All right, thank you, and welcome back to the afternoon session here on day two. We're going to kick it off with CEO of Definity Financial, Rowan Saunders. I think we got that cleaned up on the board there too, so that's good. Rowan, thanks again for joining us this year.
Great to be here. Thanks, James.
Great. Let's start with Q1. Is there anything you can share with us for how the business has been performing to start the year coming off of a pretty decent 2024?
Yeah, I mean, there's only so much I could say about the quarter, but I think that we had a really good year last year, and good momentum has continued, and I think that generally has continued into this year. The normal Canadian winter, normal environment, no surprises for us in the quarter. I would say that a lot of that momentum feels like it's just continuing. Our competitive position seems to be improving in the marketplace. Great broker support that we've got.
I've lost where we were, but.
Oh, the first quarter. Look, I think that the way we thought the year would unfold for 2025 is pretty well folding the way we expected it to be. If we think about the auto market, there was some good price movement through last year. We expected that to be a pretty firm market. That has continued. We've seen the industry kind of stepping up to some pretty sizable rate changes. That's helped our competitive position going forward. After last year's big nat cat year that we think is certainly an outlier, unusual year, the market has responded. They've lent into big price changes there.
That is a pretty firm marketplace, hard, and as we've expected. The commercial marketplace is still very constructive. I think, as we said last year, there was some more competition in the larger space. That's there. That's continued. Most of our business is not in that space, and so we're still putting prices through ahead of loss cost trend. It all feels like a very good start to the year for us.
Yeah. Let's shift then to the topic of the day, which has been the tariffs and the US trade wars that are potentially underway. Maybe just talk a little bit more about how Definity is positioned to manage that stress versus industries. We've heard from Intact, but how's Definity positioned competitively versus the industry?
Yeah, look, I think that I would say, firstly, we're a Canadian-only business. We don't export, and this doesn't directly affect us. It's a secondary effect. We're trying to anticipate and plan for what would be those secondary effects. What would it do to the economy? Are we going into a recession? What does it do to loss cost trend? What does it do to inflation? I'd remind everybody that our sector and Definity does okay in both those environments. When we look at past recessionary environments, it really didn't have a material impact on our business.
We've just come through a big inflationary period, and again, we're able to manage that. I think we feel good. We ourselves have a very strong financial position going into any uncertain times. Our teams are working on this. It's fluid, as you know. It's really difficult to be precise on what you model. When you look at what and where it could impact us, it's more on automobile than it would be on property or commercial lines claims. Even as such, a large part of our claims are either injury claims or labor claims. When we think about the portion of our claims that could be impacted from a general tariff, it's a little less than 15%.
You can put that into perspective. Not that it's immaterial, but certainly very manageable. Of course, there are several mitigants we've got to have about that. There are different substitute products we could use. There are alternative aftermarket parts, but there is also pricing. As our product, all of our products are one-year contracts, and as we've done in previous inflationary periods, we can actually price for that. I would say there's a couple of things that we've already done to prepare. Certainly in our investment portfolio, we have earlier in the year sold some equity, so we're well positioned there.
They're all high quality. When you think about claims, we've been able to, with our productivity levels, actually settle more claims than we're opening. The inventory of outstanding claims is going down. We've also recently been proactive in price changes. We've kind of had a pricing plan for the year. We've just stepped that up faster. We've recently gone into the marketplace in automobile and taken a bit more pricing power. I think we're just kind of getting ahead of what could be a little bit more permanent.
Yeah, yeah. That was what you mentioned about the pricing. That's one of the offshoots of this is that it's likely to sustain the hard market conditions. You've mentioned that you've already taken some price in auto. Is that similar in property as well? I don't know, commercial is probably a little bit different, but what do you think in terms of this environment sustaining that hard market condition?
It definitely is a cost input. I think however you think about tariffs, I mean, assuming they're inflationary with the retaliatory tariffs, that actually should extend the hard markets. Another driver to kind of keep the market conditions firm. I talked about auto, where in a regulated environment, we've lent in and really taken recently some additional pricing or earlier price changes. What we've done on the commercial lines and the personal property, we have an indexation clause in our wordings. Each and every year, we assume what an inflationary environment would be.
We move the sum insureds up in addition to pricing. With inflation that has come down over the last year, we were about to reduce those factors. We don't really need that level of indexation. Given the uncertainty, we've just paused on that. Rather than taking them down, which was our expectation, we've actually left them up so that if there is a bit more of an inflationary environment, we've already got that covered. If there's not, then we'll take them down in the next couple of quarters.
