Good afternoon, everyone, and thank you for joining us today. I'm pleased to have President and CEO of Definity Financial, Rowan Saunders. Rowan, thank you for doing this. I appreciate it.
Great to be with you, Mario.
Why don't you get us started? What are some of the things that are top of mind? You've had a great few years. How, how long has it been? Five years as a public company, maybe a little longer?
Yeah, coming up on that, right? That's exactly right. This fall, the fall of 2021.
You're ticking all the boxes, doing what you said you were gonna do, and the stock's reacted accordingly. Maybe just give us your what's top of mind for you.
Thanks for that. I would say we've had a really nice start to the year. As you mentioned, the last number of years we've been very active deploying our strategy, building new capabilities, the company has effectively, with the Travelers deal, you know, doubled in the last couple of years, which is great for a long-term mutual, ex-mutual company. We're really delighted with the start to this year, this year has been a really important year for Definity. I would say the top two things on my mind that I'm really pleased about, the first one would, of course, be the transformational acquisition of the Travelers Canada business. That closed on January the 2nd of this year.
You know, we've spent a lot of time getting ready for that, and it's going really well. I think the strategic impact of that is very important. That gets us to a top five player. It gives us whole bunch of new capabilities. It gives us, you know, much more relevance with the broker channel, and of course, financially allowed us to do a number of things like, you know, optimize our balance sheet, et cetera. We're off to a very good start. I would say when I look at the actual transaction, that went, you know, really well. Acquisition costs were lower than expected, interest costs and financing costs were lower than we had modeled, and we've ended up in a stronger capital position.
I think that part of it, the transaction, following the due diligence and negotiation, went really well. The integration. I know we're only one quarter in, but it's really going quite nicely. It's on track. You know, we see very good broker support. We see the portfolio retention where we would like it, you know, to be. The talent has stayed. I think they like the story that we have and what they're happy to join. That's all moving quickly. You know, on our results call we also shared that, you know, we've accelerated, you know, the synergy and the synergy capture, so that's encouraging and the teams are really doing a good job there.
When I sit back, I say, "That's a big objective and a really important part of our strategy," and one quarter in, really going quite nicely. I think, "What about the rest of the business?" You know, this was a very strong, you know, quarter for us. I think when you step back and you see, you know, big premium growth, over 35%, you see us delivering a really a record underlying result in the first quarter. CAD 100 million in a quarter that typically, you know, is somewhat tough through Canadian winters, is a good result and good contribution from all lines of business. That was a COR of, you know, less than 93%.
That's inclusive of the Travelers portfolio that we brought in and again, I remind everybody, that's all pre, you know, the synergies. Then I'd say our diversified earnings also look pretty good. Strong net investment income, which we believe will be higher through the course of the year, and a really strong contribution from our broker distribution platform. You know, 25% operating, you know, earnings in that area. A lot to like about the first quarter. We know we're one quarter in. We know there's a lot still to do, and the teams are very busy, very focused, but it's a really nice start to the year.
Okay. Before I get started on my questions, let me remind everyone that on the top right, I believe, of your screen, you'll see a Q&A box. You can hit that Q&A box. I'm not gonna go to my email too much 'cause it's kind of hard for me to do that while we're running these questions. I will look over my left shoulder at the Q&A box, and I'll read out your question when I get it. I encourage you to do it 'cause I quite enjoy seeing other people's perspective as well. Rowan, let me go very short-term for a moment.
Sure.
You described the acquired business as a break-even business. When I sat down with the model and I was thinking about how to model earnings this quarter and going forward, I kind of locked in the Travelers business. I did a little attrition estimate, locked it in at 100% combined ratio, and just gave you the benefited investment income. The underwriting income came in a lot better, I couldn't help but think, and you could see I kind of mused about it in my report. It's right there in the title of my report.
Yeah. Yeah.
It seemed like Travelers was better than break even to me. There's going to come a time when there's no way you can answer this question. The business will be so integrated, there's no way to break up the two. I know that, but in the very short term, you can kind of give us a window, I think, into how profitable was Travelers on an underwriting basis this quarter.
Yeah, I know, Mario. I did read your report there. I noticed that was one of the kind of the key items you referred to. I think that the best way to describe that is you're right. These numbers are gonna blur over the course of the year, but we have Early, you know, indications. You step back and you go, "Well, the first quarter, 92.9%, really strong results." Travelers itself, we have expected it to come in at about a break even. The reality as best we could see from, there's a little bit of new business that already has merged, but the bulk of the renewals are still isolated, is still really around that break even level, and that's not unexpected. I mean, this is just the activity they've been doing rolling through.
If you remember, there's a couple of points of drag that we feel it'll have. Just simply you add around CAD 100 combined ratio to our low 90s, it drags us up a couple of points. That's the investment. That differs by line of business. It's closer to three or a little over three in commercial lines, and then about two on the auto, and about, you know, one on personal property pre-synergies. That normalizes, and that's why I think I'm pretty excited about the first quarter because if you kind of unpack that, or let's call it try to normalize that, I think what that gives you is a Definity portfolio that's operating in the low 90s, and doing well all lines of business.
