Hey, great to see you.
Good to see you. How are you doing?
All right. I think Definity continues to make significant progress, structurally enhancing the ROE and the market position. Maybe we start off our conversation with a bit of a recap of some of the recent developments and really how you've kind of advanced these goals.
Sure, happy to. Look, I think there's been a lot of activity in the few years since our IPO, lots of good progress. When you think about how we've advanced some of the major points, the first one I would be remiss not to start with is the kind of exciting news we had in Q2 of this year, which was the announcement of the acquisition of Travelers Canadian Business. I think this is really going to be a bit of a game changer for ourselves. It is very strategically aligned, a significant personal lines portfolio that we'll put onto our platform, gives us more capabilities in our commercial business, and again, financially compelling. It was a great way to deploy the capital. Fairly recent news, and I think it will be very material for us. That would be one.
I think the other deployment of capital that we've made over the last number of years has been close to $1 billion into building a broker platform. The McDougall broker platform we've built is now a top 10 insurance broker in Canada. It's a great diversifier of earnings for ourselves. It's a repeatable, high-margin business. Of course, as they grow, being one of their key partners, we get access to more revenue as well. I think that would be the second one. The third one would just be I'm very pleased with the core business. Our personal lines business, our commercial lines business, as you saw from last quarter, continues to grow well. We've built these growth engines, roughly we're growing at twice the rate of the market at good margins.
The final one, Phil, that I would mention would be if you go back to our Investor Day, we are an operating ROE expansion story. The three internal levers that we have to improve the operating ROE are all well on track. That is, of course, making good progress with SONNET, it's the expense optimization and then the claims transformation. I would say that they are well on track. That, I think, structurally has moved the needle for us.
Excellent. I think you've got a lot on the go in terms of internal initiatives. What are some of the key industry-related, both risks and opportunities, that you'd be watching for in the year ahead?
Yeah, so I think, you know, if you think about our main three lines of business: personal auto, personal property, and commercial lines, it's a pretty dynamic market out there, but very conducive to executing our strategy. In personal auto, it's been quite volatile. When you think about the last couple of years with COVID and cost reducing and then supply chain issues and inflation, the way we would describe that market now is it's a firm market from a pricing perspective. What you're seeing is a normalization of loss cost trends. Frequencies normalize, the inflation factors have normalized. We had a period of pretty elevated thefts, and many people, unfortunately, may have experienced that personally. That all seems to be kind of coming down. That is positive. I think the two things you mentioned, risks. One is the Alberta auto market has light at the end of the tunnel.
It's not profitable today, but they are putting through reforms and a new structure in 2027. That will be helpful. There's also some uncertainty around the tariffs. Even on tariffs, we think that's quite manageable. For us, we see opportunities in the personal auto market. That's where we've had good growth. We think that as we go into next year, we'll continue to grow both in rate and in unit count. The other line of business is personal property. In personal property, one of the big drivers we've seen is changes in the NATCAT environment, and the market has responded to that. On the back of 2024, which was a historic year for NATCAT losses in Canada, the industry had about almost $9 billion in losses. That's changed reinsurance pricing and attachment points. All of that has made this a very firm market.
Big price increases are flowing through that market. That gives us quite a bit of opportunity. We have invested heavily in CAT management, not just from the claims management side and supply chain, but also pricing and segmentation. Our mapping and our aggregation tools have really meant that over the last 18 months, we have thinned out exposure we think are more CAT prone and written new business in other areas. With most of that work effort done, we should now be moving into more unit count growth along with a firm market pricing environment. Quite optimistic about that line of business. The commercial marketplace is an attractive marketplace. There are different levels of competitiveness in different parts of the market. There has been more competition in the large account space. We definitely see that. We have not a big portion of our portfolio.
Most of our portfolio is SME and mid-market. I think that helps us. The other point I would make in the last couple of years in commercial lines has been significant inflation. When you have high loss costs, you need significant prices. That loss cost, that inflation factor has fallen quite dramatically. The need for rate in commercial is quite different today than it was before. We still see lots of opportunity there. Because we have so much business in the SME space, brokers and customers really value ease of business, quick servicing. That is helping us gain share. In the specialty areas, we're sub-our natural market share. As we build capabilities, that's going to help us continue to grow. We still see pretty good growth. We're comfortable we can grow at about twice the rate of the industry in the commercial business.
