Intact Financial Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 15 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Intact Financial Corporation Q1 2023 Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded today, May 11, 2023. I would now like to turn the conference over to Subha Khan, Vice President, Investor Relations, please go ahead, sir.

Speaker 1

Thank you, Michelle. Good morning, everyone, and thank you for joining the call to discuss our Q1 2023 financial results. A link to our live webcast and materials for this call have been posted on our website, intactsp.com under the Investors tab. Before we start, please refer to Slide 2 for cautionary language regarding the use of forward looking statements, which form part of this morning's remarks and Slide 3 for a note on the use of non GAAP financial measures and important notes on adjustments, terms and definitions used in this presentation. As you are aware, we are reporting quarterly results Under the new IFRS 17 and IFRS 9 accounting standards for the first time, our disclosures including our supplementary financial information as well as transition impacts on opening shareholders' equity and earnings.

Speaker 1

We invite you to consult the teach in materials previously posted to our website To discuss our Q1 results today, I have with me our CEO, Charles Brindamore Our CFO, Louis Mercat Patrick Barbot, Executive Vice President and Chief Operating Officer Darren Godfrey, Executive Vice President, Global Specialty Lines Guillaume Lamy, Senior Vice President, Personal Lines and Ken Anderson, Executive Vice President and CFO, U. K. And I. We will begin with prepared remarks followed by Q and A. With that, I will turn the call to Charles.

Speaker 2

Thanks, Subha. Good morning, everyone. Thanks for joining us today. We've accomplished a great deal in the Q1. We took significant strides towards enhancing the profitability of the business and further derisking the RSA acquisition.

Speaker 2

In February, We entered into a buy in agreement for our U. K. Pension plans, removing pension risks and improving capital efficiency. And in March, we announced initiatives to accelerate our path towards low-90s performance in the UK and I, including our exit from the UK First Lines motor market. At the same time, we delivered Another quarter of solid results.

Speaker 2

Net operating income per share in the Q1 was $3.06 up 4% from a year ago. This performance was underpinned by top line growth of 5%, excluding strategic exits, which reflected healthy rate momentum in all geographies. The overall Together with robust investment and distribution income, we again delivered mid teens operating ROE in the quarter. Presentation of our underwriting results by line of business as well as our guidance, which remains unchanged. Let me therefore provide some color on the results and outlook by line of business, starting with Canada.

Speaker 2

In personal auto, premiums grew 5%, a 3 point improvement compared with the preceding quarter And more than 5 points improvement over the last two quarters. Top line momentum was a function of both rate actions as well as our improving competitive position. Retention levels remain strong And we see positive signs in new business volumes. We're comfortable growing in this environment. Our underwriting discipline resulted in a combined ratio of 97.1% in the quarter, which reflected nearly 3 points of winter seasonality, largely in line with our expectation.

Speaker 2

We remain very comfortable with our sub-ninety five percent guidance for personal auto. Inflation pressures have continued to abate With the increase in claims severity slowing to 9% in Q1, down 2 points from a quarter ago. This was driven by improvement in the cost of repairs, which in part reflects the benefits of our integrated supply chain where 2 thirds of repairs are handled by our preferred network. Furthermore, we're yet See any meaningful signs of inflation in long tail coverage. As such, the environment is evolving as expected.

Speaker 2

At the same time, claims frequency remains benign relative to pre pandemic levels, though Our pricing assumes it will gradually increase. And our early rate actions are paying off. In aggregate, written rates and insured values increased by close to 9 points in Q1. Meanwhile, Earn rates accelerated to 6% and are expected to catch up with written rates by mid year. So in a world where severity abated to 9% and rates earned at 6% heading towards 9% by mid year being now in the sub-ninety five Favorable prior year development in auto of 7 points was in line with the full year 2022 levels.

Speaker 2

As before, this reflects the caution embedded in our reserves. The current accident year loss ratio continues to reflect A similar degree of prudence. And as such, we remain of the view that these two elements have to be evaluated together, Not separately. Moving now to personal prop. Premium growth of 6% was driven by our rate actions in a favorable market.

Speaker 2

The combined ratio of 84.5% in the quarter was better than the sub-90s average over the last 5 years. I do expect challenging weather over time and inflation to sustain firm market conditions over the next 12 months. In Commercial Lines, top line growth was muted by targeted actions to optimize our portfolio as well as the loss of a few large accounts in specialty lines. Market conditions continue to be favorable with strong price increases Consistent with past quarters despite nearly 6 points of cats. The combined ratio is 90.8%, primarily driven by our profitability actions over time.

Speaker 2

Looking ahead, our business remains very well positioned to deliver sustainable Low 90s or better performance. Moving now to our UK and I business, where we delivered a combined ratio of 94.6% in the quarter. In personal lines, premium were largely flat Year over year after adjusting for the U. K. Motor exit, though it continues to be very competitive, the U.

