Intact Financial Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 13 speakers on the call.

Operator

Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on July 31, 2024. I would now like to turn the conference over to Kevin Le Mes, Deputy Senior Vice President and Head of Financial Performance.

Operator

Please go ahead.

Speaker 1

Thank you, Julie. Good morning, everyone, and thank you for joining the call to discuss our Q2 financial results. A link to our live webcast and materials for this call have been posted on our Web site atintacfc.com under the Investor tab. Before we start, please refer to slide 2 for a disclaimer regarding the use of forward looking statements, which form part of this morning's remarks. And slide 3 for a note on how to use of non GAAP financial measures and on terms used in this presentation.

Speaker 1

To discuss our results today, I have with me our CEO, Charles Brendamour our CFO, Louis Mercote Patrick Bagboe, Chief Operating Officer Darren Godfrey, Executive Vice President and Chief Underwriting Officer for Global Specialty Lines Guillaume Lemie, Senior Vice President, Personal Lines and Cal Anderson, Executive Vice President and CFO, UK and I. We will begin with prepared remarks followed by Q and A. With that, I will turn the call over to Charles.

Speaker 2

Good morning, everyone. Thank you for joining us today. I want to take a minute to acknowledge the extreme weather events across Canada over the last few weeks. These are tough times with the loss of homes, destruction of businesses and stressful evacuations. We're focused on providing support to customers in a time of need.

Speaker 2

Claims teams, on-site and wildfire defense systems have been really quick to respond. We're proactively contacting customers to assess situation, providing funding for additional living expenses and are present on the ground where possible to begin rebuilding efforts. It's in these moments that we're reminded of how important our purpose is. As to help people, businesses and society prosper in good times and be resilient in bad times. As for our Q2 results, yesterday evening, we announced net operating income per share of $4.86 which doubled since last year.

Speaker 2

This was on the back of strong underwriting performance in all lines of business as well as solid growth in distribution and investment income. Top line momentum is strong at 6%, led by double digit growth in personal lines. While the market in commercial lines is changing, it remains favorable and we expect the industry growth to be at least mid single digits for the next 12 months. As such, we're quite positive about our own growth outlook. Our combined ratio was excellent at 87.1%, 9 points better than last year.

Speaker 2

This reflected a 2 point improvement in our underlying performance driven by growth in the most profitable segments and favorable market conditions. Catastrophe losses were also low for a second quarter in contrast to the severe weather events reported last year. Overall, with our operations performing really well, operating ROE stood at 17%, up 4 points year over year. And we maintain our balance sheet in a position of strength with an increased 2,900,000,000 dollars of total capital margin and leverage in line with our 20% target. Now let me provide some color on the results and outlook by line of business, starting with Canada.

Speaker 2

So in personal auto, premiums grew 11% in the quarter, up 5 points from a year ago. Top line momentum reflected both rate increases and customer growth. The industry continues to face profitability challenges and is pursuing corrective measures. As such, we expect hard market conditions to prevail over the next 12 months and industry growth to be in the double digits. This environment plays to our strength given early action, advanced segmentation and deep supply chains.

Speaker 2

Our brand distribution and digital leadership help us grow in this tough environment. And the combined ratio in auto was solid at 91.4% in a seasonally favorable quarter. Underlying performance was strong, improving 3 points year over year, which offset lower favorable prior year development. As a result, we remain comfortable with our sub-ninety five guidance for this business in 2024. Moving now to Personal Property in Canada.

Speaker 2

Premium growth was 9% in the quarter, driven by our rate actions and continued customer growth. We expect the current hard market conditions to persist over the next 12 months and industry growth could reach double digits. Combined ratio was very strong at 78% with low cat losses in a typically active season. Underlying performance was robust, improving 9 points year over year as we reacted promptly to early signs of severity pressures last year and heavy cat losses. In commercial lines, premium growth was 1% in the quarter with very strong combined ratio of 83.6%.

Speaker 2

Rate increases were healthy and in the mid single digits. This was though mainly offset by increased competition for large accounts, which was evident in Q1 and continued through Q2. Given our focus in the mid market space, we're really keen to grow in this environment that have the means to do so. Moving now to our UK and I business. Premium growth was 42% in the quarter, mainly due to the direct line transaction.

Speaker 2

Organic growth was 6%, driven by redactions and solid new business. The combined ratio was healthy at 92.2%, in line with our expectations as we take cautious stance on the recently acquired Direct Line business. Integration is progressing well as we've begun the migration of customers to the RSA platform. Going forward, we're well positioned to deliver a sustainably low 90s performance in this business. In the U.

Speaker 2

S, our premiums grew 1% in the quarter. Our strategy is very segmented. Growth in our most profitable lines is strong, while corrective actions are being applied on underperforming segments. The environment remains favorable, though uneven across lines and still provides good growth opportunities. The combined ratio was solid at 88.5% in the quarter and the business remains well positioned to maintain a low 90s or better performance.

