Good morning, ladies and gentlemen, and welcome to Definity Financial Corporation Q2 2023 Financial 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, 4 August 2023, and I would now like to turn the conference over to Mr. Dennis Westfall, Head of Investor Relations. Please go ahead.
Thanks, Nina. Good morning, everyone. Thank you for joining us on the call today. A link to our live webcast and background information for the call is posted on our website at definityfinancial.com under the Investors tab. As a reminder, the slide presentation contains a disclaimer on forward-looking statements, which also applies to our discussion on the conference call.
Joining me on the call today are Rowan Saunders, President and CEO, Philip Mather, EVP and CFO, Paul McDonald, EVP of Personal Insurance and Digital Channels, Fabian Rickenberger, EVP of Commercial Insurance and Insurance Operations. We'll start with formal remarks from Rowan and Phil, followed by a Q&A session, where Paul and Fabian will also be available to answer your questions. With that, I will hand it over to Rowan to begin his remarks.
Thanks, Dennis, and good morning. Before I get into the specifics of the quarter, I wanted to recognize the progress we've made on a few fronts. It's been an active year in advancing our operational and strategic objectives. We were early and deliberate on the rate increases taken in personal auto. This has intentionally slowed growth somewhat in the short term, but sets us up very well from a profitability perspective.
We've also responded to government intervention in Alberta Auto with our intent to protect profitability. Our teams, from corporate development to commercial insurance to claims, have delivered on an array of initiatives, from the strategic to the day-to-day essentials. Since early in the quarter, it has been our CAT response teams that have stepped up to the plate.
Severe storms and wildfires have impacted communities across the country in recent months, and I'm proud of our team's ability to be there for our affected customers during their time of need. Being there for those who count on us is why we're here. Last night, we reported results for the Q2 that continued our solid performance in 2023.
Operating net income of CAD 64.8 million or CAD 0.56 per share, benefited from strong underwriting results, robust net investment income, and an increasing contribution from our recently strengthened distribution capabilities. Our 95.3% combined ratio was in line with our financial target, reflecting the benefits of our diversified business mix. Our commercial insurance business led the way with CAD 38 million of underwriting income, while personal property results were resilient despite experiencing 17 points of losses from catastrophes.
As expected, personal auto improved from the seasonally high Q1 of the year to report a core of 97.6%. This was driven by increases in frequency, continued elevated levels of claim severity from persistent but stabilizing inflation, and heightened levels of theft.
We maintain our view that we can deliver an upper nineties core in this line in 2023 as our rate actions begin to be reflected in the results in the second half of the year. As our actions demonstrate, our top priority is defending our profitability in personal auto during this phase of the market. Turning to the top line, I'll point out that this was the first time Definity has generated over CAD 1 billion of premium in a single quarter. That's quite an accomplishment.
Strong growth of 9% was driven by commercial insurance and personal property, as our strategy to diversify our mix of business away from regulated auto demonstrates strong momentum. On a per-share basis, book value was 12.7% higher than a year ago, including the estimated impacts of the conversion to IFRS 17, and up 2.2 points from Q1.
Continued strong operating results drove an operating ROE of 9.8% over the past 12 months. Although we've been actively deploying capital in our broker distribution business, we have a significant amount of financial capacity, putting us in a strong position to continue funding our strategic growth initiatives for the coming years.
Turning to the industry outlook on slide six, we expect firm market conditions in both personal property and commercial lines to persist over the next 12 months, particularly following another active period of severe weather events and the dynamics of the reinsurance market. We believe conditions in auto lines will continue to firm as insurers aim to keep pace with underlying cost trends. Slide seven illustrates our key financial metrics.
Growth, combined ratio, and operating ROE were in line with or better than our targets, which are unchanged from the prior quarter. We are confident that we have the growth platforms to outpace the market and will continue to protect company profitability along the way. This was evidenced in the quarter by our actions to slow growth in our direct auto business until conditions return in Alberta that enable us to achieve a reasonable level of profitability.
You'll see on slide eight that we continue to diversify and strengthen the earnings profile of the business. Recall that we acquired a controlling interest in McDougall Insurance and Financial, thereby launching our efforts to build a broker distribution platform. We followed that up with the acquisition of McFarlan & Rowlands in May, establishing a leading broker platform in Ontario.
This also provided a solid foundation for geographic expansion. In June, we announced our intention to expand our platform into Alberta with the acquisition of Graydon Insurance. The addition of Graydon will provide immediate scale and market-leading presence outside of Ontario.
Each of these brokers have experienced management teams, highly valued brands, and generate excellent operating margins. These acquisitions advance our ambition to build this platform into another billion-dollar business for Definity. We like the repeatable nature of distribution income, as it can serve as a hedge against volatility that sometimes occurs in underwriting.