Speaker 2

K. Personal lines market is gradually firming. We continue to exercise pricing discipline against this backdrop. The combined ratio of 107.3% Included 4 points of adverse prior year development related to December 3. For the balance of this year, we expect UK and I First Lines performance to be in the upper 90s despite inflation pressure, which should continue to support a firm market.

Speaker 2

In Commercial Lines, underlying premium growth was 6% in the quarter after adjusting for strategic exits. We continue to benefit from hard market The combined ratio of 88.2% Reflects the strength of our platform in the U. K. And prevailing market conditions. We expect to operate this business In the low 90s over the next 12 months.

Speaker 2

We had already made much progressed towards improving UK and I performance last year, including through investments in pricing and segmentation, Better governance as well as initiatives to optimize our footprint. We've now accelerated towards low-90s performance in the UK and I. The exit of the U. K. First Lines Motor market was a crucial step in this regard, but not our only one.

Speaker 2

And we're investing in technology and are focused on simplifying the business to drive cost improvements. We now expect to achieve a low-90s run rate in the U. K. By the end of next year. In the U.

Speaker 2

S, our business grew 15% in Q1, driven by strong growth in high performing businesses, Solid rate increases and last year's acquisition of Highland and MGA in the builders' risk business. The combined ratio was strong at 89.1%, reflecting our profitability actions over time. We expect hard market conditions to persist in most lines, supported by higher reinsurance costs and elevated cat losses. We remain well positioned to deliver sustainable low-90s performance or better in the U. S.

Speaker 2

Turning to our strategic initiatives, we remain focused on expanding our leadership position here in Canada. Earlier this year, We launched for instance new features on our mobile apps aim at encouraging more eco friendly driving by our customers. These features have increased active engagement with customers by nearly 50%. We also strengthened our supply chain capabilities in the quarter through the continued expansion and enhancement of our On-site Home Restoration Business. On-site is employing innovative techniques, including improved drying technologies Speed up cycle times, reduce claims cost and improve the customer experience.

Speaker 2

It also has the added benefit of contributing to our distribution income growth, in fact close to $30,000,000 in the last 15 months. In April, we published Our 2022 social impact report, which includes expanded climate related disclosures, and it highlights How we continue to play a leading role in building resilient communities. Our ambition is to have 3 out of 4 stakeholders Recognize us as a leader on this front. The results of stakeholder surveys, including our investors, Indicate that more than half already see it. Overall, we're off to a solid start In 2023, top line momentum in Personal Lines is improving and underlying growth in Commercial Lines remains strong.

Speaker 2

The business is operating at a low-90s combined ratio. The outlook for both investment and distribution income The industry ROE by more than 1,000 basis points, including 200 basis points from the sale of Codan Denmark. Over the last 5 years, we've outperformed the industry by 7.50 basis points on average and have grown net operating income per share by 16% annually. We're confident in both the growth outlook and the earnings power of our business. And with that, I'll turn the call over to our CFO, Louis Marcotte.

Speaker 3

Thanks, Charles, and good morning, everyone. This quarter is our first one under IFRS 17. And as we have said before, there is limited impact on net operating With the biggest changes being geography changes between underwriting and investment income. I will highlight Major changes as I go over the results, but keep in mind that the results reported today for 20232022 are entirely comparable. That is they are on an apples to apples basis, both being under IFRS 17.

Speaker 3

The overall combined ratio for Q1 was 87.4 percent after reflecting a 4.5. Favorable impact from discounting. Last year's discounting impact was lower at 3.2%, reflecting a lower discount yield at the beginning of 2022. When we look at the underwriting performance of our business, we will use the undiscounted combined ratios, which is more comparable to our historical results and our guidance. At 91.9 percent for IFC in Q1, it is slightly better than last year's and reflects Solid underwriting results in all geographies.

Speaker 3

Cat losses in the quarter were $108,000,000 driven by a freeze event in Canada and a couple of higher losses in commercial lines. This was below our expectations for the quarter, but we remain comfortable in our annual guidance of $700,000,000 Favorable prior year development was healthy at 5.3% for the quarter, Above our revised midterm guidance under IFRS 17 of 2% to 4% overall for IFC. This is slightly lower than last year's Q1 PYD, which was 5.9%, but consistent with our prudent approach to reserving throughout the pandemic and still true today. Net investment income increased by 44% in the quarter on the back of higher portfolio turnover and rising rates, particularly on floating rates securities. For the full year and based on the Q1 experience, we now Investment income to be north of $1,200,000,000 for the year.

Speaker 3

As we indicated in our IFRS 17 transition materials, The unwind of discount on claims liabilities is now netted against investment income, whereas the discount build Continues to be reflected in underwriting income, albeit in the corporate segment. The discount build and unwind should not have a material impact On the P and L, when interest rates are stable, for example, this quarter, the gap between the unwind and the discount build was $7,000,000 And the material impact on net operating income per share. Distribution income was $105,000,000 in the quarter, 14% higher than last year, reflecting accretive acquisitions and continued strong profitability. For the full year 2023, we continue to expect to grow distribution earnings by at least 10% compared to full year 2022. Overall, net operating income per share of $3.06 is up 4% from last year.