Maybe it's a bit of a follow-on then. I mean, how are divergent pricing trends across commercial lines likely to impact Definity?
Yeah, I mean, I think we trade well in that market. I'm very pleased with the way the team has structured the portfolio, so we're not too exposed to this more competitive area. I think if you dissect our growth, if you look at last quarter, around 10% kind of growth, about 50% is pricing. That's rate increases, and the rest is unit count and share gain. In that smaller segment, which is a big part of our portfolio, it's not difficult to continue to put prices through. Brokers and customers want quick service, good broad products. They don't remarket that very often, so that really hasn't changed for us.
I think what is a little bit more challenging is that in some of the larger accounts, and again, it's not a big segment for us, your opportunities to find the right level of attractive new business is somewhat diminished from what it was. I think it's fair that we've grown double digit in our commercial business in the last few years. We're not really calling for double digit going forward in the next year or so, but we're certainly comfortable we could grow up a single digit and at least twice the rate of the industry.
Excellent. Can you talk a little bit about the strategic priorities for the year ahead?
Yeah.
Bumble on my words.
Yeah, look, for us and what we kind of share with our team, the first thing is, even though we've just done a big transaction, which we expect to close early next year, it's still about the core business. It's about not being distracted. We've got a great plan. We're executing really well, and keep driving that earnings engine. The second thing would, of course, be a successful integration of the Travelers business. Really important for the organization to get that right. We continue to also keep our culture of innovation, of being a challenger, of building a Canadian champion, you know, moving. If I just kind of double click on the core business for now, I think as we share with our employees, it's really about strong organic growth, about twice the rate of the market.
It's about continuing to hold margin and improve margin in certain segments. That delivers a sub-95% combined ratio. It's about that ROE expansion. You know, how are we making progress on those three internal levers of driving an enhanced ROE? That's really how we allocated our priorities for the year ahead. The most exciting one of those, I think, is, of course, bringing in Travelers. All three are really important to us. The internal levers that drive that operating ROE, as I said, are well on track. They're likely ahead of schedule. A successful integration of Travelers and the ability to optimize our balance sheet also adds a couple hundred more basis points. As we target the path to mid-teens operating ROE, both of those are very important to us.
Excellent. I think you've noted that you're on track to deliver, is it full benefits of the organic levers by the end of 2027? Is that correct?
Yeah.
Excellent. I guess the claims transformation, I think, is the biggest remaining bucket. What are the risks related to maybe surfacing those benefits? Is there potential upside to your target?
Yeah, I think that, you know, if you just step back for a moment, when we did the transformation and the big investments, we really started with the front end of the business. If you recall, we built a new direct-to-consumer model, SONNET, the first and only fully digital company in Canada. We built Vine, which was our platform for our small commercial and for all of our personal lines platform, fully integrated into the broker channel. The final phase was the claims transformation. That is, I'd say, well on track. There are two kind of, let's call it, components to that. The first one is to transform our auto portfolio and move it on to new technology. That has actually been done, and it's working quite well. The next phase is our personal property and casualty portfolio, and that's targeted for November of this year.
Thus, there's a little bit of a delay before you get the full benefit realization of that. When you ask about the risks to that, they're really very low. The first thing I would say is that we're using the Guidewire platform. This is a globally leading platform, and most insurance companies around the world that have deployed this far, they get a couple of points of loss ratio benefit by installing it. I think that when we look at our early indications, that looks very or highly likely, highly confident that we can do that. At the same time, I think it comes just in time to also pick up the Travelers portfolio that should come on next year as well. All really on track. When you think about institutionalizing some of the best practices, it helps. What it really does is it helps you drive better customer experience.
That drives your NPS scores. It helps you be more productive. You can handle a larger claims volume, which helps your loss adjustment expense. It improves your leakage or your indemnity management. I think all three of those categories really don't have much risk attached to them.
