Okay, I think we're going to get started with our next presentation. It's my pleasure to introduce and host Rowan Saunders, CEO of Definity Financial Corporation. Rowan, I think you joined Economical in 2016 as CEO. We had really a pretty big transformation of the company, including profit improvement, demutualization, and then the successful IPO in 2021, at which point, of course, the company was renamed Definity, right? Execution post-IPO, I actually have to say, is being spot on. If anything, it's probably being better than planned when I look at the numbers. Now you've announced the $3 billion acquisition of Travelers Canada, another potential transformation of the company. It's a big, big transaction for Definity. Anyways, congratulations on all of that.
Thank you.
Thank you for joining us and taking the time today.
Great to be with you. Thank you.
I guess where I want to start is Definity closed a $1 billion debt offering just the other week related to Travelers Canada. Now you have the debt in place.
Yep.
You, of course, completed the equity issuance earlier this year. All the capital's in place. If I look at, you know, the deal hasn't closed yet, but everything feels like it's on track. It's on plan. The capital is there. Everything's lined up to close as expected.
Very much so. Yeah, no, I think we're, look, I mean, that is exactly the way we would characterize it, Paul. I think, as a backup for a moment in your opening comments, you shared our kind of story, and we were delighted to be able to announce the acquisition of Travelers Canada Business. It really goes to what we were all about. I mean, we're trying to build a Canadian leadership position. We were a mutual company. We demutualized. When we demutualized just three and a half years ago, we were the eighth largest P&C company in Canada. We organically, in the last three years, grew that to the sixth largest P&C company in Canada. Now with Travelers, we've become number four. The way I look at that is like this is a very strategic, important transaction for us as it moves us to that area.
Scale in personal lines, a great commercial product, and financially compelling. As you say, you know, now we've been able to also optimize our balance sheets to some extent as we get that to close. We're delighted with the progress. I think, you know, in July, we had the Competition Bureau approval quicker than typically it takes. We're working very well with OSFI, which will require a recommendation to the Minister of Finance. We think this was on track to close in the first quarter of next year. The equity raise we did was well subscribed. We really appreciate investors supporting that and the bond issues done. Actually, timing is probably quite helpful for us on the bond timing. Certainly, the rates we ended up paying are less than what we've got in our valuation model. Everything's kind of moving along quite nicely. Yeah, we're very excited about that transaction.
Yeah, as I say again, large transaction. It's going to be a multi-year integration process.
Yep.
As we head into 2026 with the anticipated close, what should investors be focusing on in the first year to gauge success early on, success with Travelers? What can we expect in the first 12 months?
Yeah, I think that, you know, the way we work about looking at this internally, the most important thing is really retaining the business. It's a good business. There's room for improvement in the business. That's the number one kind of metric I think that investors should pay attention to and we're very focused on. It's important for us to retain the top talent. It's important for us to retain the business. The way we do that is really making this really seamless as much as we can for our broker partners. We have excellent broker relationships. We've got a very strong broker value proposition. We've got modern, scalable systems, which should make this quite a smooth transition. If we do that effectively, we'll retain, you know, as much of the business as we would really like.
If I just step back for a moment, if you think about some of the upsides to the brokers as well on this, because it's a 100% intermediated business. In personal lines, it's a $1 billion portfolio that really today is run on a legacy system. That's not as easy to deal with for brokers. It's not as agile. It's not easy to make price changes, product changes. That is now going to be moved on to our buying system, which is the leading industry system. I think brokers will have a much better experience on that business. In the commercial side of the business, there's $600 million that will be added to our $1.5 billion. Roughly, that's about a third in small business, a third in middle market, and a third in specialty. That comes onto our buying small business platform, which is really easy for brokers to use.
We think that, you know, that will help a lot. The other thing what we're hearing is that, you know, that expands our capabilities. Ultimately, the broker value proposition does get better. As such, we expect higher retention.
That is obviously critically important given it's a broker-driven business.
Two follow-on questions on that: what is the initial response? What are you hearing from brokers? How have they responded to it? The second question I would ask is, how long roughly will it take to transition that block of business to Travelers Canada's block to your buying system?