Speaker 3

If we exclude the impact of rate changes in the Q1 2022, net operating income per share growth would have been 19%, which is more consistent with the growth in all of our earnings streams. Now let's turn to our underwriting results starting with Canada. Again, comparisons are on an apples to apples basis. In personal auto, the combined ratio increased by 3.4 points to 97.1%, which includes 3 points of seasonality and higher than expected trends. Favorable prior year development of 7 points was very strong and once again reflected the heightened caution embedded in our reserves.

Speaker 3

In Personal Property, we delivered another solid results with an 84.5 Percent combined ratio, 3.8 points better than last year due to milder weather and lower cats in the quarter. Unfavorable prior year development on losses such as the December snowstorms in Ontario and Quebec tempered the results. In Commercial Lines, the combined ratio was 90.8% Despite 6 points of cats in the quarter from the freeze event and a large fire in specialty lines. The solid result was largely due to Profitability actions and more favorable non cat weather. Although 4 points lower than last year, favorable prior year development was strong at nearly 7 points.

Speaker 3

The overall expense ratio in Canada was 32%, a point higher than last year due to planned increases in marketing and technology expenses. We expect the expense ratio run rate to be 32% to 33% going forward under IFRS 17. Turning now to the UK and I. In personal lines, the combined ratio of 107.3% included Four points of unfavorable development from the late December freeze event and continued inflationary pressures. We remain disciplined in pushing through rate and prioritizing risk selection.

Speaker 3

For the balance of the year, we expect this business to operate in the high 90s With profitability actions having a more meaningful impact in 2024. In UK and I Commercial Lines, the combined ratio was a strong 88.2%, Including solid results in businesses, we were strategically targeting for growth such as the UK regions business. The combined ratio improved 2 points from a year ago, mainly driven by our profitability actions and a benign cat experience in the quarter. Looking ahead, we are happy to grow this business while focusing on the sustainability of their strong results. We are nearing the 2 year anniversary of the RSA acquisition.

Speaker 3

And when I look at all the actions taken so far to improve profitability and de risk the balance sheet, I'm pleased to see the operating ROE of this segment Progressing towards the mid teens level as we deliver on our combined ratio targets. In our U. S. Segment, combined ratio was solid at 89.1% and included 2 points of cats from a single fire claim. We continue to see very strong growth in our highest performing lines and are taking targeted profitability actions on the worst performing segments of the portfolio.

Speaker 3

No doubt, our U. S. Business is on strong footing. The overall effective tax rate was elevated at 33% Due to a reclassification of the tax recovery from the pension contribution from earnings to OCI. This was expected, has no impact on book value per share or on our ability to recover taxes in the UK.

Speaker 3

With regards to the RSA integration, we estimate annual RSA synergies to have hit a run rate of $285,000,000 And we remain well on track to achieve our revised target of at least $350,000,000 by mid-twenty 24. Over the last 12 months, RSA contributed 16% accretion to net operating income per share and we remain confident of this rising to 20% by 2024. Moving now to the balance sheet. Our financial position continues to be strong with a total capital margin of $2,800,000,000 This was driven by strong capital generation, including a favorable impact from investments, offset by the UK pension buy in. We closed the quarter with a debt to total capital ratio of 22.4 percent in line with prior guidance and remain on track to take that towards 20% by the end of the year.

Speaker 3

Our balance sheet is certainly in good shape to capture opportunities as they arise. Book value per share was down 6% quarter over quarter As expected, solid earnings, favorable market movements and the positive impact from the IFRS transition were offset by the impact of the UK pension buy in transaction that we completed in February. As a reminder, the 100 basis point impact on ROE from the pension buy in is not fully reflected in the Q1 figures as it accrues over time. Overall, the agility and bandwidth of the platform was evident this quarter As we delivered solid results while tackling inflation and executing on multiple initiatives in the UK and I. Our business is now in a more focused and stronger position and we have a clear roadmap to our performance.

Speaker 3

With the platform we have in a strong balance sheet and an opportunistic mindset, I'm confident we are well positioned for outperformance. Now before I give it back to Subha, I'd like to express my gratitude to our finance, IT, actuarial teams in the U. S, the U. K. And Canada, Who worked so hard to get our systems and reporting across the line and on time.

Speaker 3

It's been a long journey and they can all be very proud with our successful transition to IFRS 17 While tackling a transformative acquisition. Most of them are listening on the line today. I want to thank them. With that, I'll pass it back to Subha.

Speaker 1

Thank you, Luis. In order to give everyone a chance to participate in the Q and A, we would ask you to kindly limit yourselves to 2 questions per person.

Speaker 2

You can

Speaker 1

certainly give EQ for follow ups and we will do our best to accommodate if there's time at the end. So, Michelle, we're ready to take questions now.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. One moment please for your first question. Your first question will come from Paul Holden at CIBC World Markets. Please go ahead.