Speaker 2

Our team continues to execute with rigor and discipline against our strategic priorities. Let me highlight important milestones and initiatives delivered over the past few months. In Canada, Broker Link further consolidated the market, successfully closing 9 acquisitions this quarter and has now reached $4,000,000,000 in annual premiums. The business is well on track to achieve its ambition of $5,000,000,000 in annual premiums by 2025. Ongoing investments on the digital and branding front have enabled Better Direct and Impact Insurance to capitalize on increased shopping traffic with a 39% increase in our web influence quotes this year.

Speaker 2

This led to strong growth, especially in our direct distribution business, which grew by double digits in the quarter. The expertise in data and AI that we've built over the years in personal lines then in regular commercial lines is now being leveraged within specialty lines. NS models for property coverages in the U. S. Are now being deployed.

Speaker 2

While our global specialty lines performance is already really good, there remains in my view a lot of room to improve from a sophistication point of view. We continue to invest in our supply chain capabilities as well, a key driver of our underwriting outperformance. 5 new claims service centers were opened in Q2, bringing the total 37 locations across Canada. On the climate front, recent events have shown that we need to double down on our climate adaptation efforts. Since 2010, we've engaged with cities in Canada from coast to coast by providing funding of over $25,000,000 to more than 100 climate adaptation projects.

Speaker 2

These are focused on helping communities become more resilient. We're providing an additional €2,000,000 in our municipal grants program to help communities adapt to extreme weather events. June 1 this year marked the 3 year anniversary of the RSA acquisition, a landmark transaction for us, both strategically and financially, with both IRR and net operating income per share accretion above 20%. And looking forward, the platform we've built is impressive with a meaningfully larger and more resilient footprint. We've become a global specialty lines leader with more than €6,000,000,000 of premiums worldwide.

Speaker 2

We also now have a new pipeline of growth in the UK, which is on the path to delivering mid teens operating ROE. And we have substantially expanded our scale advantage in Canada, where we're more than twice the size of number 2 in a highly fragmented market. With an overall OROE in the high teens and a balance sheet and a position of strength, we're very well positioned to invest in growth and achieve our financial objectives in the years ahead. And with that, I'll turn the call over to our CFO, Louis Massape.

Speaker 3

Thanks, Charles, and good morning, everyone. This quarter is a further proof point that our strategic actions in recent years and our focus on outperformance is paying off. Strong underwriting performance as well as robust investment and distribution income growth have all contributed to an operating return on equity of 17%. It is worth noting that this return still includes the impact of the $600,000,000 of catastrophe losses from Q3 last year. Catastrophe losses totaled $96,000,000 this quarter Q2 and reached $193,000,000 for the first half of twenty twenty four.

Speaker 3

While this is below expectations, we still have 6 months to go in 2024. We had the recent floods in Toronto and we are also monitoring the impact of the forest fires in Jasper, Alberta. Although we expect significant losses from these two events, we remain comfortable with our guidance of $900,000,000 on an annual basis. Favorable prior year development of 4.7% was in line with last year and remained at the higher end of our guidance of 2% to 4% overall. This was driven by healthy development across all lines of business, reflecting our prudent approach to reserving as well as favorable development on the elevated catastrophe losses from last year.

Speaker 3

The consolidated expense ratio of 34.1 percent in the quarter was in line with prior year. And while there are some movements by quarter, we continue to expect the full year ratio to land within the range of 33% to 34%. Operating net investment income increased by 19% to $387,000,000 in the quarter, driven by higher reinvestment yields captured in the latter half of twenty twenty three. Given persisting high short term yields, we expect investment income to be north of $1,500,000,000 in 2024. Distribution income was $169,000,000 in the quarter, an increase of 23% versus last year on the back of higher revenues from solid organic growth and robust M and A activities in the latter part of 2023.

Speaker 3

With this growth momentum led by our wholly owned distributor BrokerLink and a healthy pipeline for acquisitions, Distribution income remains on course to deliver growth of at least 10% in 2024. Our operating effective tax rate was lower than expected at 19.5 percent in the quarter. This reflected the impact of new Canadian tax legislations recently enacted, offset by tax recoveries related to the increasing profitability in our U. K. Operations.

Speaker 3

Looking ahead, we expect our operating effective tax rate to be around 22% to 23%. Overall, net operating income per share grew 108% in the quarter, a third of which was attributable to strong underlying performance in all geographies as well as stronger investment and distribution results, the remainder from lower cat losses. Earnings per share growth was also robust, thanks to the strength of our operating earnings, but also due to improving non operating results, including muted exited lines losses. This contributed to a book value per share growth of 4% in the quarter and 15% year over year to $88 For the past 5 10 years, our book value grew 12% and 9% respectively on an annualized basis before adding the impact of dividend yields. This is very consistent with our NOI growth of 12% over the past decade and our average ROE outperformance of 6.8 points over the same period.