Excellent. Listen, Travelers Canada, I think, is looking like it could be a great transaction. You got 200 bps , at least through a combination of, I think, it's balance sheet optimization, earnings, and synergies. I guess my question here is, I mean, how should investors gauge success in year one? For context, it feels like a transitional year. I think you risk having some near-term pressure with the loss ratio simply from business mix. You're balancing retention with risk selection and price adjustments. I mean, how do you gauge success? How should investors kind of look at that in terms of gauging progress in year one?
I think the most important measures to look at are retention of the business and retention of the talent. If you can get that right in year one, everything starts to flow quite nicely from that. We like the business. It's very complementary to our business. There's lots of great talent in the business. We've already done very well so far from the talent perspective. Right away, within literally 48 hours, we had met with 1,200 of their 1,400 employees. Of course, this is always a little bit of a surprise, and it takes a little bit of anxiety at first. As we continue to meet, I think we've been so impressed with the level of talent. We've made certain arrangements, retention programs to retain the very critical talent in the business. I think that's going to go well. I think people are pleased to be joining a Canadian champion.
This is a Canadian headquarter business that's building a leadership position. You're leaving a number 12 carrier to become part of the fourth largest insurance company in Canada, and we feel really good about that. When it comes to the business retention, because it's fully intermediated, 100% distributed by brokers, it's really important to get broker support so the brokers support us. We have already very strong broker relationships. We have met with brokers across the country. We've met with all the largest brokers, and they're excited about this. They see this as a step change for us. Definity is the third largest intermediated channel already, a broker in the intermediated channel, third largest insurance company. It just reinforces that. I think the other part of the story is that we have a good platform.
What brokers would be saying to us is that they like the Travelers capabilities, but they'll like it more when it's on the Definity platform. I think that will help the transition. We're trying to make sure that as we transition the business, we do so smoothly and effectively and retain as much of the business. If I just give you a quick example, in personal insurance, we're moving about $1 billion of Travelers business from an old legacy system that has friction, complications, isn't as agile and responsive to the leading insurance system in the country, Vine. That's going to go well. We have very similar appetites from products and business mix, so we expect that to move. We'll be careful to maybe migrate and manage customer dislocations. If customers do have a price change to us, we will manage that over a year or two.
There are a few other things we get as well. I mean, we have a fully automated underwriting system. They do have some exceptional underwriters, which actually allows us to think about opening up our addressable market. There's upside on revenue for us there. On the commercial side of the business, we have a $1.5 billion commercial business today. We're picking up $600 million of commercial business from Travelers. It's equally split among the three segments of small business, SME, mid-market, and specialty. We have an excellent proposition, the Vine platform for the SME. I think that will run a crossover nice and smoothly. We have strong regional presence and relationships with brokers for the middle market business. The specialty we're delighted about, you know, we have been building out our specialty capabilities. We're still, as I said, sub-market share.
To get another couple hundred million dollars with that level of talent and capability and some new products like Ocean Marine and management liability lines, you know, really is pretty exciting for us. I think that'll all go well. If you kind of go back to your question, how do investors, you know, measure the success? It's, did we retain the business? We'll report, you know, on that. Of course, that leads into, are we on track for pulling the actions to generate the synergies, which are about $100 million?
All right. I guess it seems like the bulk of the targeted synergies are maybe, I'll call it system cost related. That feels low risk, but probably means the benefits are more back-ended in year three. Is that the right way to think about it?
Yeah. I think that's a pretty accurate way. I think we should be clear that when we say, you know, what's the improvement opportunity? We've disclosed there's $100 million of cost synergies, and that's cost, but not other synergies like loss ratio improvement. If you step back and say, look, over the course of a three-year integration, what are all the areas that will improve? The first one will be expenses. That's the $100 million. There will be some loss ratio improvement as we put the Travelers business onto our rates, our programs, our capabilities. That will improve a bit. The investment portfolio over time will mirror our mix, and there'll be some improvement there, some reinsurance costs. There's a number of levers. The big one that we've disclosed is that $100 million of cost synergies. At least half of that is just simply from technology.
There are other items like U.S. cross-border charges from the home office, which all of these are, you know, I think we have a, let's call it, a very high degree of confidence we can achieve. Your point, Phil, is correct, though, that because you've got at least half the synergies coming from technology, you really can't capture that until you've actually migrated the technology. I would say that really two-thirds of that benefit comes in the second half of the three-year plan.