Right. Sounds good. With the Q4 results, you did lower your combined ratio target for the year, I suppose, to sub-95%. It was previously, I guess, like high 90s. What gives you the confidence to come out with that guidance, first of all? Then second, you outperformed that benchmark in 2024. Could we see further outperformance beyond that in 2025 and maybe in the coming years?
Yeah, I think for us, it's a bit of a journey. We've been three years as a public company, and we've done better than our targets in both the top line and the bottom line.
There is a number of reasons for that.
I would say that as we're progressing along with our targets and our confidence in the business. If you look at last year, last year, we had a sub-95% combined ratio in a pretty challenging year. If you think about that year, historic nat cat events, which we were able to weather. We also had Sonnet, which was loss-making for the full year, but profitable only in the fourth quarter. All of those are improving. You see our operating leverage improvement over the years. When you think about that, good progress on our claims transformation progress, there's a lot of reasons for us to kind of see that coming down.
I thought rather than the mid-90s target, we're comfortable saying sub-95%. As far as the next part of the question, could we further outperform that? I think this is all part of a journey for the next phase. What we are trying to do is grow twice the rate of the industry and print the sub-95. Doing that, we think, is a very strong way of value creation, compounding that underlying income, which size and scale a bit longer. Likely that target could be better, but that's not the kind of plan for the next couple of years.
Okay, great. Let's shift to personal auto specifically. Growth very strong in personal auto last year. Rates continue to still have some momentum, as you alluded to. What can you tell us about unit growth going into 2025? Are you starting to see more acceleration there as your competitive positioning improves?
Yeah, we are. I think that when you think about the two lines of the two companies, there's the broker business and there's the Sonnet. If you isolate the Alberta exit, which obviously has a run of policies, that's really the main driver of any policy drag. What we are doing is we have seen the competitive position of the company improve. We're leaders. We take rate typically earlier than the marketplace. That's been helpful to us. As the market has kind of moved towards us, we're now back into unit count growth as well as the pricing increase.
We've supplemented that with further segmentation changes. We're growing in some areas and limiting other areas. Net-net, I think you should now expect to see a feature of our result being both unit count growth, so i.e., market share gains, as well as the pricing changes in personal auto.
Yeah, maybe just elaborate a little bit on some of those changes you've made in product and segmentation and personal auto.
Yeah, I think what we try to do in personal auto is you look at it by province and by kind of segment. What we try to do is make sure that in the more attractive segments, we're more competitive, and we're also able to deflect other segments. That's been a key part of what we've done in Sonnet on its path to get profitability. I mean, that's a big learning for us. I think there's been quite a lot of churn in that portfolio. Retention rates have been lower than a normal runway would be. We've shifted the mix there. In that portfolio, it looks much more like Group and Affinity than just general retail.
In the broker side of things, there's less churn because it's a mature portfolio. What we find is that new business always performs a little worse than subsequent renewals, and your margin improves with tenure of the customer. For us on the broker portfolio, we really try to keep the retention high, which has been pretty good. The ease of buying helps tremendously. Brokers really don't have an interest in remarketing that. We also, in the last couple of years, made some shifts. You'll recall that theft became quite an issue. I think there used to be a couple of points of loss ratio pre-pandemic, and then it went up literally three times.
We structured pricing and surcharges and segmentation to be less competitive on those high theft target vehicles. As those keep changing, we then moderate our segmentation away from that. What we sometimes find is sometimes you overshoot it a little bit. We got a little less competitive than we wanted to on new vehicles. Part of that segmentation changes makes us now more competitive on new vehicles, newer year models, and that again changes the mix a little bit. It is kind of an ongoing process that the underwriters do.
Yeah, of course. Sonnet, as you mentioned earlier, reached profitability in Q4. How significant of a contributor should we think of Sonnet in 2025? Is it still pretty much at the margin, or are we going to see this really start to drive some of the profitability growth of the overall platform?
I think there's a timing impact from that. I think, firstly, on the Sonnet one, we're delighted because this has been, quite frankly, really hard work to do in multiple years. I think ourselves and one other global pure insurer tech company are profitable. So it's not an easy thing to do. There's a lot of IP that we've developed, and so I think we've got to motor around that business. It's been a drag. What we've kind of said is, look, over the last couple of years, where it was to where it's going to be, there's a couple of points of ROE improvement, and we're about halfway through that.