I would say that firstly, the brokers are very happy about this. I mean, initially, right off the bat, it was important for us to be able to meet Travelers Canada's employees and meet with the brokers. Within 48 hours, I met 1,200 of the 1,400 Travelers Canada's employees, and we've continued to work with them. I think they're looking forward to joining a Canadian business. They were the 12th largest company in Canada. Now they've become part of the fourth. That's quite motivating when they think about the opportunity. That actually helps. It's important because they have great relationships with their brokers, and that continuity is also important. I've met with most, personally, of our top 10 brokers who happen to be the same top 10 brokers for Travelers Canada. They are very important to us. They're very positive about the deal.
They have committed to retain the business with us and actually see a greater value proposition. Our teams have been across the country doing business plannings. I think, overwhelmingly, there's a positive. I think brokers would ultimately say they like choice, and they would like more companies than not. What they very quickly follow that up with, if Travelers Canada had to leave the market, we would be the best buyer for Travelers Canada. They are looking to have a couple of big, strong, Canadian-oriented markets. I think that's the vision we've shown. That's the vision we're building. This is just another logical step. I don't think it's a surprise to the broker community.
We've told them our plan is we actually have a 10-year strategic plan, which is to triple the company in that period of time, take market share from our five to roughly just a little over 10%. Organic engines take us there, but also acquisitions play a part. They were expecting something like this.
Okay. I mean, you've made it known. Travelers Canada, roughly a 100% combined ratio. Certainly, margins aren't as strong as Definity's business.
Correct.
If we think longer term, I guess two parts of that question, as we think about that 100% migrating towards where Definity is low 90%, how long does that roughly take? Then going back to that client retention part of the equation, which is really important, how can you maximize retention while increasing profitability? Because there's a little bit of competing interest there, right?
Yeah. I think that as we think about moving it on, it will be middle of 2026 by the time we have the business rolling on. Think about it, it's not a one, it's not a big bang. It's a 12-month rolling. The business kind of migrates on from the middle of 2026 until the middle of 2027. That's how we would put it onto the portfolio, and therefore, it'll take a little bit of time. That's why we say it's ultimately a three-year integration period. The performance of Travelers Canada is roughly a 100% break-even business from an underwriting perspective. The loss ratio component is not dramatically dissimilar from ours in most cases. Really, it's the expense side of things. When you think about the $100 million of cost synergies, that's about six or seven points of combined ratio.
That kind of takes you from your 100 to your low 90s, and that's the period that comes. Most of that comes from technology, cross-border U.S. charges, and some productivity gains. If you think about that 36 months as two 18-month periods, we'll have done about two-thirds of the actions in the first part of that, and we'll get about one-third of the synergies in the first third of that. The rest follows. The good news about that is it's high conviction that we can get those returns out. Really, it's an expense efficiency story as we pull onto our business. On the other hand, there are some product lines, and I'll give you an example. Personal automobile would be the one. That is that lifts and shifts from that legacy system to the buying system. The loss ratio will improve.
With insurance math, it's going to take a couple of years before that turns in. Ultimately, we think there's the $100 million of cost synergies, and then additionally, there will be some loss ratio improvements as well over the next couple of years as that comes on. The balance between retention and margin is always a very important one. I think when we look at their commercial business for sure, there's very little that we don't think fits or we don't like. We need to make sure that that continues. Personal lines, the appetite is quite similar. There's a couple of areas, a couple of products they don't do we'll look at, but that's really on the margins. We're not expecting any significant retention shock as that comes over.
We will make sure that as we retain those customers where there are product differences or pricing differences, we'll manage that over a couple of years. If our automobile rates are materially different for a particular segment, we'll pace that over one or two years.
Okay. I think that's a really important point, right? Because what we've seen with certain other acquisition activity in the market is the need to have to reprice in some cases significantly, which obviously then you give up some retention.
Yep.
Saying that's not applicable in this case. You have also had certain lines of business where its combined ratio is not attractive and had to exit over time.
Exactly.
Not applicable in this case. Yeah. Okay.
No, that's what we like to do.
That's good. That's good. Let's talk about your ROE objectives. Roughly around 10% today. I think you've communicated with the Travelers deal you expect to go to mid-teens. Without the Travelers deal, you could probably get to, my math would say, 12, 13.