Speaker 4

Thank you. Good morning. I want to start on personal auto and the PYD in the quarter, obviously, 7 points is higher than you'd normally see in that business. I want to make sure I get the message Great. So as that PYD normalizes over time, we should also expect a normalization in the underlying, I.

Speaker 4

E, I think you continue to probably reserve conservatively. And so while you give back some PYD, you're also going to get a benefit, I think, on the underlying Loss ratio as well. Is that the correct way to look at this?

Speaker 2

That's absolutely correct, Paul. And you see 7 ish this quarter, you've seen close to 7 for all of last year's. We're Being prudent on the current accident here, there's lots of moving pieces and your understanding is exactly right. I don't know if there's anything we need to add, but I think that was very clear. Thanks.

Speaker 4

And then my second question, just sticking with Personal Auto. So good to hear that severity and claims inflation is tracking In line with your expectations sequentially, can you give us an expectation of where you think that should be by end of 2023 And or kind of what normalized claims inflation should look like given that I think with the additional technology that goes into cars these days, maybe claims inflations higher than it would be historically just because of the incremental costs associated with new vehicles?

Speaker 2

So Paul, let me Kick this off by first saying that our guidance from a combined ratio point of view has not changed. Our view is we're well positioned to operate sub-ninety 5 on a seasonally adjusted basis For the foreseeable future. As we mentioned before, there's a number of things going into that. There's obviously Severity, which is the heart of your question, so far so good, moving in line with what we were expecting. There's also frequency, which has been benign so far and certainly below what we're assuming from a pricing point of view And also what we're assuming in the guidance.

Speaker 2

Those rates, which a big chunk of it is baked, Heading towards 9%, and we'll do more when needed. And then there's the overall Caution embedded in how we're reserving because there's lots of moving pieces in this current environment. You put all that together and we're comfortable with our guidance at this stage. And I bring those 4 pieces on the table, Paul, because forecasting one element is just A portion of the equation. That being said, we're spending a lot of time on each of those four pieces and I'll ask Guillaume Lamy to share his perspective on your question.

Speaker 2

I'd like to point out this is Guillaume's first earnings call. He's SVP Personal Lines, has been groomed for that role and he's got the backup of 3 former SVP Firstline's President on the earnings call. So, Guillaume, you're in safe territory is what I would say. Go ahead.

Speaker 5

Sure. So, I think I'll start maybe with the rate portion, where, as Charles mentioned, we've been increasing written rates in the past year or so, reached 9% in Q1, 6% of that is earned and that's continuing to increase for the next few months Peaking in mid year this year. So As we look forward, we expect inflation to start taming down, rates are continuing to go up. So those two lines should cross around mid year. That being said, there is the other pieces That needs to be taken into the equation.

Speaker 5

So starting by frequency, Frequency has been relatively mild again in Q1, Below what we're expecting, we're still pricing for some kind of an increase in frequency. The other part I think that I would mention is theft, which had an impact on our severity, Which we're continuing to monitor and have pretty strong actions against that. And then Inflation as it came down, I think the question, and we're not pretending that we necessarily have the answer on where it will land, but there's uncertainty as to Where it will land, there's a range around that and we're pricing in a way to make sure that depending on where those pieces fall, we're seeing sub 95 On a seasonality adjusted basis.

Speaker 2

So I think the key point would be to your question, there's an expectation that inflation abates Some more. There's if it was not the case, there are things going the other way, such as frequency and prudence, but then we have Leverage to move rates if we feel that severity is not abating at the speed at which we're hoping for. But we're getting in the zone, there's no doubt. I think one point that's probably worth spending a bit of time on, Paul, is The levers we have to keep inflation in check, and I'll ask Patrick, to provide a perspective on supply chain actions that we're taking and that we've taken In the past year, which I think has contributed a fair bit actually to inflation abating as well. Go ahead, sir.

Speaker 6

And maybe Paul, without pointing to a number, if you look at how what created a bit of a decrease in inflation this quarter, but also the Quarter before that, market values of used cars and new cars have been stabilized over 4 to 6 It's the case both in U. S. And Canada. But when we compare year on year, it's still a significant pressure on inflation on the loss cost. So we're not necessarily assuming that the market value will go down, but as we compare to quarters where we've seen increases last year, that in itself reduces The year on year inflation.

Speaker 6

The car parts are continuing to go up both in both countries, in U. S. And Canada As well, but not at the same pace as last year. And the capacity of The supply chain in general in Canada is in better shape. What we've done though over the last many years is build competitive advantage in the Supply chain, especially in the body shop area, we 2 thirds of our repairs is done through the preferred network.