We also built this insurance broker platform to improve our access to high-quality portfolios, which come from delivering high service levels and fostering strong relationships with the brokers in our network. I'm confident the additional distribution income from this platform will support growth in our operating ROE in the coming years. With that, I'll turn the call over to our CFO, Phil Mather.
Thanks, Rowan. I'll begin on slide 10 with personal auto. Premiums were up 2.6% in the Q2 of 2023, driven by an increase in average written premiums. This is particularly evident in Ontario, our largest single portfolio, where we were successful earlier this year in obtaining multiple rate increases in both our broker business and in Sonnet.
We are proactively managing our business in Alberta with the ongoing regulatory constraints, which has led to a deliberate drop in new business volumes for Sonnet. We're committed to taking a disciplined approach to growth and have paused all Sonnet marketing activities in Alberta until market conditions improve. We are redeploying marketing efforts to other areas of the business where we see opportunity for more profitable growth in the interim.
We continue to be focused on our affinity and group segments, which continue to grow at a faster pace than retail. In the quarter, Sonnet partnered with Tangerine to become the digital insurance provider for their digital bank customers.
Tangerine's high-quality customer base aligns very well with our focus on affinity. In addition to continued strategic commitments to our affinity group and partnership growth strategies, we've recently launched our new usage-based insurance auto product in Ontario exclusively to Sonnet customers, which has seen solid results in take-up since its pilot launch.
The recent Tangerine partnership and UBI launch are expected to support Sonnet's longer-term growth strategy and offset some of the in-year impact from the Alberta rate pause. Our reported combined ratio of 97.6% in the Q2 is 4.8 points higher than the result from a year ago and in line with our expectations.
Rowan mentioned the primary drivers of profitability. I'll note that although severity was up from a year ago, inflationary cost pressures have been stabilizing and were down slightly from the Q1 of the year. As we discussed in our last call, theft continues to be a challenging issue for us and the industry, accounting for approximately 10% of our total auto loss costs and six points of loss ratio points over the last four quarters.
In response, we are implementing both underwriting and claims initiatives aimed at addressing theft and auto recovery. We continue to expect this line of business to operate in the upper 90s for the remainder of the year. We've taken meaningful rate actions across much of our auto book, which we expect will result in earned rate improvements that will more fully benefit results in 2024.
Turning to personal property on slide 11, we reported strong top-line growth of 12.3% for the quarter amid continued firm industry pricing conditions. We expect to maintain our growth outperformance versus the industry, supported by strong broker relationships and scalable platforms. Focusing on the bottom line, we reported a combined ratio of 102.5%, inclusive of 17 points of CAT losses.
Although the overall level of CATs for the company was largely in line with our expectations, personal property bore the brunt of these losses in the quarter. Despite the CAT events, actions to improve the underlying results are paying off, as core accident year results improved 5 points from the 2Q 2022. We continue to target a mid-90s combined ratio for the personal property line of business on an annual basis.
I'll remind you that Q2 and Q3 tend to be our most active CAT quarters, accounting for about 70% of our annual CAT losses. Moving on to slide 12, you'll see that strong growth in commercial lines continued in the quarter, with gross written premiums up 15% versus the prior year, as we continue to benefit from broad support from our broker partners across Canada.
Growth was driven by strong retention and great achievement in a firm market environment and further scaling of our small business and specialty capabilities. Commercial lines combined ratio was very strong at 84.3% in the Q2, compared to 91.6% in the same quarter a year ago. The current quarter benefited from a low level of CAT losses and elevated favorable prior year claims development.
We continue to view this line as a key growth area for the company and expect the Commercial Insurance business to sustainably deliver annual combined ratios in the low nineties. Putting this all together on Slide 13, premium growth was a strong 9% in the quarter, while profitability at a consolidated level remained consistent with last quarter and the year ago at 95.3%.
Bolstered by the strong performance in commercial lines. The chart on the right illustrates the balanced nature of our earnings between underwriting income and net investment income, as well as the growing contribution from distribution income. Diversified earnings profile gives us confidence that we can more sustainably generate operating ROEs that are inherently less volatile and with the potential to grow over time. Slide 14 shows our investment portfolio in greater detail.
Net investment income again increased substantially in the quarter, up nearly 35% from Q2 of 2022. It was driven by higher interest income from the combination of our proactive actions to capture yield in an increasing rate environment, together with higher reinvestment rates. We expect double-digit growth to continue in 2023, resulting in expected full-year net investment income exceeding CAD 160 million.
This recognizes the solid start to the year, while also taking into account the impact of our anticipated cash outflow for our investment in Graydon Insurance. As you can see on slide 15, our financial position remains strong. We are well capitalized with over CAD 660 million in financial capacity under our current legal structure, and subject to the continuance of Definity under the CBCA, we could add another CAD 600 million in leverage capacity.