Speaker 3

In my perspective, this track record is industry leading and we intend to maintain it going forward. Our balance sheet continues to strengthen, thanks to approximately $1,400,000,000 of capital generated year to date, leading to a total capital margin of $2,900,000,000 at the end of June. Some of the capital generated was used for deleveraging and drove our adjusted debt to total capital ratio down to 19.8%. Overall, our balance sheet is as strong as ever and our capital generation capabilities provide flexibility to invest in growth, both organically and via acquisitions. Overall, I am proud of the strength demonstrated by the business again this quarter.

Speaker 3

With the platform we have in place, the quality of talent we have across the globe and a clear strategic roadmap, we are in very good shape to grow net operating income per share by 10% for years to come and outperform the industry ROE by at least 500 basis points. I would like to thank all the teams that are there for those who have been impacted by the recent weather events across Canada. We've

Speaker 4

been on

Speaker 3

the front lines of climate change for over a decade and with the strength of our people, we continue to help protect what matters most to customers and building a more resilient society. With that, I'll give it back to Kevin.

Speaker 1

Thank you, Louis. In order to give everyone a chance to participate in the Q and A, we would ask you to limit yourself

Speaker 3

to 2 questions per person.

Speaker 1

You can certainly leave queue for follow ups and we'll do our best to accommodate if there is time at the end. So Julie, we're ready to take questions now.

Operator

Your first question comes from Paul Holden from CIBC. Please go ahead.

Speaker 5

Thank you. Good morning. First question is related to personal auto. I'm getting a lot of questions on how sustainable this high level premium growth might be as we go into 'twenty five. So I guess my first question on that is maybe you can provide some context in terms of auto rate approvals you've received year to date?

Speaker 5

And then maybe also in terms of like the un or less regulated markets you operate in where premium growth is trending as well, just to get a better sense of sustainability and that strong top line numbers you're posting? Thank you.

Speaker 2

Thanks, Paul. We'll ask Guillaume to share his perspective.

Speaker 6

Thanks, Paul. So first, I'd like to point out industry is still not in a profitable position in personal auto. We've seen in 2023 as well as in the Q1 of 2024, combined ratio of north of 1 100% for the industry. On our side, we're writing rates in the low double digit right now. And with the rates approval that we have already obtained, we're expecting to stay at the current rate level for the remainder of the year with some residual flowing into 2025.

Speaker 6

Beyond that, it will really depend on how the last trends evolves in the upcoming quarters. There's an obvious downward trend observed, especially on physical damage coverages, but we're keeping a close eye on the liability trends. So we'll adapt our rate strategy in each province based on the local outlook on trends and inflation. And nationally, we're already rate adequate. And outside of Alberta, we're in a good position to execute on rates where we

Speaker 2

need them and when we need them. Great. Thank you very much, Guillaume. So Paul, when you ask yourself how much time, the way the math probably works here is that you have an industry in aggregate that's operating above 100% combined ratio. So that tells you that there's a risk adequacy problem at the industry level.

Speaker 2

Now the challenge is not just to bridge that gap. The challenge is also to cope with inflation that is currently in the system and prospectively. So for me, it's easy to see that you've got 12 months worth of correction at least I think in the market. So this plays to our strength because we moved really fast and we're keen to grow in this environment in most jurisdictions.

Speaker 5

Okay. Thank you for that. That's helpful. And then second question for me, and this is maybe a little bit more of a nuanced one, but I see that you expect to increase investment allocation to common equity by roughly 4 percentage points by end of the year. So my question on this, is this a move to enhance investment income or is this more of a move to offset anticipated downward pressure on short term fixed income yields?

Speaker 2

None of the above, but I'll let Louis share his perspective.

Speaker 3

No, Paul. You may have noticed that I will say probably over 3 years, we've been underweight on equities compared to our historical position. And for good reason, market volatility, but also in the midst of the RSA acquisition, acquisition following the COVID crisis, we were sort of very prudent. And now we're at the point where capital is reestablished, balance sheet is strong and we feel conditions are right to move back towards our targeted allocation, which is the 4 points you've raised earlier. This is what we view as per our Efficient Frontier work as being the optimal way to allocate our assets.

Speaker 3

And therefore it's a return based on long term return expectations, not on a short term basis. So it should not come as a total surprise. We were there before. We're going back. We think the time is right now.

Speaker 3

And the reality is you might come back with the forecasted investment income with short term rates being where they are, the gap between the long term equity returns and those rates are not huge. But over the long term, we think that that will drive actually ROE outperformance points based on historical experience with our asset allocation.

Speaker 2

Okay. That's helpful. We were playing defense a few years back, anticipating the pension buy in and acquisition in the UK, a bit of volatility. Now we're moving back to target.

Speaker 5

Got it. Thanks for that.

Operator

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

Speaker 7

Yes, thanks very much. First question I guess is, is there anything else you can add with respect to potential losses associated with the Toronto floods and the Jasper fires, other than this adhering to the $900,000,000 annual cat loss guide?

