven James.
Speaker Change: Go ahead.
Stephen Bolland: Thank you. Charles, I want to go back to your comments on reinsurance pricing, that they've been very profitable, even with the storms in Canada and the U.S.
Stephen Bolland: You know, basically, it should be a rational renewal season.
Speaker Change: So I'm just wondering, what's the barrier in your mind?
Speaker Change: You know, what prevents, I guess, your expectation that, you know, the premium growth is going to, or the rate increases are going to be in that mid to single digit range?
Speaker Change: Well,
Speaker Change: So, first of all,
Speaker Change: I don't want to mix Canada and the US. I think that there have been cuts in Canada and we'll tackle the question in relationship with what happened this year in Canada, what it means from a reinsurance pricing point of view.
Speaker Change: U.S. might be a slightly different story, but we're far less dependent, not that we're dependent in Canada, but in the U.S. it's not a cat-prone book, so non-issue for us.
Speaker Change: In the Canadian context, I mean,
Speaker Change: We're not completely guessing what the environment will be next year because we're in active discussions.
Speaker Change: with free insurers in terms of how much we want to purchase next year. And we know that the market is constructive.
Speaker Change: There's capacity and range for its performance, frankly, in the Canadian context.
Speaker Change: have been good. I think the issue is that there has been an increase in natural disasters. There has been inflation. A big portion of that is happening under the retention.
Speaker Change: You know, the earthquake risk has not gone up in Canada. That's a big portion of why we buy reinsurance from. So and if anything, we manage our direct exposure from an earthquake point of view in a very rigorous fashion. I think the supply chain keeps
Speaker Change: Overall, Beyond Quake passed down and we must be an outstanding customer for Reancher and we're looking forward to the upcoming discussions.
Speaker Change: Louis, I don't know if you want to provide color.
Louis Marcotte: Well, if that answers Steven's question, I'll stop here, unless let him come back with a, you know, a follow up questions on it. I thought that was pretty clear.
Speaker Change: Shubha Khan, Louis Marcotte, Charles Brindamour, Unknown Executive
Speaker Change: Yeah, I think that's fine. And then the second question, I don't know if this is an off call discussion. But, you know, one of the things you always highlight is machine learning, AI, how that's being factored into your pricing. And certainly you have the skill to do that.
Speaker Change: I'm just wondering like, is there a general, you know, whether it's in personal auto or personal property or commercial, especially in Canada, is that is that move the pricing?
Speaker Change: Unknown Speaker Like if you charged me 100 but you put in more variables in the machine learning, does that move my premiums up 10% or 5% or down 10%? I'm just trying to get an idea as this theme becomes, you know, even more priority, how much it does move your pricing segmentation.
Speaker Change: Yeah, this is not about average price.
Speaker Change: It's about
Speaker Change: Pricing accuracy, how many cells
Speaker Change: you have. I'll get, I'll ask Patrick to give you his perspective on the output of using machine learning which
Speaker Change: We're using widely here in Canada, of course, both personal and commercial lines and we're on a mad race to deploy these models in the U.S. and in the U.K.
Patrick: Yeah, so there's two, two layers to machine learning when we apply in pricing two main ones that I keep also that the first one is to improve significantly analysis of the risk.
Patrick: Which determines the premium and when we move from more traditional models
Patrick: to machine learning, we get into...
Speaker Change: The trillions.
Speaker Change: price points overall when we combine all of the of the variables.
Speaker Change: and then there is a layer on top of it that is pricing optimization so making sure we factor in
Speaker Change: Our appetite for where to go and the dynamics of the market and and that's where even if from a pure risk perspective if I create a lot of dislocation because we implement a lot of new segmentation
Speaker Change: Then it's optimized based on the market conditions to win in the marketplace. So we started in PL We're in the third generation of Machine learning models being deployed in personal lines or now have a lot done already in Canada for commercial lines
Speaker Change: and we're getting into specialty lines but more importantly it's a big lever for us to support our performance roadmap in commercial NSL outside of Canada and US.
Speaker Change: Okay, so the bottom line, Stephen, is the fact that
Speaker Change: Using machine learning doesn't move the average price for consumers but it creates
Speaker Change: Far more pricing options and dislocation at your existing customer. The good news is the fact that
Speaker Change: The PNC insurance industry is one of the most competitive marketplace, where in every product, every province, you probably have 20 active
Speaker Change: competitors. And the good news about massive dislocation is that the odds of finding a better deal in the marketplace are going up, they're not going down.
Speaker Change: Okay, thanks. That's good.
Speaker Change: But you should try our offers first.
Speaker Change: That was a joke, Steve.
Speaker Change: Your next question comes from the line of Paul Holden with CIDC.
Speaker Change: Please go ahead.
Paul Holden: Thanks. Two questions for you and hopefully they're pretty quick. So first one is with respect to bodily injury and personal auto. I think there was a reference to it earlier. Maybe just an update there if there's any change in trend versus last quarter.
Paul Holden: Patrick, what's your perspective? No, Paul, no change. I mean, we flag that there is pressure in BI, mainly in Alberta. We reflected it in our both our pricing and reserving a few quarters back, but this quarter
Paul Holden: it's there's still pressure in bi but it's all reflected and it hasn't moved up this quarter compared to the last couple quarters overall inflation in auto is still mid single digit very stable and it's high single digit for bi
Speaker Change: but very low in first-party injuries, which is actually a benefit. So overall long tail or injuries together is still in the mid single-digit range.
Speaker Change: Second question is going back to UK and I, obviously a number of questions on the change in the rate environment there, but does that in any way alter your appetite for planned market share gains, particularly in the SME market?
Speaker Change: Absolutely not. I think that the
Speaker Change: The rate of involvement in the SME and mid-market space is quite constructive. It's in the mid-single-digit zone. And if anything, that's the space we need to occupy to a greater extent. The good news is, NIG expands our distribution relationships.
Speaker Change: by hundreds of new brokers and so the upside of distribution management and so on is is big and all of this is ROE inducive as far as we're concerned.
Speaker Change: there for the interest of time thank you
Speaker Change: Ladies and gentlemen, this is all the time we have today. I'd like to turn the call back over to Jeff Korn.
Jeff Korn: Thanks everyone for joining us today. Following the call, a telephone replay will be available for one week and the webcast will be archived on our website for one year. A transcript will also be available on our website in the financial report section.
Speaker Change: Of note, our 2024 fourth quarter results are scheduled to be released after market close on Tuesday, February 11, 2025, with the earnings call starting at 11 a.m. the following day. Thank you again. And this concludes our call.
Speaker Change: Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.