Speaker 6

And over the Last year, we've opened 13 dedicated shops across Canada, further enhancing the capacity to repair the cars of our clients. And in fact, We've seen the cycle times reduce in Q1 in our own book. The total pending claims of car repairs, if I look at the end of December versus the end of March, Has reduced by 10% in our book, which is a

Speaker 2

sign of the accelerated cycle time we see here. Yes. Thanks, Patrick. I think it's that's a really important point, Paul, in terms of capacity and therefore inflation, Patrick, The claims teams were totally focused on crunching the pending and closing files as fast as we can, leveraging The supply chain and then putting an extra focus on speed. So far so good.

Speaker 2

We're seeing good progress. The Net Promoter Score And claims is climbing up again, getting close to the zone we're shooting for, which is 70% NPS for those who would be familiar with that metric, which is how we define success. And so far so good. Lots of moving pieces, But then again, lots of tools in the toolbox to manage and offset additional pressure point When they'll show up. I think the key point is inflation, 9, earned rate, 6, Take 97.1 subtract 3 point of seasonality.

Speaker 2

You're in the zone, yet you're not fully earning the rates you're writing. And that gives us good confidence, but it's all a hands on deck.

Speaker 4

Thank you for the detailed answer. Appreciate it.

Operator

Your next question comes from Geoff Kwan at RBC Capital Markets. Please go ahead.

Speaker 2

Hi, Jeff. Hi, good morning. Good morning.

Speaker 7

First question is, I know these happened very recently. Just wondering if there's any Color and scent you have on just some of the weather activities, the wildfires in Alberta and then the floods in Quebec Around potential impact, but also too obviously it's Q2 is a high Order for cat losses, directionally how this might track to how you think about normal cat losses in Q2?

Speaker 2

Yes. Thanks, Jeff. We're obviously on top of that, both flood and forest fires. Why don't you and Patrick Share your perspective.

Speaker 6

You're right, Jeff. Q2 is always one where we expect more cats than in average Overall and especially in Canada, we've seen in at the beginning of April an ice storm that created some costs in Quebec, we're following by the hour the states of the reverse and the flooded area in Quebec. It has improved over the past week In that area and the wildfires as well in the West, where not all of them are totally In control, but we're following that very closely. Overall, claims team and on-site teams are deployed where there are damages. But sitting here today with what we know, what is reported, it's still within the overall envelope of what we would expect for Q2, but as you say, these two systems, the floodings in Quebec, the wildfires in the West are still Happening as we speak.

Speaker 6

So if there was a big change, yes, we would advise.

Speaker 2

So I'd say, Jeff, if you look at the guidance we provided From a cat point of view, sitting here halfway roughly in the quarter, we're within the guidance, but then there's Has a quarter left to go. And if we feel that we need to provide clarity or details at the end of the quarter on cat as we've done historically, we'll do that. We're not there yet.

Speaker 7

Okay. That's helpful. And just my second question is, you've talked about it before, Kind of use of machine learning AI and whatnot in terms of helping your business. Just wondering since you last kind of gave an update on there, If there's been any sort of interesting progress on things that you're working on or have been doing to improve the business and financial performance.

Speaker 2

Thanks, Jeff. We've chosen to make A pretty aggressive shift 7 or 8 years ago In the use of machine learning, deep to a certain extent, natural language processing and so on. We've built a full steam, a team of about 500 people solely dedicated to deploying Machine learning models in the operation, we have about 300 models in operation today. We think it's generating a recurring $100,000,000 of earnings. And we're very much focused on that.

Speaker 2

A big portion of the inflow And a big portion of the focus has been on what we would call quantitative models used in pricing And risk selection, that remains our focus and we're deploying in the field day in, day out. So in terms of interesting development, Patrick, Patrick oversees the AI Group, interesting development that would not impede our competitive advantage. Is there anything you want to share Jeff? Well, maybe

Speaker 6

a little more color on the quantum and segmentation and pricing. We're deploying, As we speak, a 3rd generation of AI models within the pricing of auto in Canada, each of these generations have added Some additional segmentation benefits. We're moving into we have moved in property last year as well across Canada. And now we're doing the same for our commercial lines and specialty lines and expanding These models outside of Canada. So this is the trajectory.

Speaker 6

It uses about 70% of the capacity of the team. The other 30% are really helping on two fronts, so creating efficiencies in the operations and improving the customer journeys By automating and reducing cycle times simplifying customer facing solutions. So we're in that other 30%, we're Getting into natural language and some of the other things. And I think that part of the evolution will accelerate for sure in

Speaker 2

Guillaume, anything you want to add on this front?

Speaker 5

Yes. Maybe I can add a couple of comments To, I guess, get more concrete on some of the benefits that we're seeing in the field. So Patrick was talking about machine learning and pricing. We've rolled that out in auto in many places. In property, it's a bit more recent.

Speaker 5

And one thing that we've seen in property, We're able to push more rates and retain more units at the same time. Usually those two things kind of go Again, as you get more rates, a bit of a cut on units. With the new techniques that And the new models that we've deployed, we're able to double down on that and get the benefits on both sides. I think QBI is another area where we're investing quite a lot of efforts from the team. Again, from a pure segmentation Perspective, this is very powerful.