Speaker 2

So why don't we ask Patrick to share his perspective on what's going on at the moment It's all hands on deck. That's our business and Patrick will give you a bit of perspective. Great.

Speaker 8

So you know the flash flood in Toronto from 2 weeks ago was really the first significant weather events we had this year. So our operations were ready to jump in. They were pretty quick to respond both the claims operations and the on-site teams. We now have a pretty good view on the volume of claims and a lot of the work, the emergency work is done, but we are at the early stage of the rebuild process. It's very interesting for me to see that 3 quarters of all the files in the Toronto area are being handled by On-site, which is by far the most files they've taken on any single event since we acquired them

Speaker 3

a few years ago.

Speaker 8

On the Jasper side, this one is more recent. Thanks to WDS who are on the ground. We received some information. We have also other sources of mapping and imagery that helps us have a reasonably good understanding of the extent of the damage. But our teams are on the right thing are adjusting teams don't have direct access to the site as we speak.

Speaker 8

We've been proactively contacting our clients from the area to offer help in their temporary relocation process. And to give you a feel, we insure about 700 families and businesses in the area that has been evacuated. And we estimate that around 250 or so have very likely suffered significant damage. At this point though, when we look at our estimates of these two events like Charles mentioned, And the low amounts that we've incurred in the first half of the year, our total year guidance of $900,000,000 is still a good number at the moment.

Speaker 2

Thanks, Patrick. I think for us true estimates at this stage, when you think about our retention per event, €250,000,000 roughly, If those events were meaningfully above that, that would be easy for us to put a number on the table. They're not. And therefore, we want to get a bit more maturity on both these events at this stage and all the energy is going to getting customers back on track as opposed to fiddling around with models.

Speaker 7

Okay. Thanks. And on the On side, where does that show up in terms of your earnings? Which one of the lines would we be looking for in terms of your ownership of the earnings with respect to Onside?

Speaker 3

So the our share of the earnings, is 100% is in the distribution income and other.

Speaker 7

Okay, great. And so then the second question has to do with the favorable development we continue to get that's kind of running north of your 2% to 4% guide. What can you attribute that to? What kind of what accident years, what lines are you seeing the most favorable development? And if I look in 2023, you had unfavorable development in personal property.

Speaker 7

You said that was atypical. If you can just elaborate on why that may have been atypical and why we wouldn't expect that going forward? Thanks.

Speaker 3

Sure. So maybe I can start with some color here. So 4.7% versus our guidance of 2% to 4%. I will say there's probably close to a point that comes from prior year cats and that should not be a surprise with the level of cat activity we had seen last year. You would expect some favorable development given the way we reserve for the cat activity to come back in the following year.

Speaker 3

And of course, it's outsized given the level of cats we had in the prior year. I would say secondly, I think the we've talked about prudence for a long time and you're seeing some of it come back. We're getting further away from the famous COVID years. So that's you see it in auto, it's still very positive but tempering, which is as expected. When you talk about personal prop, last year was an exception.

Speaker 3

If I recall correctly, we had a late year storm, which we had some unfavorable development in the first half of the year. But if you look back a number of years, it's pretty unusual for us to see. What the reality is, we reserve to make sure we never see PYD. In this case, it was a late storms that surprised us in the first half of the year. That's why we say it's unusual and we expect to go back to within the ranges.

Speaker 3

I will say it varies by line of business by quarter of it, but overall, you should expect us to land roughly within that 2% to 4%. And I would say largely across lines of business. Won't be even over time, over quarters, but over time it should be landing in those zones.

Operator

Your next question comes from Doug Young from Desjardins Capital Markets. Please go ahead.

Speaker 2

Hi, good morning.

Speaker 4

Hi, Charles. On Canadian Commercial, it looks like competitive pressures in the large cases persisted for, I guess, 2 quarters in a row. And I'm just hoping you can flush out just what you're seeing. Can you remind us how much of your Canadian commercial is large case versus mid case where you're trying to grow? And are you seeing this move into other segments of the commercial market?

Speaker 4

Are you starting to see some irrational behavior anywhere across the Canadian and commercial landscape?

Speaker 2

Doug, thanks for your question. In aggregate, no, I'll let Darren share his perspective on what we're seeing in Canada.

Speaker 9

Yes. So thanks for that, Doug. A number of moving pieces that I probably want to highlight in the quarter. But firstly, I mean, as we said in the remarks, rates are in that sort of mid single digit range. Quotes and new business were both up in the quarter year over year, so that's positive.

Speaker 9

As we highlighted, we did see some pressure in the large account space. That is about 10% of our total Canadian commercial lines portfolio. And I should highlight that Q2 in particular is our largest quarter from a large account renewal standpoint. So obviously, we felt the effect more in Q2 here. We had a number of other pieces of, say, timing related with movement of renewals from quarter to quarter that had about a point of an impact.