That's the positive news. Our plans now are to, it's about a CAD 300 million or so business. We think it's a billion-dollar business in the years ahead. What we want to do is just stabilize that, stop the contraction because we have contracted the business to get the mix to work for us. Then we'll start in the back half of the year to see more growth coming out of that business. The intention, unlike our more mature broker business, is not to run that at 95 combined or better, but to keep it as a profit, which really means high 90s.
The reason for high 90s versus mid or lower is really because the percentage of new business that we need to do to scale. I think when we think about Sonnet, there are the two components. Are you comfortable with the loss ratio and the expense ratio? The loss ratio is now generally in the line of what we'd like it to do. That says to us that the model works, it's got a good future, and you can attract and make money on the target customers that come into Sonnet. It's still a bit subscale, and that will just be pure math as you start in a digital business gaining up.
We don't see a bigger change in the loss ratio in the next few years, but we do see a material shift in the expense ratio. The way we think about it, it's absolutely helping the operating ROE, but it's still going to run high 90s for at least the next few years as we kind of scale that up. If we slow that or when we choose to slow that to more normal growth, there's no reason to believe that it won't operate like the rest of our business at around 95% for a regulated automobile.
Okay, good. Over to personal property. A good year, but one that was very heavy in cats, as you mentioned and alluded to, and we know. Assuming a normal cat year, is this a sub-90% combined ratio business? If not, what steps do we need to get there?
Yeah, so I think that if I step back and look at last year, I mean, this wasn't an unusual year for the industry. For us, it was material, but our nat cat losses were about 50% of our natural market share. We did a really good job in managing that, much better than our peers in the industry. That being said, it still was above our expectations, and we're about 96. That line of business, I think when we think about building it and growing it, really is kind of a low 90s combined ratio. Could it get into sub-90? In a benign year, it would, but we're not pricing it for that.
We're pricing it and assuming we will grow that part of our business in the low 90s. There is also some volatility. I think that we saw the negative volatility last year where when we had bad results, we still stay profitable. If we happen to have a good year, obviously there's a fair bit of upside. Generally, we take the view that climate change is continuing, losses are expected to continue, and so we're more consistent and conservative in our modeling and our probabilities and therefore our underlying and kind of pricing. We are assuming this trend to continue, and therefore we price at a higher probability of more cats. If it's a better cat year, clearly there's upside.
Okay. Onto commercial. Your exposures are in SME mid-market areas, a little bit more nichy. You did mention the larger part of the market is where you're seeing some pressure, but not exactly where you participate. Maybe the question is more like what's driving the resiliency in the SME mid-market space where you're not seeing some of that pressure?
Yeah. When we look at our portfolio, over 80% is SME and mid-market. The rates are not as high as they were the last couple of years, but that's really just driven by lower inflation. Inflation, the loss cost trends are lower, and we can kind of match that. In those segments, which is 80% plus of our business, we're still getting rate ahead of loss cost trends. No margin kind of erosion there. It is the larger piece. What's really driving that? I think there are different drivers. If you look at the small business segment, brokers and customers do not like to shop that too much, and it is much more concentrated.
If you look at the big four or five commercial underwriters, they control the majority of that segment. There is less competition in that segment and less remarketing than some of the other ones. What's really important is speed and ease. What brokers find is that if you can get back to a client literally within minutes or hours, your chance of winning that is really high. If it takes you a couple of days or longer, much different probability. Vyne Commercial, very much like our Vyne in personal lines, does a great job of integrating the broker management systems, letting them quote and bind over 50% online.
It is that ease of business that I think is gaining share. Brokers are concentrating small business. In that marketplace, we're not seeing challenging competitive behaviors. It's really just the larger and more specialty area, which, and I would even go on to say that when we talk to our trading teams, yes, there's more competition up there, but do not forget, this is on the back end of three or four or five years of firm market prices. There are some big margins on some of those accounts. Even though rates are not going up and in some cases are coming down, there are still attractive margins to be found.
We are still finding opportunities in the area. We call it out as being more competitive because its behavior is different than the mid and the small, but that is not to say there are not opportunities. You just got to work a little harder to find them.
Right. So when you talk about double the growth rate of the industry, I mean, commercial is part of that, part of that objective, is it sounds like it's really on ease of doing business and speed.