Excellent. I'm just watching the clock here on this one. Can you talk a little bit about how complementary the businesses are, kind of the overlap, and again, maybe potential for revenue synergies over the midterm growth rates, what that could mean?
Yeah. I would start off by saying they're very complementary, the businesses, right? When we look at it, there's no obvious portfolios that don't fit with us that we'd like to exit or walk away from. Anything that doesn't quite fit our standards is really going to be on the margin. In personal insurance, we get about a, it increases our portfolio by about a third. We like the mix of business between property and automobile. Even when you think about CAT management, they are very good underwriters. They've got a good personal lines product. We don't anticipate being overweight, overconcentrated in zones that we're uncomfortable with. I think that's a good complementary story. I think the same applies in commercial lines. Essentially, this is an additional 40% growth in our commercial lines business. We'd like to retain it all. I think that looks good.
When you go back to, okay, what does this ultimately mean once you have successfully integrated the business? The real reason, or one of the key reasons why I believe Travelers sold the Canadian business was at number 12, they felt they were subscale at $1.5 billion. They did have a difficult time growing the business. Go back to the earlier question you asked me. We've built these growth engines. We've got great broker relationships. We think that we'll be able to grow both businesses whilst they become one at the same growth rates that we've been growing. We're targeting about twice the industry growth rates. That, you know, ultimately is effectively a revenue synergy in the years ahead.
Excellent. I'm going to shift gears a little bit. We'll talk about, I guess, technology and some of the competitive edge. You've made great progress, I think, in expense optimization as part of the organic levers. Just kind of remind us how big a cushion you've kind of baked into the overall ROE enhancement goal for technology spending to really sustain that competitive edge you've got now.
Yeah. I mean, I think the first thing I would say is, you know, we believe technology is really important. We have made some big investments in that. I wouldn't say when you look at our operating expense ratio that has come down and continues, I wouldn't say that's because of technology or less technology spend. It's in fact the reverse. We continue to invest in technology about at least a point or so of our ROE on an annualized basis to continue a leadership position. We keep making those investments, which help customer and broker value proposition. What it does, though, is it drives a platform that allows us to be more efficient. If you look at Vine, which really is an automated underwriting system, it now allows us to grow revenue ahead of the market without a corresponding expense ratio growth.
That's why the expense ratio has been drifting down. Roughly, our operating expenses are growing at only about 50% of our revenue growth because of the digital and technology platforms.
All right. What's Definity's plan? You've got solid digital leadership now. You've talked about SONNET. You've talked about Vine. Can you just talk a little bit about the plan to maintain that leadership as competitors start to ramp up spending?
Yeah, we definitely are seeing people stepping up and trying to invest in technology. I'd say a couple of things. Firstly, there are barriers to entry here in terms of making these big technology spends. If you're going to do it properly, these are really big, multi, you know, $100 million plus investments. You have to be a certain size to do it. That would be the first thing. The second thing would be just because you go out and you buy a technology platform like Guidewire, it doesn't really mean you can compete at the same level as someone like Definity because that's just the foundation of the system. You then start to put all your foundational layers on top of that. Maybe an easy example that I could share would be SONNET, our digital direct business.
Whilst many companies have a platform or a policy management system of Guidewire, we built this integration layer and innovation layer where in five minutes, you ask five questions, you can get a quote, you can buy it, and you can actually pay for your product. That isn't just part of the core deliverable. Those are the barriers that I think happen. As I said, we continue to invest as well. We're not standing still. I think all of these keep our advantage going forward. The Vine platform does have a number of advantages for us. Number one, it's in the cloud, fully scalable. We're able to grow this business quite quickly. The scalability is a really important thing. The fact that it is embedded and integrated completely into broker management systems makes it a great user experience. It also allows us to interject AI tools.
It allows us to bring in all of our underwriting sophistication that helps us better with risk selection and pricing. A very similar theme applies to the Vine part of commercial insurance as well. I think claims is the one that, you know, we're back to your earlier question about the probability of value creation out of unlocking out of claims. There's a lot we can do there as well. I think that the user experience is going to be easier. It's what's required to really lead on AI, Gen AI tools that I think will definitely improve the claims experience, but are going to be critical to be a top insurance company in the future.