Speaker 9

And as we mentioned last quarter, we're continuing to take action on unprofitable accounts and that was worth about a point as well. So even though there was all that noise in the quarter, retention was still relatively flat, but the biggest driver in the quarter was really around a 3 to 4 point negative mix impact on the top line. Now we'll often see that in terms of I mean, obviously, large accounts is one example of that, but we sometimes will see that. But that for me I think was the biggest driver. It's not something we see consistently every single quarter or quarter on quarter.

Speaker 9

So I think Q2 is more of an anomaly from that standpoint. We like where we're positioned. Rate is still strong. It's a good operating environment. We want to grow here.

Speaker 9

So I think that's some of the color that I would give on Q2 in and of itself.

Speaker 4

And can you flush out what

Speaker 6

do you mean by sort

Speaker 4

of a negative mix? Can you just kind of elaborate on that?

Speaker 2

Yes. If and that goes like this, you have retention for SME, retention for mid market, retention for large account. When your retention for large account is meaningfully lower than the average retention across the rest of the book, you get a mix change, so to speak. Not much to do with profitability. In fact, the profitability is strong across the board.

Speaker 2

It's just the average size of account written in the quarter has created a drag of 3 to 4 points as Darren just highlighted.

Speaker 4

Got it. And so you're still seeing price increases in

Speaker 2

the large case, Darren? Like is

Speaker 4

that it's just you're not seeing the market as hard as it once was? And it doesn't sound like there's any irrational behavior going on, but yes.

Speaker 9

I mean in that large account space, it's case price underwriting. So some are up, some are down. It's a function of the individual account. Yes.

Speaker 4

Okay. And then the second question is just something that I'll throw out there. I'm not sure it's relevant or not, but obviously we had the CrowdStrike outage. I'm just curious what implications that has on your business from a business interruption perspective? I know you I think you've been starting to write cyber policies, maybe kind of how does that impact you from a current business perspective, but even kind of framing your view in terms of the outlook for building out that side of your business?

Speaker 2

Yes. I'll ask Patrick to share his perspective.

Speaker 8

Yes. So first of all, on the commercial base product business interruption, this kind of outage from system is not covered. It's similar to the COVID business interruption. It requires physical damage to trigger business interruption. So in this case, this is not the case.

Speaker 8

We do there is some coverage on our cyber insurance policy for this. But for the large majority of these products, there is a time a waiting time period, financial deductibles and then for excess policies fairly high attachment points. So we don't expect any significant

Speaker 9

significant.

Speaker 2

Most people were back on track in a very short period of time.

Speaker 8

Yes. They need the same day.

Speaker 6

Yes. Perfect. Thank you.

Operator

Your next question comes from Mario Mendonca from TD. Please go ahead.

Speaker 6

Good morning. I want to go to U.

Speaker 10

S. Specialty, specifically the comments around certain business lines or segments that require corrective action. Could you speak to the areas where you figure you need corrective action, what's going on there and how important are those segments to Intech?

Speaker 2

Jared, why don't you share your perspective?

Speaker 9

Thanks, Mario. I mean, at a high level, new business was up in the quarter year over year, but retention was down 2 points. And that was mostly the result of our own actions. So business units that I would highlight is entertainment and financial lines. Both were down double digits in the quarter.

Speaker 9

That was driven a combination of reunderwriting the portfolios, shifting of appetite, I think about our financial institutions portfolio, but also where we've been pushing strong aggressive rates with the aim to improve profitability. If I was to strip out those actions and those business units, our growth profile in the U. S. In the quarter is more in the mid to high single digit range. Now similar to Canada when we talked about a negative mix, we had 3 points of negative mix in the quarter in the U.

Speaker 9

S. And that was driven by 1 single large account in our accident and health portfolio, which is really a downsizing of a transportation account. So again, not something that we would see every single quarter, but that clearly had a significant impact on the top line growth in the quarter. When I strip out the 2 lines, which obviously we're working on remediating, we have very, very strong growth in our strongest performing possible lines. That's a continuation of what we're seeing over the last sort of 12 to 18 months and I expect that to continue moving forward as well too.

Speaker 9

So again, a little bit of noise. Most of it was self inflicted, I would suggest there, Mario. But the outlook remains strong with rates in that mid single digit range. We're really looking to grow in that particular marketplace at the moment.

Speaker 10

And those lines, entertainment and financial lines like or yes, financial lines, I think you said, how relevant are those to enter to that business in particular in the U. S?

Speaker 2

Well, they're relevant. I mean, they're part of 12 verticals that we believe in and want to grow. And I think in those 2 segments, we want to make sure that they're on the right footing to grow. So I would say they're not the largest lines by any stretch, but there are lines that I want to make sure we have a sustainable profitable path going forward. And I do believe that these are lines that will grow back in time.

Speaker 10

And then just maybe very broadly, what is the company's outlook for U. S. Specialty? Just broadly, is this business do you still feel like it's a firm market? Is there any change in your sentiment in that business line?

Speaker 2

We love the specialty lines business in the U. S. And if I go macro for a moment, Mario, specialty lines performs better than commercial lines in the U. S, which performs better than personal lines in the U. S.