Yeah. That's what we say in commercial lines. I think that we've demonstrated we can do that. When you think about last year, we had 13 percentage points of growth, but remember about half of that is rate. We have been in a firm market. You're gaining share, but you've got a significant rate rating contribution to that. The SME is the consolidation marketplace there. As you get into the large and specialty, our natural market share is pretty low. If you think about particularly the specialty lines of business, for many years, most Canadian insurance companies didn't have capabilities or played in that space.
It was really for international players. Now some of the domestic capability is actually pretty good, and we're now competing in that space. Even in large and specialty, there's a long way for us to continue to grow because our natural market share is pretty low. Clients and risk managers would prefer to deal domestically if they can. Particularly with the big brokers, they have a much more strategic relationship with us than some of these international players because we do everything. We're really a one-stop shop from the largest Canadian business down to the corner store and into your personal insurance.
I think that's the big reason why we're finding it a pretty high degree of confidence to say we can continue for at least several years to grow at twice rate of the industry without really moving up the risk curve.
Right. Okay. When we think about Definity as a story of ROE expansion, you talked about Sonnet adding some points. Obviously, this scale is going to help add points. I guess the next leg on the organic side is the operational improvements that is helping to drive some of this ROE expansion. Is there anything left or what has been done and then what's left to do from an operational improvement standpoint to drive some expansion?
I think that, one, as we continue to shape the portfolio with growing commercial faster than the other product lines, it's higher margin. That just naturally is going to help move that. As the business continues to scale, I mentioned that operational leverage, we're halfway through driving the underwriting expense ratio from 13 to 11. It will drift there over the next couple of years. That's all in place. That's all working. We feel pretty good those actions have been taken. The next piece is a really interesting one, and that's claims.
What we did is we decided to transform the front part of the business, make all those changes, all those technology advantages first, which helped us become a growth story. Now we're in the middle of transforming the claims operation. The big product line there is automobile. Last year we had completed that. We've done the technology shifts that was put in place. It's only been a few quarters, but it's working really well. NPS is up, leakage is down, cycle time is improving. That's going to drive additional margin. We're now in the middle of working through the business model and the technology development of the property.
That doesn't get put in place until later this year, November of this year. Therefore, the next couple of years is when we'll get that benefit from that perspective. In terms of those operational levers, most of the levers are already pulled and are just literally earning their way through.
Great. Maybe we'll wrap up on some M&A conversation, I guess. You have the infrastructure to complete a large acquisition in the carrier space. You've been active on brokers. Maybe just talk us through how you're looking at the opportunities on the M&A side.
Yeah, I think the way we look at it is, look, we've done and deployed capital CAD 800 million or so in distribution, which is going really nicely. There's a good pipeline there. We've got four anchor brokers there doing a program roll-up. That's all good. In order to help us meet our strategic objective of getting to top five and then setting another goal of probably top three, we do need carrier M&A. That is where we're spending a lot of time and effort. I think for our management team, we feel that we're completely ready to do something. We've transformed our business.
We've built the platforms, and so we're ready. We've been active in the marketplace. I think that's not a secret, and we're trying to find opportunities. I think the world has got more complex. I think we went through a unique period of COVID and post-COVID where nothing really happened. I think the long-term secular trends and thesis for continuing consolidation are emerging back up again. What would we like? Clearly, Canadian. We've only got 5% or 6% share. We know Canada. We've got tremendous broker support. Any in-market acquisition will be highly synergistic for ourselves.
We like the commercial would be really preferred for us or at least a sizable commercial portfolio because we get talent and portfolios. In personal lines, that's where there's really a strong financial play. The example we use, if we're quite a billion dollars of personal insurance business dropped onto Vyne, we wouldn't need any additional headcount. It's really highly synergistic from that perspective. We do not feel that there is pressure to do something unless it is on strategy and it drives the operating ROE targets up to the teams that we focused on. The first part of the story is we are pretty comfortable.
We can get those few points just organically. We do not need to do M&A to move the operating ROE up a few points. To get into the mid-teens, what we need to do is optimize the balance sheet and ideally do that through M&A.
Yeah, that's great. A couple of points from organic, a couple of points inorganic. Mid-teens ROE is sort of the next couple of years the outlook we'll see. I think you said top three insurers. Phil, I'm going to remember that one for you. That's all our time, even though we had a couple of glitches in there. Rowan, thanks very much for joining us this afternoon.
You're welcome.
Thanks very much, Rowan. Thank you.