These figures include our acquisition of McFarlan Rowlands, but not our announced acquisition of Drayton, which is expected to close in Q3. Slide 16 shows recent capital management actions and longer-term priorities. While our capital management priorities remain unchanged, you will see we continue to make strong progress in our execution.
We continue on our journey to the optimization of our capital structure. Our recent broker acquisitions represent concrete examples of our ability to deploy our financial capacity in a strategic and accretive manner. In July, DBRS recognized the progress we've made in diversifying our business and the steady improvement in our overall performance by upgrading the issuer rating of Definity Insurance Company to A from A low.
As we prepare for our transition to a CBCA, which we continue to plan for late summer, remember that we successfully renewed our debt facility and upside this capacity to CAD 700 million immediately upon conversion. With that, I'll turn the call back over to Rowan for some final thoughts.
Thanks, Will. We've been clear that we believe we can build the company into a top five player in the industry. This requires continued inorganic growth, which will include both insurance carriers and distributors. The acquisition of McFarlan Rowlands and pending purchase of Drayton Insurance are expected to result in our annual insurance broker platform premiums of approximately CAD 900 million.
Once Drayton has closed, our insurance broker platform should generate over CAD 75 million in annual operating income before finance costs, taxes, and minority interests. This level of earnings contribution is possible as each run with excellent operating margins while benefiting from access to more than 50 insurance markets.
McDougall will continue pursuing organic growth in addition to the successful track record of bolt-on acquisitions. While we've been successful in quickly building a leading insurance distribution platform, we remain focused on our top five objective.
Carrier acquisitions are very much part of the strategy, and our team continues to work to identify actionable opportunities. In terms of focus areas, we're interested in expanding our commercial insurance expertise and capabilities, particularly as it relates to specialty. That said, given our investments in technology, our platform is also well-positioned to take advantage of any scale opportunities in personal insurance. In closing, I'm pleased with our performance in the quarter and excellent continued momentum in the business.
We delivered strong revenue growth. Despite an active CAT quarter, we delivered on our target mid-90s combined ratio. Distribution income is building nicely and provides a new and stable income stream. Net investment income again benefited from our actions to capture yield. Putting all this all together, we move forward with a strong and growing balance sheet, which enables us to continue executing on our strategic vision.
With that, I'll ask Dennis to start the Q&A session.
Thanks, Rowan. You know, we're now ready to take questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. One moment, please, for your first question. Thank you, and your first question comes from the line of John Quan from RBC Capital Markets. Please go ahead.
Sorry, we can understand which, which analyst you're asking for there.
Hello, excuse me. Your first question comes from the line of John Quan from RBC Capital Markets. Please go ahead.
Oh, hi. Good morning. Just, my first question was just on the capital you've been deploying, into the on the distribution side, you know, the relatively sizable, acquisitions on the distribution side, and obviously, to diversify your earnings.
Normally, when you've announced these, your share price hasn't moved, doesn't normally move off of this type of news. My question is this, is how does the ROE on the distribution side compare to the insurance business? The reason I ask is just if the distribution has a higher ROE, then growing that part of your business should have positive implications for your consolidated ROE, and therefore, I think, would have positive implications for your valuation multiple.
Hi, Jeff. Yeah, thanks for that question. Yeah, I'd agree with that synopsis. If you look at the operating margins of the broker business in comparison, to the carrier side, they are better and sustainably higher. I think the other thing that's important to us when we look at it, it's not just the contribution, which I agree is, generally speaking, at a high level, it's also stability.
The degree of volatility that you may experience on the underwriting side is a more sustainable base when you look at the broker platforms. They have very high retention levels, generally speaking, higher than the insurance side, and a pretty diverse portfolio with a good base commission level.
I'd agree with your synopsis in terms of the contribution, but also, you know, we're pretty keen on that, stability aspect and the diversification it gives us in the overall profile.
Okay. Just the other question I wanted to ask is just on the auto theft side, are there certain measures that you're taking right now or you plan to be taking to try and mitigate that impact? I know there's stuff like vehicle tracking technology, that some insurers may be using. Just wondering if that's, like I said, if you're using that or just in general, how you're trying to tackle the impact of auto theft.
Thanks, Jeff. Actually, just to level set, what we're experiencing is quarter-over-quarter frequency and severity, and theft is slightly decreasing, which is positive, but it still remains elevated, as you've indicated. As Phil mentioned earlier, the loss ratio impact of this is about six points. To give you a sense of comparison, it's about two points pre-pandemic. We're, we're experiencing about a 4% unusual drag on our results.
That's why we are taking corrective actions to address this. There are a number of things that we're doing. First and foremost, of course, there is a underwriting and pricing component, and we're particularly targeting high theft vehicles. Depending on what our models suggest around the types and models of vehicles, we, we have ensured that we've increased premiums related to them.