Speaker 2

So I feel that entering in the U. S. Or operating in the U. S. In really the most profitable segment of the marketplace is the right entry point for us.

Speaker 2

We've been at it for almost 8 years now. This business in Q1 was outperforming its peers by 5.5 points of combined ratio outperformance. And with a growth pattern that very much looks like our peer set. Now what is the competitive environment at the moment? I would say it is a very good competitive environment.

Speaker 2

Just to put things in perspective, Mario, in Q2, the average rate increase in the U. S. Was 4%. The difference between Q2 this year and Q2 last year where we were closer to 5.5% is that there are a few lines that have softened and we've talked about those line management liability would be a good example. Cyber would be a good example.

Speaker 2

And as a result, in these two lines, we're not seeing the sort of growth we have seen as rates were harder in the past 4, 5 years. But this is still an excellent environment and frankly, one in which we want to see more growth.

Operator

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

Speaker 11

Hi, Grace. Hi, everyone. I wanted to go back to the earlier question about premium growth in personal auto and I guess kind of personal lines more broadly. How should we think about the personal lines more broadly. How should we think about the policy count growth component of the top line over the next several quarters?

Speaker 11

It seems like it's inflected to sequential growth in the past couple of quarters. And I was just curious what you're seeing from a shopping perspective, if there's any updates there and if we should expect maybe acceleration in the policy count growth? And I guess just kind of to round it out, if given I think some of the profitability actions you've been taking in property lines after the cats last year, if we should expect a gap in personal auto policy count growth versus personal property growth? Thanks.

Speaker 2

Yes. Thanks, Grace. We'll ask Guillaume to give his perspective on what we're seeing from a shopping point of view, what we're seeing in the digital channels and how that should translate into customer growth over time?

Speaker 6

Thanks. So we're very comfortable with our profitability position in both personal auto and personal property and are really happy to be growing in that environment. I think the growth was strong again in Q2, 11% in personal auto, 9 ish percent in personal property. While the unit growth was mildly positive, as we're still continuing to be active on rates to reflect the emerging trends that we're seeing in the portfolio. We're seeing strong growth in our digital channel.

Speaker 6

Sales are up 84% year to date, which benefits mostly our direct channel where a larger portion of the traffic is digital. The direct channel also benefited from the conversion of the RSA portfolio, the affinity portfolio to the Bel Air Direct brand, which can now access all the same digital ecosystem as the rest of the retail portfolio. Food time, we're still expecting our competitive position to improve as given what we mentioned earlier that the industry profitability is north of 100%. There's still a fair bit of catch up to do for the industry and that should help unit growth going forward, while our retention remains really strong in most markets. So we're already seeing customer growth when we look at written.

Speaker 6

Written is kind of a leading indicator of the policy in force. So we're expecting that to also become positive. And it's already actually became positive this quarter and we're expecting that to trend positive for the next few quarters.

Speaker 2

And Grace, we're tactically adding to our marketing or call this response generation sort of budget in the jurisdictions where it makes most sense to do so because we want to lean in, in this environment. I'd say, the exception here for me remains Alberta, where there's this artificial cap that is below inflation. It's very hard for the industry. And as a result, players as anticipated started to exit this market. I do think that if the cap stays in place, you'll see more exit from the market.

Speaker 2

And every month where you're in a position where there's more inflation than the cap, our own appetite in this province is reducing, I would say, at a pretty good speed at this stage. We think there are very clear solutions on the table. We've shared those with the government. The ball is in their court.

Speaker 11

Thank you. And sticking with personal auto, I mean, I think the last time we saw such strong year over year improvement in the underlying combined ratio kind of on a natural basis was maybe in 2019, but that trend obviously it got a bit disrupted by the pandemic environment. And I was just kind of wondering given the slowing reserve releases in that line, if you could help us think about maybe kind of maybe the long term target range for the underlying combined ratio in personal auto and if we should expect sub-ninety 5 on a total combined ratio basis to be achievable over the course of the personal auto cycle, just kind of regardless of the environment? Thank you.

Speaker 2

Dion, do you want to share your perspective?

Speaker 6

Yes. So, combined ratio was again really strong this quarter at 91.4. Let's not forget this is a seasonally favorable quarter. So this is really in line with our guidance of sub 95. We're observing the underlying loss ratio improvement of 3 points with still LTPYD of 3.3 points, which is lower than last year's level.

Speaker 6

On the cost side, we're seeing inflation in the mid single digit, very similar to the last few quarters, while on the premium side, both are written and earn rates are operating around 10%. So really our profitability outlook remains unchanged. I think the inflation trajectory is definitely downward, especially on physical damage. But we're not banking on a much larger decrease and we're keeping an eye on the liability trend. So that's why we don't want to really decrease guidance at this point, but we'd very much like to beat that guidance.

Speaker 6

So overall, we're comfortable with our position in personal auto and really happy to be growing in that environment.