Speaker 5

We're seeing between the best third of the drivers and the worst third of the driver, A 65% loss ratio difference and through our latest iterations and the model, we're going to leverage more and more of that predictive power And drive segmentation benefit through retention. So those are, I guess, 2 concrete examples of the things that we do in the field With the tools that Patrick and team are developing for us.

Speaker 2

So and I don't know, Jeff, is behind your The recent advances in generative AI, if we go back to our thesis 7, 8 years ago, what's happening is not Surprising. I mean, you could foresee that this is what AI would do. There's been a step change in the past 3 months. There's absolutely no doubt about it. I think From an impact point of view, less so in the quantitative world, but certainly in the world of Human interaction, language, video, text, etcetera, changed there.

Speaker 2

So our work today is to figure out, as Patrick has pointed out, How we can accelerate outside the quant world some of the techniques that we've deployed. And so We're excited by this evolution.

Speaker 7

Great. Thank you.

Operator

Your next question comes from Doug Young at Desjardins Securities. Please go ahead.

Speaker 8

Good morning. I wanted to start just in Canadian Commercial. I think there was mention in the MD and A and maybe in Discussion that you're seeing increased competition in large account specialty lines. Hoping you can elaborate a little bit. Where are you seeing more pressure?

Speaker 8

And how are you counteracting that?

Speaker 2

Thanks, Doug. I'll ask Darren to share his perspective. But in aggregate, the market conditions haven't changed much. I think in Q1, we've lost a few large accounts in large accounts In Specialty Lines, as a result, these are needle mover. Is this increased competition or a few one offs?

Speaker 2

I'm not sure, but Darren, you're closer to the field, maybe you have color.

Speaker 9

Yes. Thanks, Doug. I think before I go there on the large account space, Just a few comments on what we call the regular commercial lines book. So that's both our SME and our middle market portfolio. Like in the specialty lines space, as Charles alluded to, market remains hard there.

Speaker 9

I I mean retention remains strong though at the same time. And our pricing strategy, our reselection strategy very much continues. We are Seeing a pickup in quotes, which is encouraging. And that's very much a function of the service and speed of which our teams are operating at In the as I say, the SME and also the mid market, really the pressure point as we've highlighted Is Specialty Lines and we did see negative growth, premium growth in the quarter and it was about 5 points Impact due to, as Shaul said, profitability actions. And that's a scenario of, in one particular case, account where the risk profile changed and deteriorated and our decision was made to not offer terms or In a few other cases where the terms and conditions that we did offer in the market were not accepted from a renewal standpoint, so We did not successfully place the renewal.

Speaker 9

We do see that these are largely one time in nature. However, you obviously you had picked up the notion of large account. That's a little bit reflecting some of these one time things. There definitely is a little bit more competition Coming into that space, a little bit more capacity coming into that space. But our message to our underwriters and that executing exceptionally well, which is We're maintaining our discipline and we'll continue to operate accordingly in the marketplace.

Speaker 2

Yes. So Quite favorable market conditions still in CL, NSL across the board.

Speaker 8

And just a follow-up on that. I know you gave pretty good detail on written and earned premium increases in personal auto. Can you talk a bit about What you're getting in commercial from an earned and written perspective?

Speaker 9

Sure. When I look at really both written and earned, Very consistent with past quarters, up in the high single digit range. When you reflect changes in exposure, in other words, Increases in amount of insurance due to rebuild costs and so forth, we're up in the low double digit premium change range, And that's consistent both from a written and an earned standpoint. And as I said, beyond that little bit of challenges in the large account space, It's consistent very much with all of 2022 and even before that as well.

Speaker 8

And then second, just in the UK commercial, I think last quarter, I think it was written the industry premiums were expected to grow in the upper single digits and now it looks like the outlook for mid to upper single digits. So a little tweak, just wondering if there's something to read into that on the UK NI Commercial and if so, where are you seeing some pressure in that line?

Speaker 2

Darren or Ken? Yes, Ken, why don't you share your perspective?

Speaker 10

Yes, on the U. K. Market from a commercial lines point of view. I would say, firstly, overall, the specialty and domestic commercial lines market broadly remains hard. We're continuing to see that favorable rating environment at that mid to upper single digit rate.

Speaker 10

I would say notably in property and liability portfolios. There are few pockets of the market that are seeing some rate tempering, I would say, notably, Profin and the D and O lines, which I think is consistent with North America. Yes. And that's after multiple rate hikes over the last number of years. Looking ahead, I think the expectation would be hard market conditions broadly to continue given hard reinsurance markets, inflation, cat activity.

Speaker 10

And we see continuing capacity is entering the market, which is increasing competitiveness, but we expect That those pressures will broadly keep the market disciplined over the next 12 months.