Yep.
I think that frames sort of where you are and where you're going. Expense efficiencies, you talked on that. That is one of the key levers. Maybe drill down a bit onto that in terms of the work you've already done on the expense efficiencies.
Yep.
Because you've seen some good progress there.
We have.
What's still to come organically, and how that helps set you up for the success on Travelers and reducing that combined ratio?
Yeah, absolutely. I think there are two kind of key messages I think that are relevant to our investment thesis. The first one is that we are a growth story, and we've shown we can grow organically at about twice the rate of the industry and now some inorganic growth. The other one, Paul, you're referring to is the operating ROE expansion story. We don't see ourselves as a 10% ROE business, and that's really a byproduct of excess capital coming out of our life as a mutual company. We have, you know, internally three levers that we talked about at the Investor Day, which really are all performing pretty well. The first one was how do we get SONNET, our digital direct insurance company, to break even. Then there was operating expenses. That's the underwriting expense component. Then the claims transformation. On the SONNET, that's done.
We already have got that to break even and are happy with how that business is performing. On the claims transformation, what we did there is essentially when we transformed the company back to getting ready for IPO, we front-end loaded this. We worked on customer acquisition. We worked on building SONNET. We worked on modernizing the technology platforms. The last thing we did is then modernize and transform the claims operation. That's on track. Then the expenses. The way we think about that is our operating expenses or the underwriting ratio component, if you exclude broker compensation commissions, is running about 13%, and we'd like to get that to 11%. There's two points. A point of combined ratio equates to a point of operating ROE for us now with our current capital structure.
We're at least halfway through that, and we think that'll be completed by the end of 2026. I think it is relevant because what we then do is we're getting the benefit, firstly, some cost discipline, but also the digital platforms. We're able to organically grow our revenue much higher than our expenses. That operating revenue is there, and I think it's going to continue. There's no reason to see that want. It's not for lack of investment in the business. We still have a model where we take about two points of operating ROE and roll it back into technology CapEx each and every year to maintain our digital leadership. That's in the financial targets and model. The other thing I would say, you know, Paul, you asked about the implications for Travelers. It gives us high confidence on Travelers.
I think that we clearly don't need to run two technology stacks. That's a big difference. We clearly don't have the management oversight that comes from the U.S. That's a transfer charge that just simply stops. That productivity gain we see through our digital platforms will again benefit as Travelers comes on. When we say we're taking Definity's operating expense ratio from 13% to 11%, and those points, when you think about SONNET's operating expenses and claims transformation, move us up to just under the teens, that is well on track, and we're highly confident on that. The Travelers integration is an additional 200 basis points, and that's how you get your math to the mid-teens. I think we feel very confident that there's a highly credible path to the ROE expansion story for us.
A couple of things I want to pick up on here. You talked about the premium growth, and I think you said 3X where you were.
Yep.
You've talked about this expense efficiency and being able to use digital capabilities basically better than the market to help you gain share, right?
Yep.
I think longer term for this business, the 10-year plan is, as you said, you think you can 3X premiums and at the same time earn higher margins.
Yes, we do.
So. I think the way we. That's a very powerful combination.
I mean, that is like, you know, we have our business plan, and every year there are going to be some economic and market adjustments, but we're building the model that says we can be an acquirer in the marketplace, which we think is going to continue to consolidate. We can keep growing the market at about twice the organic growth rate. To deliver that mid-teens, if you're back into reasonable assumptions on investment returns, you need to be in the low 90% from a combined ratio. We think we're very close to that already. I think the scale helps us. The shift of the business to more commercial will again be beneficial to us. Even in the Travelers portfolio, when you think about their business, one-third is in commercial, one-third's in SME. That goes onto our automated system.
The other third is specialty, which is much higher margin as well. Those are the things that are going to help. One of the points that we're working very clearly on is the SONNET story. There is no contribution yet from SONNET. I mean, this is an option for the future. It's been a drag on our results as we built it. It's now break even, but it hasn't really provided any earnings. That, again, our assumption will start to be additive in the years ahead.
Okay. Maybe we'll drill down a little bit more on SONNET and the path going forward. I think it's a business model that was launched in 2016.