Speaker 11

Thank you.

Operator

Your next question comes from Jeremy Goran from National Bank Financial. Please go ahead.

Speaker 4

Yes. Thank you. First question just on capital. The margin, I believe disclosed at $2,900,000,000 Louis, can you give us a sense as to how much of that you would describe as excess or deployable capital? And then is there any constraints on the mobility of that capital across jurisdictions?

Speaker 3

So, I would say on the deployable of that margin, I would say 10% to 15% is probably the pure deployable. It's high because of the capital generation in the first half. There are a few uses expected in the second half now. As you know, we've redeemed preferred shares out of our U. K.

Speaker 3

Business and these were closing in July, so that will consume a bit. So that's one element in the re risking of the equity portfolio will be another consumption of capital. So I expect to level down a bit by before the end of the year on that basis. And then hopefully next year we'll start generating a fair bit as well. But the deployable, I would peg it in the 10% to 15% range.

Speaker 3

And then across geographies, it depends on the structure specifically. Generally speaking, what we need to do is pull it out and bring it up to the corporate and then having the ability to deploy it wherever we want from that point of view. But I would say given the strength of our capital position in each of the countries, the ability to pull out dividends is quite high.

Speaker 2

Yes. So I think it is indeed the case. And I think one thing to keep in mind is that in particular in the UK, each time we improve the earnings profile of the organization, this alleviates capital requirements. And this is good for capital requirement. And so we've made a lot of progress there.

Speaker 2

You think of the pension buy in, you think of the improvement, the refocusing of the footprint towards commercial lines. Maybe Ken, you can give us a perspective on profitability in the UK and the trajectory that we should expect.

Speaker 12

Sure. Yes, look, firstly, things are going very well. Q2 combined ratio, 9% to 2%, very solid, in line with the overall 2024 goal of 2020. The DLG business, as you know, we began recording that in Q4 last year in the form of a cold share. We have been taking a cautious stance though as we assume and integrate that new portfolio.

Speaker 12

That brings a

Speaker 8

little bit of a drag on

Speaker 12

the near term performance, but very much in line with expectations. The integration is in full swing though now. Policies are now actually renewing onto our platform, gives us much better insight into the portfolio, which by the way is 20% larger than what we anticipated. And we're getting strong rates on that portfolio, which will bring loss ratio benefit in the coming quarters. And we're on track to realize the £20,000,000 of synergies over 36 months.

Speaker 12

So if you go back to when we announced the DLG acquisition Q3 last year, we said that we expected the UK and I business to run-in the 92% or low 90% range in 24%, percent, but down close to 90% by 2026. We're right on track to deliver that. That's getting us in the zone to mid and above mid teens ROE in the UK business and that starts to create room for dividends and capital repatriation from the UK.

Speaker 2

Especially that capital requirements come down when your forward profitability is improving. And so this is really double impact here in terms of generating strong ROE in that jurisdiction.

Speaker 3

And we get more tax recoveries.

Speaker 2

And we get more tax recoveries.

Speaker 8

It's all positive. Yes. Thanks, Jim.

Speaker 6

Great.

Operator

Your next question comes from Lamar Persold from Cormark. Please go ahead.

Speaker 9

Yes, thanks. So it's meaningful

Speaker 4

to me that you guys are reminding us that the 17% ROE includes elevated caps from Q3 last year. Is that to suggest that you guys feel like a 17% ROE feels like something that Intacct could deliver in a normalized environment. Is that kind of the point to that comment? Or am I reading too much into it?

Speaker 3

I would say your reading is exactly right. That's we wanted to highlight the fact that the 2017 year was not driven by lower cat losses in the quarter. It is impacted it still is impacted by last year's heavy cat losses in Q3 as we're giving a figure on the last 12 months basis. Think we're running at a very solid 17% right now. And I think our view is with every measure we have in place, this is sustainable.

Speaker 9

Okay.

Speaker 2

Yes. I think the focus for me, when you get past 15, it's earnings growth. And so you need to find that right balance between your growth profile, which translates into earnings growth. And I think that the earnings growth profile of the firm is really good with our new footprint. And where above 15 should you be, in my mind, should be determined by the balance between growth and bottom line translating into earnings growth.

Speaker 4

That's helpful. Now does it feel like all these positive underlying trends with Intact, like at what point do you revisit that 500 basis point ROE gap versus the industry? Because it seems to me like you're putting some distance between yourself and peers and maybe that has to be revisited. So maybe Charles or Louis, at what point do you revisit that 500 basis point ROE gap and say, this is a large enough organization, we've done enough to improve profitability And now we think the gap is something higher, maybe $750,000,000 How do you think about that? Yes.

Speaker 2

I think it's a great question. And it's a question we debate from time to time. We think the machine can generate more than 500 basis points. In fact, our track record over 10, 15, 5, whatever you want to cut it is closer to 600, 700 basis points. But creating outperformance on a sustainable basis day in, day out has to be achieved at the customer level in a way.