We're encouraging customers also to take proactive steps and actions to avoid theft in those classes of vehicles. In addition, we have implemented a variety of different initiatives around vehicle tracking, which will help us track and recover stolen vehicles. As we've said before, theft is a very expensive component on our portfolio because often you don't get the recovery.
Wherever you can recover something, that's very beneficial to our performance. Of course, we continue to make improvements to our enhanced predictive modeling scenario. This both allows us to identify types and locations of potential stolen vehicles. It also allows us to connect up with our fraud initiatives. We've helped to identify a number of fraud rings, and we've worked with local authorities to both break up those rings and recover any vehicles in that area.
We're confident that, that the industry as a whole, and Definity, particularly, is focused on this issue. As I said before, we're starting to see a slight decrease and, and, too early maybe to tell a trend, but we're cautiously optimistic that we will continue to focus and remediate this part of the business.
Okay, thank you.
Thank you. Your next question comes from the line of Jaeme Gloyn from National Bank Financial. Please go ahead.
Hey. Good morning. First question, just on the commercial lines portfolio. Obviously a good headline combined ratio beat, but seeing some core accident year uptick year-over-year. Wondering if you can kind dig into perhaps what was driving that uptick and anything structural or or, you know, persistent in those trends?
Yeah. Thank you, Jamie, for your question. This is Fabian Rickenberger answering your question. Overall, I would say that we are very pleased, as you said, with the results that you achieved in Q2, and we believe that the combined ratio that we have in our portfolio is now solidly in that 90% range.
I think what is important to recognize is that, if you have a commercial portfolio of our size, any given quarter, you will have different loss emergence patterns based on seasonality, based on weather, based on large loss, and based on CAT activity. As you said, and as you pointed out, the impact that we had in the Q2 from weather on our CAT loss ratio was very low.
It was only 1.2%, but as you would expect, based on all the weather that we have had to go through in Canada, the impact on the operational loss ratio was a bit elevated, but we are really not concerned about that. If you look at what you're doing on the underwriting side, what you're doing on the rate side, we are very comfortable that you're mitigating the impact of inflation, that you're mitigating the impact of higher reinsurance costs quite effectively.
You're getting about eight, nine points of rate. If you add the impact of inflation adjustment, the premium change from that is in the lower double-digit range, and that gives us confidence that you are, as I said, that you're mitigating the impact of inflation and reinsurance very effectively.
Again, that gives us confidence that we continue to run the portfolio in that lower 90% range, and we'll be able to continue to drive growth rates in that maintain level as well.
Okay, if I understand correctly, whether which maybe normally would have driven higher CAT losses just ended up driving higher attritional losses. It's as if some, some losses didn't breach the CAT threshold. Is that, is that kind of the right way to think about it for this quarter?
That's exactly it, yeah. Again, if you normalize our combined ratio, you posted an 84.3. Phil will give you more details on the impact of a COVID-related release. T hat gives you a normalized combined ratio in the Q2 in the high 80s range. Again, that's very much in line with our guidance. This is based on the rate and underwriting actions that you're taking, we are confident that we'll be able to continue to run portfolio in that 90% range.
Jaime, I think the big picture, the big picture for us there is, you know, as you know, we're trying to shift the overall portfolio by growing personal lines, property, and commercial lines at a rate faster than the regulated auto. We continue to be very pleased with that impact of growing commercial on the overall company.
Even within commercial insurance, there is a mix change as well, where we're getting, you know, above average portfolio growth in specialty and in small business, which further improves the margins on that commercial business. Fabian and the team have done a tremendous job of leaning into the market and ensuring that we consistently are achieving, you know, earned rate at a higher than the loss cost trend.
That's where, you know, we come back to, each quarter is going to be a little bit different, but with a very strong level of confidence of continuing to run this business in the low nineties for, quite some time ahead.
Okay, great. You know, following up, Fabian, on that COVID release, my understanding or my assumption is that that's, I guess, somewhat one-time, and the reserve development we saw this quarter should return back to, let's say, a low single-digit reserve development in upcoming quarters and in the future years. Is that a fair assessment?
Thank you for that. Yeah, that is a fair assessment. You've, you've certainly seen a higher than normal level of favorable development in the quarter, and it was triggered by successful progress in the outcome of the class action on the COVID BI claims. It's a good example, though, I'd say, of the prudent approach reserving.
You know, while we were confident throughout class action process of our position, you know, we were prudent in establishing those initial reserves, which ultimately supported the drawdown. Yes, you're right. We wouldn't normally see this level of elevated PYD in the quarter on commercial lines, but it is indicative of the kind of prudent approach that we take in establishing reserves for these kind of issues.
Very good. Okay, shifting to the broker acquisitions. Obviously, it's flowing through distribution income nicely, and you're getting some benefit there, but it's also coming through the expense side. I was just wondering if you'd be able to quantify that benefit from the broker side and eliminating commission fees on consolidation.