Speaker 2

Yes. And we're thrilled with the performance Of the Commercial Lines business and the Specialty Lines business in the UK, Ken, maybe you want to provide perspective on Combined ratio and what you're seeing in the field?

Speaker 10

Yes. Well, in terms of commercial profitability, Q1 indicative of the last number of quarters, An 88% combined ratio. We're seeing a little less cap activity. But overall, the Expectation is that, that business is running at that 90 or thereabouts combined ratio moving forward.

Speaker 6

Yes.

Speaker 2

I mean, 2 things that I would observe in the UK. 1, the London Market business under Steve Watson's leadership is really making the most of the environment and the performance is super strong. And then in the regions, we've worked a fair bit on service value proposition with brokers. We're appointing new brokers in the mid market regional business in the UK Under Lee Mooney's leadership and volumes are picking up there. And so for me, that's concrete sign That the opportunity we see in the mid market business in the U.

Speaker 2

K. Is really there and starting to pay off with bottom line that's really strong.

Speaker 8

Appreciate the color. Thank you.

Operator

Your next question comes from Tom MacKinnon at BMO Capital Markets. Please go ahead.

Speaker 11

Yes, thanks very much. Just a quick one here. Just some clarification. I think you said for all of your U. K.

Speaker 11

And I that you'd be looking for a high 90s combined for 2023 And a low 90s combined by the end of 2024. Do I have that right? And what would be driving That improvement.

Speaker 2

No, Tom, we said upper 90s in PL in UK and I. And just Yes. UK and I overall in Q1 what I would consider results in PL that are not at the level we want them at 94.6 In aggregate, not a bad performance. But Kent, why don't you provide a bit more color? Yes, indeed.

Speaker 10

The PL performance in Q1 at 107 was clearly elevated. I'd point out a few things though. Firstly, There was unusual adverse prior year development of about 5 points, largely driven by the strengthening on that December Freeze event. I would also point out Q1 is a seasonally higher quarter, 2 to 3 points of seasonality This year. So overall, I'd say the underlying PL business is running around 100 core Currently reflecting that inflationary environment that we're in.

Speaker 10

But as we look out further, the pricing and risk selection actions that we've Been taking should start to bring benefit in the coming quarters. There's double digit written rates going through and they will start Erinn, as I say in the coming quarters. Also, we've been investing in technology in PL, both on the claims and the policy admin side, And those will start to come on stream improving our capabilities. So with this, that upper 90s core overall for the rest Of 2023 is all. In PL.

Speaker 10

In PL, improving further as you look out into 2024 in PL Towards a mid-ninety PL objective and that should be contributing overall to a U. K. And I End of 2024, sustainable low-90s performance.

Speaker 11

Okay. And part of that, Does any of that remaining run rate of synergies help There or is that largely a Canadian piece or is that largely not in your combined ratio expectations?

Speaker 3

Mostly Canadian at this point, maybe a bit of loss ratio improvement, but largely Canadian.

Speaker 11

Okay, thanks.

Operator

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

Speaker 12

Yes, thanks. A couple of them here for you. First, just clarification on the commercial lines business. The targeted portfolio actions, Was that the large commercial business you're talking about? And if you kind of strip out that stuff, what would premium growth have looked like?

Speaker 12

Will that continue going forward?

Speaker 9

Brian, we'd be more in the upper single digit range in Canada and would be our expectations going forward as well.

Speaker 12

Perfect. That's helpful. And then the second question, I'm just curious Charles, can you talk about your competitive positioning right now within the personal auto space and you continue See your declines in units, policies and force. At what point do you think here you're going to be in a position to start gaining some market share?

Speaker 2

So first of all, one of the points we've mentioned About, I don't know, 6 months ago or something like that is that we expected competitors To increase the speed of reflecting inflation and pricing and that's happening. And therefore, you've seen us shrinking by 3%, 4% -ish 6 months ago when we're now growing at about 5%. The units are not there completely. I expect that to turn, but I'll let Guillaume provide His perspective at this stage. But there's clearly momentum, Brian, in the top line in auto, An environment in which we're comfortable growing.

Speaker 5

Yes. I guess to put some numbers on what Charles was describing. So growth was 5% this quarter, up from 2% last quarter and minus 1 ish 2 quarters ago, coming mostly from rates, but that's been supported by very strong retention despite us Increasing rates and new business level has been improving. We start seeing increase in shopping activity, Especially in digital and direct channel. So if you remember last year, we're saying quote volume was very low.

Speaker 5

We're expecting it to resume as the industry is taking action. We slowed marketing investments at the time as the cost to drive The mission didn't make really kind of make sense. And now we've seen the movement there that we're expecting, more people shopping for insurance, And we're seeing the top line momentum as a result. That being said, I think we're not done on rates. I was mentioning like we're at close to 9 points now and we expect to maintain that in the near future.

Speaker 5

So we plan to keep that momentum and stay ahead of inflation. So premium growth should remain strong, But until the industry is fully caught up on rates, we expect unit growth To stay relatively muted. We're expected to move in the short term, but stay relatively muted given we're So, active on the rate front.