Speaker 2

And we know in Canada, given our size advantage and the fact that we've been focused for decades on creating outperformance, we know it's super well anchored. We're really happy with the progress we've made outside of Canada. But we've gone from 100% Canadian business 8 years ago and now it's 65% Canadian. So we feel this is still very much the right objective. We have the horsepower to outperform that objective, but we need to deepen the foundation of our performance in the U.

Speaker 2

S. And in the UK at this stage and then we can have a debate as to whether we move the bar, the goalpost up or not. But so far so good. All these business units are firing on all cylinders and we're really keen to grow in the markets where we have. The good news is that the sandbox in which Intact operates is 10 times bigger than what it was 8 years ago.

Speaker 2

There's outperformance everywhere. So we can just keep our head down, grow where we operate today and meet our earnings growth objective while outperforming from an ROE point of view. And a few years from now, we can debate whether 500 basis points is the right objective. But we think there are very few companies and very few industries that have generated this sort of outperformance and we're very keen to protect that outperformance and if we can grow it, we definitely will.

Speaker 9

Appreciate the time.

Operator

Your next question comes from John Aiken from Jefferies. Please go ahead.

Speaker 4

Good morning. Thanks for squeezing me in. Charles, I wanted to revisit some of the comment you made in your prepared commentary about the specialty lines and basically a little bit more room for improvement. Now I think this is in context of when you're talking about digital and AI. Are you willing to give us a couple of examples just for my own edification in terms of what you're trying to do with specialty lines?

Speaker 4

And then I guess pushing my luck, can you go actually discuss whether or not you're willing to quantify what the impact of these improvements could be?

Speaker 2

So you look at the specialty lines business, now it's running in the 80s in a favorable environment. And I think the sophistication lift we can get and keep us operating in that zone on a sustainable basis. That's really what we're trying to achieve. The example I would give you just to be very concrete is that in Canadian Commercial Lines, so our Main Street Commercial Lines operation, you have a very sophisticated pricing engine, machine learning based in many segments. The specific view of expected profit per customer that is used to manage the business.

Speaker 2

All that is automated and it generates tens of 1,000,000,000 of price points in a product in a given province. We're not there in other jurisdictions and that's where I see a fair bit of upside. Like we're racing to deploy segmentation models. We're not working yet with systems who are as modern as we have in the Canadian ecosystem. So we're investing heavily in our systems in the U.

Speaker 2

S. As well as in the UK and increasingly in Europe that helps lift the quality of the data you use when you segment. And so the performance is really good. But when I look at the depth of the sophistication that's in the field right now outside of Canada, I see a lot of upside myself. And that's why we're investing massively in that space.

Speaker 4

Fantastic. Thanks, Charles. So given time, I'll leave it there.

Speaker 6

Thanks.

Operator

And we have time for one more question from Nigel D'Souza from Veritas. Please go ahead.

Speaker 4

Good morning. Thank you for taking my question. I just had some minor follow ups for you on cat losses. Just to get a better understanding of how it plays out going forward, should we expect that most of the losses from recent events that's going to be reflected in Q3? And is any of it going to bleed into Q4?

Speaker 4

Could you remind us how long the tails are for these type of events? So in future quarters or future years, how long could your PYD be impacted? And the last point on the Jasper wildfires, there's a lot of disruption to businesses and potential lost revenue. So any commentary or color on the potential impact on your commercial lines from the wildfires?

Speaker 2

So just in aggregate cat losses, you should not expect any of the Q2 and Q3 losses to bleed in Q4. In fact, the pattern we've shown over time is you have favorable development in subsequent quarters because we go to the ultimate very fast, in fact, faster than the industry. And you see that in big cat moments, our outperformance can shrink for a quarter or 2 as the industry moves to ultimate. So I would not expect adverse development from current cats outside of the current quarter. That's the first point.

Speaker 2

And then there was

Speaker 1

Commercial. Yes,

Speaker 2

commercial in Jasper. In the overall

Speaker 8

kind of guidance or color that Charles provided earlier around these events and the potential impact with the catastrophe retention. When we project the Ultimates, we fully take into account all coverage. So the cost to repair, we rebuild the houses, the content, the additionally big expense during the evacuation, including the business interruption for all of the clients that are interrupted during the evacuation, but also for the clients who need to be rebuild and that's where the business interruption period might be longer. So to your point, Doug, by the end of Q3, we'll book fully the full extent of that, including that there is misinterruption eventually.

Speaker 6

Perfect.

Speaker 1

Thank you, everyone, for joining us today. A replay of the call 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 Financials Reports section. Our 2024 3rd quarter results are scheduled to be released after market close on Tuesday, November 5, with the earnings call starting at 11 a. M.

Speaker 1

Eastern Time the following day. Thank you again. And this concludes our call for today.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask you to please disconnect your lines. Thank you.

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Earnings Conference Call
Intact Financial Q2 2024
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