I think about, like, the expense ratio or, you know, commissions coming down, let's say 40 basis points, sorry, 60 basis points year-over-year. You know, how much of that would be driven by the broker, the owned broker, commissions being eliminated? Is there a little bit more color you can provide on that benefit?
Yeah, sure. It can move around quarter on quarter because it obviously would be dependent on, you know, the flows of, of the business that gets pushed through the brokers. It is the primary cause for the reduction that you're seeing in the commission ratio there. I'd say probably, you know, two-thirds to three-quarters of the, of the 0.5, 0.6 you're seeing come down in the quarter was attributable to the consolidation. It move up and down a little bit, depending on the quarter, but it is giving us that beneficial run rate in the expense ratio, as you say.
Okay, great. I'll recue.
Thank you. Your next question comes from the line of Paul Holden from CIBC. Please go ahead.
Thank you. Clearly making some good progress on, personal auto and seems to be trending in line with your expectations. Maybe you just do a quick drill down for us on what earned premiums look like in Q2, i.e., what's the rate of change on earned premiums, what you expect for Q3 and then Q4 also, just so we can get some sense in the, building momentum there?
Thanks for the question, Paul. Let me just kind of start that off, and then, and then I'll ask Paul to add some, some flavor and specifics to your earned rate question. Look, I think that, when we sit back and look at the overall environment, we, we know that it's been normalizing, you know, post-COVID period, and we're seeing, you know, certainly increased evidence of, of now the environment stabilizing.
That's really positive, you know, for us. When you look at the big picture, we know that year-on-year frequency is up, but we see that kind of flattening now, and it's going to remain, likely remain below pre-COVID levels. That's a good point.
On the severity or inflation point that, that you talk about, we have to remember it's still elevated when you compare it to, you know, year-on-year, but absolutely, you know, stabilizing. I think those are the, the pretty good forward-looking impacts. Then not only are our prices moving up, but the industry is moving up as well. That's also very relevant because it'll maintain our competitive, you know, position. We might have been a little early than the, than the market.
As the market starts to follow with price increases, and we are actually seeing rate increases being approved by the regulator right across the industry, that is going to mean we're going to keep high levels of our retention and earn the rate.
That earned rate is obviously, you know, very important for us. The main message here, don't forget, the big picture is this is still about cycle management for us. We are absolutely prioritizing, you know, margin over, over rate through the portfolio, and that has led to the actions that Paul and his team have taken on rates. Paul, why don't you get into a little bit more detail on what we're seeing on written and earned rate?
Yeah, thank you, Rowan. As we previously disclosed, we leaned hard into asking for additional rate on our auto portfolios in the first half of the year. As of Q2, the written rate was just over 7%. As we've also previously disclosed, the earned rate takes a while to come through the portfolio, and we expect that to increase dramatically in the back half of the year.
To give you a point of reference, in Q2, our earned rate was just under 5.5 points of earned rate. Toward the end of this year, that's going to increase by three points to 8.5 points of rate, which is a material improvement to the overall portfolio. It doesn't stop there.
Into next year, we, we go up into the double-digit earned rate increases throughout the portfolio. As Rowan says, given the double-digit rate increases that are flowing through the industry as a whole, we have a high degree of confidence that we'll retain that rate.
That's helpful. Thank you. Thank you for that. Given, given that you're expecting to trend to 8.5 by the end of 2023, and that severity remains high on a year-over-year basis, your, your expectation for sort of that crossover somewhere around middle of this year is unchanged, i.e., the pace, the pace of earned is, is good enough to exceed the increase in severity?
Yeah, Paul, just as a reminder, that there's a really two crossover periods. One is the written rate exceeding the severity trends, and that's happening essentially right now at the midpoint of the year, as we previously discussed. The crossover point at which the earned rate is covering the trend is going to occur toward the end of this year.
We, we are encouraged to see the path, as you indicate, and as Rowan indicates, frequency remains consistent quarter-over-quarter, which is positive. As Phil indicated earlier, severity is starting to come down a little bit. If that pattern continues, that should bode well for our trajectory.
Okay, got it. next question for me is regarding climate risk. You were less impacted by CAT events than your major public, comp this quarter, still, climate risk seems like it's a, it's an increasing question from, from investors. Like, is there anything you're rethinking in terms of reinsurance, product structure, claims management, in respect to climate risk? Has anything really changed in your mind, or is this really a continuation of trend that we've seen for the last 10, 15 years?
Yeah, I think the short version of this is it's a continuation. You know, climate change is increasing as expected, and it makes it quite difficult to predict where and when it will occur. While we're proactively managing concentration of risk to ensure we aren't exposed in areas like, you know, Alberta hail zones, it's very difficult to predict exactly where other things like tornadoes and severe rains are going to occur.