Yep. I think. That's right.
Almost 10 years.
Yeah.
It's been in the making, right? I think it's been a little bit of fits and starts, and I think a little bit more challenges than maybe originally thought in that business. Also, when I look at the direct-to-consumer industry or market in general in Canada, I think it's been more challenging to penetrate consumers than one would think.
Mm-hmm.
Maybe talk about some of those challenges in terms of SONNET, what you've done to overcome those, and sort of the path forward for the business.
Yeah, look, I think that when you think about the strategy behind this, Economical, the mutual company, was 100% intermediated, been around 150 years. We did see a trend in the distribution of personal insurance that direct-to-consumer has been gaining share, about half a point to a point, depends on each year. That's an area that we didn't have any capacity in, and we felt we needed to be in that market. The way that the management and the board decided was, look, rather than build an agency force, rather than build a conventional contact center, let's leapfrog. Let's go to a digital model. I think two things we've learned, quite frankly, we were early. We were too early. Customers in Canada weren't quite ready for that model. The second thing, this is absolutely harder than you think, taking money from the incumbents. There is the technology cost that's significant.
There is the marketing cost that's significant in terms of building trust and brand. I think where many people haven't really understood is there's the underwriting leakage. There is anti-selection. There's fraud. There are things like that that make it pretty difficult. In a very transparent way, this was much more difficult than I think the organization understood. We've made a lot of changes to that. What we have done is we've invested heavily in capabilities to manage a digital business. I think that is now proven, we've got some unique intellectual property there. To me, it's a barrier to entry. It's just not that easy to do that, and it takes time to really understand that. We now know what the profitable customers are. We now know how to retain them, and that's important. We've also shifted and pivoted a little bit. It's not just completely pure retail.
We focused on the group and affinity market, which is actually performing very well for us. It's now about 50% of our new business, and it's a disruptive model. This is a highly attractive, it's about an $8 billion market in personal insurance, and that is where we're having great success from pulling business from the incumbents without having to pay the traditional cost structures that happen. What we wanted to do was take 2024 after scaling the business up to get it to break even. We accomplished that. This year is about keeping stability and sustainability, just making sure that we can actually win customers that will be the quality we want, and we can retain customers that we've chosen to retain. As we move into 2026, we're going to start scaling this up. We're feeling much better about the business.
There was a while there that we had to say, does this model really work the way it should? I think that it's been a big investment for the organization. It now becomes quite an exciting opportunity for the years ahead.
Okay. I want to ask a couple of questions on the P&C industry conditions. Starting to see some slowing in terms of premium rate increases in commercial.
Mm-hmm.
I think last quarter you sort of reduced your expectations for industry growth rates. Talk a little bit about the dynamics there and how it may or may not influence your growth plans.
Yeah, I think what we've seen in commercial insurance is definitely lower growth rates for the industry. The main reason for that is less about new capital coming into the marketplace, but it's more about the cost trends. When we were in an inflationary environment and you had upper single-digit, mid-single-digit cost trends, inflation, you needed rate at least that or higher to cover that. As we've seen inflation drop a few points in the commercial business, you just don't need, this is a well-priced business. It's had four or five years of a hard market. There's rate adequacy, in fact, some excess profit rate in those segments. You don't need as much price. I think the market is reflecting that. That would be the first and really the main message of why the market growth has come down a bit.
There is, on the other hand, some more competitive activity happening, particularly on the larger accounts. On the margin, there might be a couple, there's certainly some more new capacity coming in. In many ways, that still is a profitable segment, even with that competitive environment. If someone is taking less rate or even giving up a little bit of rate, those large accounts tend to be very well priced. There is some capacity for that. I guess from our perspective, the vast majority of our portfolio in commercial is not in that large segment. It's not that we're not seeing it, but it's the minority of our portfolio. When you think about our growth rates, we talk about being double the industry. We're quite comfortable we can double the industry. If the industry goes to 2%, it's not like we're going to go to 4%.
We may not be double-digit, but we're still going to be upper single-digit because we're gaining share, particularly in small business. That small business marketplace is different. We're still able to at least cover our cost of loss cost trend in those areas. The large and specialty markets, particularly, we've still got a pretty low market share. Lots of opportunity runway for us.