Can you give us maybe a little bit of color in terms of some of the measurable benefits of AI and automation and how that'll scale kind of post-acquisition?
Yeah, I think the more volume you put on, you know, it helps. We already use a lot, and we've got something like 275 practitioners in advanced analytics and AI, you know, pool. We use it in commercial insurance for triaging which policies go to which underwriter. We use multiple fraud tools. Unfortunately, you've got to be good at that, you know, in our industry. It's allowing us to refine our pricing precision and risk selection. I think to me, there's a number of current uses, which for sure have helped our customers, contact centers, call summarization, etc. That efficiency and user experience is good. The next phase of this is really how do you out-select on risk selection, underwriting, pricing and capabilities. It's something we're investing very heavily on, and we know we've taken a leadership position in.
In terms of kind of closing, it feels like the value creation thesis in my mind has shifted increasingly towards execution. What gives you confidence the team can successfully execute on several, I'll call it organic initiatives, while also managing the integration of your first carrier acquisition?
Look, I think that we feel very confident on this. I think that number one is we've got a great track record of doing big things simultaneously. If you go back to how we did a textbook turnaround of the Economical business, how we built, you know, SONNET, the leading platform, put our businesses onto one Vine platform, all at the same time getting ourselves ready to go to IPO. Whilst Economical, Definity has not done a major insurance acquisition. What we did do is we had four different underwriting companies. We collapsed them into one and put them all into the same system. That is actually more complicated than just doing one company acquisition. Effectively, we have done so. I think we've got a fantastic team that's also got tremendous experience, not just of being great insurance operators, but also of integration and M&A track record.
We've been planning for this for years. We've got our playbooks ready. We have built an integration management office. I think that integration at the same time as running the business, we feel really good about. I'd also go back and remind us that this is an in-market acquisition. The risk profile of buying another insurance company that looks very much like us, that deals with exactly the same brokers we do, that deals with the same regulators we do. We understand Canada. We've demonstrated through our financial performance. Really, to me, I'm definitely not going to say it's easy because my team would go mad. I know they're working incredibly hard and doing amazing stuff. It's definitely a high-confidence integration for us.
Excellent. Listen, Definity shares, I think, have generated a stellar return, I think, since the IPO, four years of act. First and foremost, congratulations.
Thank you.
In terms of closing thoughts, what do investors have to look forward to for the next four?
I think it's an exciting story. I think that, quite frankly, as well as we are doing, we are not firing on all cylinders yet. We are still in the early innings. I go back to the investment thesis. I think of the investment thesis as we're a growth story. We can grow at twice the rate of the industry. We can do that profitably with sub-95% combined ratios. We'll compound that underwriting result. We're an operating ROE expansion story. We've talked about the three levers. We have to move our operating ROE up significantly. On top of that, we've just done a sizable insurance industry restructuring, an acquisition of Travelers. That's going to add another couple hundred basis points for us. It brings capability for us. It gives us more standing with the brokers. It adds more product and opens our addressable market for us going forward.
I think that makes sense. Our thesis is that this isn't the last acquisition that's going to happen in the P&C space. I think we've proven that we're a credible buyer and participant in that marketplace. If I digress for a moment, if you're a company as sophisticated and well managed as Travelers, and you look at Canada and you say, I've got a $1.5 billion- $1.6 billion business in Canada that's subscale, there are many other international players that are much smaller. I think they would be or should be having those same discussions. I think that helps our story. You've seen us deploy capital, $1 billion in the broker, built a top 10 broker, good returns on that. Overall, I'm most proud about our people, our culture, and our capabilities that we've built. We are insurance operators. We have underwriting in our DNA.
All of that leads me to be very excited about the next phase of our journey with a high degree of confidence. We are delighted with the progress. We absolutely feel we're still early innings in this game.
Excellent. Sam, great discussion. I'd like to thank you personally again for taking your time out of the day to meet with investors and have this chat. On behalf of Scotiabank, Global Bank, and the markets, I'd like to thank the entire Definity organization for your continued support. I hope to see you begin to participate next year as well.
Absolutely. Look forward to it. Thanks so much, Philip. Thank you.
Thank you.
Much appreciated. Have a good day. Appreciate it.
We are going to take a short break.