Despite this, we do actively manage our CAT volatility in our portfolio through a number of different mechanisms. First and foremost, we use sophisticated CAT modeling tools for key perils like quake, wildfire, flooding and hail, and we continue to enhance those models. Our Sonnet and Vyne automation allows us to dynamically suspend binding activity in the face of impending CAT exposure, so we can reduce exposure from that angle.
We continue to improve our claims handling processes and enhance our vendor relationships to minimize exposure post-CAT event. We really have a multi-year view of CAT volatility. Back to your point, this is why, for us, the expectation doesn't really change, because we look at this in the long year cycles, which inform our pricing strategy and our choice of reinsurance structure.
Of course, we continue to remain focused on our on continued improvements underneath our property portfolio. As was indicated previously, we're delighted to see a 5% year-over-year improvement in this quarter, which also helps manage the overall CAT volatility of the portfolio. When you take all of this together, and when we adjust for the elevated CAT this quarter, our expected core is in the mid-90s, which is in line with our run rate expectations.
Despite the elevated levels of CAT, this is something that we expect and we price and action for, and therefore, we end up with the results that we guide to.
Paul, maybe just to comment on reinsurance. you know, in terms of philosophy, it's pretty consistent as well. When we look at reinsurance, we look at it in the context, protecting the company from large events. Obviously, we have the catastrophe treaty that we structure in place there. We also look at individual large events, our purchases of a risk coverage on individual events or facultative, depending on the complication of the risk.
We also do have an eye to volatility management. Paul has talked a lot about the actions we take there. Consistently, we've tended to perform below market share when we've looked at annual levels of cat losses, and a large part of that is being well distributed across the country and being cautious of the key cat areas.
The last comment I'd make is I'd just remind you of the, the aggregate cover that we have in place for this year and, and also through 2024. For us, that was an important tool because as we grow.
Property and commercial lines and take on some more climate exposure. You know, we're leveraging the balance sheet to support that, but we knew as the attachment points move on the, on the CAT, we wanted some coverage from the aggregates. That, you know, at the end of the Q2, was about halfway to being switched on.
If I always talk about it in the context of, you know, it's to protect you from multiple kind of mid-sized events, gets to a point where it's switched on, and then it's available for recovery against what comes next. We were probably about halfway to that coverage being switched on by the time we got to the Q2. Like, helps give us some comfort around management to expectations in the second half of the year.
That's helpful context. Thanks for that. Last one for me, and I want to go back to one of the questions that Jeff asked regarding the broker acquisitions and impact on ROE. Also, a question I'm hearing a lot from from investors. Just to sort of fine-tune the question: based on the multiples you're paying for these acquisitions, are they immediately accretive to ROE? Does it take time for the ROE accretion to come through? I think that's kind of what the answers people are searching for. Any help there would be appreciated.
The first, the first kind of comment I'd make is, yes, they are immediately accretive to ROE, we're pleased with that. I think the other points I would kind of add to this is if you go back, you know, we really like distribution. As we said before, we like the stable margin earnings, and also we like the access to a pool of high-quality distribution income.
Don't forget, when we think about the contribution as per the earlier question, there is the distribution impact, there's an elimination of commissions, but also we write a significant amount of high-quality business, which, you know, we generate underwriting profits on. There are really two streams of income from that for us here, underwriting income in addition to distribution income.
You know, that's why this is immediately accretive, you know, and, and favorable to our ROE targets. The other point I would make is that when you think about what we've done, we wanted to build a platform, and we really, you know, leaned in, firstly in Ontario with MacDougall's, then with McFarlan's to build out a solid platform, and now we've taken that, you know, outside of Ontario.
We've been very fortunate that we've been able to attract what I would say is top-notch assets. I mean, these are scarce opportunities in the marketplace, given their size and their expertise and, and, and kind of track record. That gives us a lot of confidence. What we've bought is a very high-quality assets here that generates above market returns and growth outlooks. That's gonna be very helpful to us.
I think the next phase of this really is as we start shifting from these anchor brokers to more programmatic bolt-on M&As, which they currently do, and, you know, they're not large enough for us to report or announce those, but those are happening. What we see in those areas is they are really quite synergistic, and so they're obviously revenue synergies they bring.
They have more influence over the mark of their insurance companies and, and, yield management and of course, back office, you know, synergies. You know, not only are they very strategic to us, but to answer your, your point, it is immediately accretive and very helpful to our operating ROEs going forward.
Great. That's all I had. Thanks for your time.
Thank you once again. Should you have a question, please press Star, then the number one on your telephone keypad. Your next question comes from the line of Brian Meredith from UBS. Please go ahead.
Thanks. Good morning. A couple questions here for you. Just focusing in on the brokers a little bit here. I just want to clarify, the CAD 75 million includes McFarlan and Drayton in it, correct?
That's correct. Yep.