Speaker 12

Great. Thank you.

Operator

Your next question comes from Grace Carter at Bank of America. Please go ahead.

Speaker 13

Hi, everyone.

Speaker 2

Hi, Grace.

Speaker 13

I have a follow-up to the last question. The policy count And personal property held up pretty well relative to what was going on in personal auto. I was just curious if you could give us any color on what's going on there and if there's any

Speaker 2

I think in personal prop, Grace, the market was harder to start with. I think the industry has been on a multiyear journey To move rates, and as a result, the environment and with average Premiums going up in personal property on its own, it's a product that customers are focused on. It's quite different from a behavior point of view from where we were 10 years ago. So I think the market was further In dealing with inflation and natural disasters in home insurance and that's why units held to a greater extent. We have from a bundling point of view, I think we're north of 50% to 60% bundling, but we've had a push to grow in particular in the direct channel, the home insurance portfolio and we're happy with single home policies as well.

Speaker 2

And you put all that Together, and I think you get the sort of results that you're seeing. Guillaume, any color you think is warranted?

Speaker 5

No, I think I'd just point back to what I was describing a bit earlier where we're deploying the new machine learning models In personal property and that's been done last year and in the past few quarters. And as I said, this has drove retention lift For a similar level of premium and new business, competitive it has also increased as a result of that. So I think it's Both the combination of the market being receptive as well as our own action driving benefits there.

Speaker 13

Thank you. My other questions have already been answered. Appreciate the help.

Speaker 2

Thanks. Thanks, Grace.

Operator

Your next question comes from Nigel D'Souza at Veritas Investment Research. Please go ahead.

Speaker 14

Thank you. Good afternoon. I wanted to circle back to PYD and I understand that there's a benefit under IFRS 17, the PYD looks like it's about 1 to 2 percentage points. So just wondering if you could A highlight of what the PYD ratio would have been this quarter if it was still under IFRS 4. And my understanding is that the profitability in IFRS 17 were the same over the long term.

Speaker 14

So is there an offset to that Favorable impact to BYD either in the short term or long term on IFRS 17?

Speaker 2

Yes. There's an offset to the current accident year and that's one additional reason why we think you should look at both combined. Louis, the expert On IFRS 17, I'll let him share his perspective.

Speaker 3

Yes. So I will say generally speaking, we expect to be neutral overall on combined ratio, But the big change is the when you take out the unwind and move it, that has been the impact on the PYD. So you mentioned 1 to 2 points. That's roughly where we thought we'd land in terms of improvement to the PYD. It's reflected in the numbers.

Speaker 3

We haven't backtracked 2023 into 20 22, frankly speaking, but the one to two points is probably a bit of a proxy. So it's a bit more elevated than it was in the past. You've seen a rise in the PYD on a restated basis between 2022 and 2023, but that's a True RISE in an undiscounted PYD basis that gave landed at 7% overall. So in the long term, Clearly, there's a shift of the unwind into the investment income that will improve the overall combined ratio, neutral on NOIPS And lead to a slightly higher PYD percentage that we will report going forward.

Speaker 2

And that's in part why we've upgraded the aggregate guidance last quarter from 1 to 3 to 2 to 4. Correct. To take that into account. But that point is a drag to current accident here and therefore in balance everything is Same. Correct.

Speaker 14

Okay. That's helpful. And then if I could second question was on operating Net investment income, I believe you guided to $1,100,000,000 annualized for 2023 and your current run rate would imply Nothing a bit above that. So just wondering if that guidance has been updated? And also, is there any impact to how trading activity is recorded under IFRS 17?

Speaker 3

So our revised guidance now is north of 1.2. So you correctly picked up, we have beat our guidance In Q1 with a 44% increase in investment income, driven clearly by higher yields and I would say higher turnover. So it's a good tailwind and that will lead to the north of $1,200,000,000 for a full year. So it is an increase in the guidance of more than $100,000,000 and you'll see that in the run rate in the future quarters continuing. And here essentially on the investment income itself, No impact from IFRS 17.

Speaker 3

Now that's investment income. The words investment results After deducting the unwind that obviously changes, but the investment income itself, dividend and interest is impacted.

Speaker 14

Okay. That's helpful. That's it for me. Thanks.

Operator

There are no further questions. At this point, I will turn the conference back to Subha Khan for any closing remarks.

Speaker 1

Thanks everyone for joining us today. Following the call, a telephone replay will be available for 1 week and the webcast will be archived on our website for 1 year. A transcript will also be available on our website in the Financial Reports and Filings section. We will be hosting our virtual 2023 Annual and Special Meeting of Shareholders at 1 pm Eastern Time today. You may join the meeting via the live webcast on our website.

Speaker 1

Our 2023 second quarter results are scheduled to be released after market close on Wednesday, August 2nd,

Operator

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your

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Earnings Conference Call
Intact Financial Q1 2023
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