Okay. It's not like there's been a flood of additional capital coming in the industry, pressuring margins and making growth less attractive. That's not the case.
No, we're not seeing that. I mean, I would say that in the small business area and many parts of the middle market, we continue to trade just like we would. Finding in the larger business more profitable new business is more difficult. That's the area where on the margin there is less opportunity if you stay disciplined to your strategy. Yeah. Okay.
I guess similar line of questioning on personal auto. We've also seen strong rate increases over a hard market in personal auto for a little while now. It was required. It did. Right?
Yeah. It was required.
Are we kind of at that tipping point now where industry profitability, other than Alberta, looks pretty healthy and solid? Maybe we should expect the premium growth in personal auto to also slow, maybe with stable margins but slower top line growth?
I would say at an industry level, the answer would be yes to that. I think we're going to normalize. We've had quite an exciting ride in automobile. It's been quite difficult. We had the COVID years, then we had the super inflation years. Supply chains weren't working. We seem to have responded as an industry to that. I would say that the auto market is a good market at this stage. What you've got is you've got normalization in frequency of accidents, structurally below pre-COVID. That's good news. You've got inflation that's now running at mid-single digit. That's normal. It's what we expect. It's how we price the products. There were some unique things like a massive increase in theft, still a little elevated from pre-COVID, but coming down quite nicely. That seems to be kind of under control. We've got a regulatory environment that's been quite responsive.
I think you called out Alberta, and that would be the exception. Outside of that, which is a little bit of a headache for the industry, everything is looking pretty well. In automobile, we think that the industry growth that's taken literally 10% double-digit increases will normalize as more companies get to rate adequacy. Not everybody's yet at rate adequacy. There's a few of us in the industry, Definity is one of them, that feels that we're at the right place. There's still some price increases flowing through the market. That will probably mean that as we turn over the calendar and go into 2026, our competitive position will improve and we'll go back to kind of unit cap growth. Automobile is a little bit of a lumpy market, right? Because part of how we grow is we do tend to take rate. We tend to be early.
We tend to be ahead of the market, which reduces our competitive position. Then our new business slows a bit. Others tend to follow, and then we become more competitive and grow. We do win some big portfolios. It links to one of the earlier conversations we had where some brokers are saying, look, I'd like to deal with Definity and not Company 5 or 6 or 7, and they lift and shift their portfolios. In our case, we actually have one portfolio that's wrapping up. We'll have a quarter or two that's a little lower. The long-term growth is upper mid-single digits, I think, for us as we take some share and keep reasonable pricing, but quite consumer-acceptable pricing for the next couple of years.
Yeah. I'll ask one more question. We haven't touched on personal property yet. It's always topical because of the increasing.
Right, yeah.
Weather-related risks. It's been a quiet year for catastrophes in Canada, but I'm sure your work towards risk mitigation for the future has not changed. Maybe talk a little bit about your strategy around managing climate risk.
Yeah, I would say, look, this is a big focus area for ourselves. We clearly, as we shape our portfolio, have more personal property and more commercial lines in terms of growth than we do personal automobile because that's the unregulated lines of business. Knowing that, we've got to be very good. Climate change has picked up over the last number of years. We've actually done very well in each of these years, including last year, which was a historically high $9 billion of net cats. We still were profitable from personal property accounts. I think that shows you even in the worst outlier year, we still can make an underwriting profit. We typically had about 50% of our natural market share weight. The team has really demonstrated some strong capabilities.
For us, this is about accumulation in management, being really sophisticated, identifying and modeling the more likely cat prone areas, reducing our share in those businesses, growing in other more attractive segments. It's about adequate pricing, sensible reinsurance, cat management teams as well, which we've invested in, and consumer education. There's a lot we're doing in that area. The teams and the modeling has become, you know, really quite sophisticated. We can act very quickly because it's such an automated underwriting. Whilst the kind of the thought and modeling and direction comes from the center, this is a completely automated underwriting model. You can get that to point to sale faster than your peers.
Great. Looks like we're just on time. Why don't we wrap it up? Rowan, thank you very much.
You're welcome. Thank you.
Thanks very much.