Okay, great. Just wanted to. How do I think about just the breakout of where the earnings is coming from those brokers? I know you've got some commission benefit as well as just a distribution income. Is that CAD 75 million inclusive of both the commission benefit and the distribution income, or is that just simply distribution income?
No, that's fully inclusive. What it would exclude is high quality underwriting opportunity. You know, to Rowan's point that he's just made, if we're able to grow more and attract high-quality customer opportunities, that would benefit loss ratio and premiums. The CAD 75 million is fully inclusive of the expense benefit as well as the distribution income.
Gotcha. Okay, that's, that's helpful. Is it possible, I know that's, that's kind of, kind of like a 2024 run rate, to give us kind of what the current run rate is so I can kind of think about it for the remainder of this year?
For the current year, just including McFarlan transaction, we have about CAD 50 million expectation, fully loaded for the current year. If Drayton closes, it would go up a little bit further after that. We're, we're confident Drayton's gonna close, but obviously, it's just subject to an approval process. That's for 2023.
Gotcha. Last question, just on personal auto insurance. You know, taking a look at here, you know, we've seen, you know, PIF decline, first and Q2 because of some of the initiatives and what you're doing and your, your discipline. You know, when do you think, now that written rate is exceeding trend, do you think we'll start to see that reverse at all here, here soon?
I think, Brian, on that particular point, you know, we're not anticipating, a significant change in the next couple of quarters from a unit count perspective. What we're really focusing on this time, you know, as we, as we've mentioned, is really margin, overgrowth.
Yeah.
You know, I think there's, there's a couple different stories in the portfolio. You know, the broker business, which is more rate adequate and higher quality and more of a mature portfolio, continues to grow, you know, and we're quite comfortable, you know, about that.
Really, it's the Sonnet area, and particularly with respect, you know, essentially exclusively driven by Alberta, that we've really tapped the brakes on that, on that issue. We're not expecting any change on that portfolio until the end of the year. You know, the freeze is in place until the end of the year. That's why I think when you ask about, you know, the growth in auto, you know, it's the kind of low single digits for the next 2 quarters. That's all rate.
Really, I don't think you're expecting to see much of a change to unit count until we get into 2024. I think then that'll start to normalize.
Makes sense. Very helpful. Thank you.
Thank you. Your next question comes from the line of Tom McKinnon from BMO Capital. Please go ahead.
Yeah, thanks and good morning. Just to follow up on the PIF question here. If I look gross premiums written per policy, you know, that's kind of only up about 2% year-over-year despite the rate hikes. Is this strictly just a mix change?
Yeah, it is a combination, of course, of the Alberta freeze, which, freezes rate, but it's also very much a mix change. As we continue to take actions to improve the profitability of the auto portfolio, that results in lower AWP because it's a, it's a higher quality client.
I'll remind you also that we're focusing very hard on growing our affinity portfolio in Sonnet. Typically comes in at a 10%-15% discount relative to retail rates. That clearly drives the AWP down, but it's a much higher value client in the long term, with far lower, experience on the loss side.
Just to give you a couple of data points around how successful we are being with that, Definity has grown 20% year-over-year, and it's now representing 25% of Sonnet, which is up from 19% last year. Another proof point, it now represents 32% of our new business counts.
We're pushing very hard in that space. As Phil mentioned in his opening remarks, we're delighted to have partnered with Tangerine, which is a leading digital bank. They've got over 2 million high-quality customers that are very focused on digital transactions, and we've had great success so far with that partnership.
Those customers come to us and have a, a much higher conversion rate, much higher retention rate, and essentially on every risk characteristic, they're a higher quality customer, which is a proof point for us of why we continue to make the strategic investment. In the short term, that will result in lower AWP, and in the longer term, obviously, we'll make up for it in, in growth.
Yeah, and maybe just a question on Sonnet. We don't hear much conversation on Sonnet anymore. It seemed to be a big part of the IPO. We tracked all the great growth you were getting in Sonnet, and now it's hard to find any mention of Sonnet at all in anything that you guys would produce, and it doesn't seem to come up much in terms of the conference call.
What is the future of Sonnet? It seems to have stalled a bit now. I guess, getting insurance and seven questions may not necessarily bring in the right kind of client you want in this environment, but maybe you can elaborate a little bit on that for us. Thanks.
Yeah, Tom, on that, on that one, look, I think it's still a strategic part of our, our platform. When we think about auto, you know, we think about it as a total portfolio, but of course, there are two paths to the market. There's the intermediated path, and then there is the, you know, the Sonnet path.
You know, I think what we've got, and if you kind of step back, is that we think that Sonnet is a great tool to have for changing customer demographics over time. What we've also said is that we have a path to profitability, and what we were trying to do is scale this business to a reasonable level and ensure that we could get to a break even.
At the IPO, we were talking about the end of 2023. Given, you know, the post-COVID hyperinflationary environment, you know, we've moved that out to the end of 2024. We still believe that is, you know, in line. The focus for us has been at this stage of responding to the market cycle, a little less about rapidly scaling Sonnet, but staying disciplined, putting, you know, the, the, the underwriting quality in to ensure that we are, you know, on path to profitability.
That's really been the, the, you know, the priority that we've got. Back to, you know, I think 1 of the earlier questions. You know, Sonnet is. You know, we've tapped the brakes, let's put it that way, on, on Sonnet, particularly on the auto lines for the next, you know, few quarters.
It's been magnified by the fact that a third of the automobile portfolio of Sonnet happens to be, you know, in Alberta. That's, again, responding to a bit of a unique and temporary position. I think once we roll out of this year, with all the favorable trends we're starting to see and our confidence overall with the auto segment, you know, you know, picking up, we expect that to, kind of, let's call it, normalize or go back to, you know, previous trends, but in 2024. That's the way we think about that.
Yeah, the question, a decision to tap the brakes with respect to Sonnet, like pulling ads and that, does that have an impact on that operating expense ratio? It seems to be a little bit lower than what it's been in the past. When you kind of decide to ramp up on Sonnet again, would that increase?
Yeah, a couple, couple of points on that. As Rowan has indicated, our desire to tap the brakes has been mostly supported by us dramatically reducing our marketing expenditure in Alberta. That has a temporary impact of slightly reducing the expense. It does take a little while for us to reset when we reallocate those marketing dollars to other jurisdictions.
The algorithms have to reset, and it takes a while for those efforts to begin to take hold, but we expect that to occur. While we are tapping the brakes on Alberta Auto, we are most certainly not tapping the brakes on our investments in Sonnet as a whole. As I just mentioned, we, we are very pleased with our continued efforts in growing Sonnet, particularly in the affinity space.
As Phil mentioned in his opening remarks, we've also just recently completed a pilot in UBI, which is focused solely for Sonnet. This is an exciting new product that has completed its pilot phase. We are now gonna be rolling it out to all of Ontario and thinking about future expansion.
This is a Sonnet investment to help Sonnet customers and Sonnet affinity customers come up with another product to help improve conversion rates and improve long-term profitability. We are very committed to this space, and we feel that with the earn rates coming through in the back half of the year and into next year, which are even higher than the broker portfolio, we're quite excited about this.
Thanks for the color.
Thank you. You have a follow-up question that comes from the line of Jaime Gloyn from National Bank Financial. Please go ahead.
Yeah, thanks. 2 follow-ups. first one is, sorry if I missed this, but, what's, what's the latest on the CBCA conversion?
Thanks, Shane. The, so no specific to update at this point in time. I will say we're continuing to actively pursue what we think now are the final stages of the approval process. As we said last time around, we're continuing to plan for a late summer kind of timing from an approval outcome.
We don't control the outcome or the timing, but we do continue to believe that any risk of non-approval is, is very low at this point in time. As you've seen from the balance sheet, we're well positioned. Our financial capacity is strong, but late summer would be our kind of planning expectation at the moment.
Okay. Second one is, Rowan, you talked about or you just reaffirmed your desire to execute carrier acquisitions. I'm curious what you're what you're seeing in terms of the M&A market on that front. Are you seeing any any more, let's say, I don't know, liquidity, if that, if that's the right word, in terms of the acquisition opportunities there?
Yeah, it's a, it's a hard one to, to kind of answer there, but other than to say, you know, we, we are active in the marketplace, you know, we think this is an important part of our strategy. You know, I, I think the macro trends, you know, are favorable for increased, you know, M&A activity, right?
I think that when you think about some of the comments we made earlier in the call about some of the pressures on certain lines of business, like automobile, on the need for technology, on commercial lines, when you think about the larger impact of reinsurance and that kind of, you know, events, this favors, I think, companies with bigger balance sheets and, and, and larger scale, and particularly those that have already made a lot of the technology investments.
You know, our, our thesis is that there will be more opportunities over time. You know, I think, you know, I remind everyone, you know, we've made massive investments to be able to participate in that. And some of those outsized investments we made leading up to our life as a public company, really mean we've got a platform that's built for a bigger business than we are today.
As we, you know, grow organically, as we do with our growth engines at a rate ahead of the market, but as we supplement inorganic activity, that's really gonna be, I think, a favorable impact to our operational leverage and, and future ability to get synergy.
You know, we're, we're still very, you know, confident in that thesis, but as you know, these are opportunistic things, and that's hard to be specific about timing.
Yep, understood. Thank you.
Thank you. Mr. Westfall, there are no further question at this time. Please proceed.
Thank you, everyone, for participating today. The webcast will be archived on our website for one year. Telephone replay will be available at 2:00 PM today until 11 August . Transcript will be made available on our website. Please note that our Q3 results for 2023 will be released on 9 November . That concludes our conference call for today. Thank you. Have a great weekend.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may all disconnect.