I'm particularly pleased with that because I think that, you know, when you look at the personal property, which had a very strong quarter, that is some really good underlying performance, and actually that comes from, you know, both of those portfolios. The commercial lines which, you know, the market has been more difficult than prior years, continues. The Definity portfolio is really running very strongly, so there's really no margin deterioration there. That's really the net of it. We fully expect that the loss ratios and the expense ratios will merge over the next, you know, couple of years. When you step back, really what we've thought is by line of business it's a little different.
The biggest opportunity, let's say that CAD 100 million plus, translates into about seven points on the Travelers combined ratio. It's mostly expenses, and that's why we're excited. We're off to a good start, and we think we can get, you know, that benefit. On the loss ratio side, there will be some improvements, and I think, you know, the portfolio that really has the most opportunity is personal auto. I think we're closer on the loss ratio on commercial and closer on personal property, but that personal auto, there is a gap between the two businesses, and that's mostly because we've got the modern Vyne platform. We're able to be more sophisticated and more proactive on pricing over the last couple of years along with underwriting.
That'll take a little time because we've got to first convert it onto our Vyne platform and then earn in. That's why we said, look, we do believe there's that CAD 100 million or so of expense synergies, but over time there will also be a bit of a loss ratio improvement, you know, as well. I think really as expected, Definity core business really running low 90s. Travelers comes in, prints the first quarter around break even.
Yeah. Let me editorialize for a moment. If Travelers is instrumental in driving that 35% increase in revenue, now clearly Definity's a growing company too.
Yeah.
Travelers made a meaningful contribution. Travelers is at 100%. You can't help but believe that the underlying business, the incumbent business, had a very strong quarter.
It did.
It must have.
Yeah.
Is it, w ould it be your view that we should be careful not to read too much into how strong the underlying result was at from the incumbent business? Like, what made that so special, that existing business, this quarter that is?
I think when you look at what our expectations are, you know, I think that the automobile is in that range we would've expected it to be. Travelers a little higher, Definity in the, you know, just under the 95% kinda range. I don't think that there's a dramatic difference in terms of expectation there for the few quarters. What really made it very good was the personal property. That was an exceptional quarter. Good underlying and good business. I would also then, you know, say it's not just personal property because whilst the commercial lines business underlying, you know, we printed a little over 90%, 93% there.
If you normalized that Travelers expense impact, that business would also have been running in the low 90s, and I think that gives us good confidence that our portfolio composition in these markets is still able to generate a very strong loss ratios. That's really unchanged from the last, you know, several quarters. It's giving me confidence that through a number of tactics and portfolio adjustments, you know, we can hold the margin that we had from last year on the underlying portfolio.
The reason I'm asking that and sort of drilling down a little more is I don't wanna make the mistake myself of reading too much into that.
Yeah.
Building expectations into Q2 and Q3 that may be unreasonable.
Yeah.
We'll see how, what the market gives us, but it just I know for myself I can make that mistake when I see a quarter that beats me that much. I tend to, you know, recency bias kind of screws these things up a little bit. Let me be a little bit more long-term in my thinking now. It's three years from now, it's gonna be three or four years from now, you're looking back and reflecting on this transaction. You can, you can never measure the success of a transaction with one metric, but what would make you feel like this went really well? Is it, is it a materially higher ROE, a lower combined ratio, satisfied, you know, broker channel?
Yeah.
There's gotta be a bunch of things that's gonna make you feel good about this deal three to five years from now. Help me think that through.
Yeah. Yeah, no, it's a great question there, Mario . I think I go back to the first one would be we've, we believe that what we've done since we've become public is we've built a really strong COR Definity business. This is a business that can take share, grow much faster than the marketplace, and generate combined ratio outperformance. What would really make us pleased is if the Travelers portfolio post-integration migrates to the Definity story. That what we have is we can have strong financial performance out of Travelers. It too, that portfolio ends up also running at a low 90s combined ratio. That's the first one. The financial performance of the Travelers gets to the low 90s.
If it does, that along with our other initiatives gives us a high degree of confidence that we walk our operating ROE up into the mid-teens. That's that plan. I think the second item to look at would just be around that synergy realization, and there are two elements to that. The one we've really talked to the market about is the cost synergies. That's the CAD 100 million or so of cost synergies, and, you know, we fully expect to get that earned in. It's a bit accelerated. It'll be completed by the end of 2028. You know, there's the technology element, there's the kind of head office corporate costs, and there's the efficiency that, you know, comes with putting it onto our platform. Some of it comes nice and quickly. The technology takes some time. We've got to complete the cycle.
There's just no way around that. That we would love to make sure we can deliver. The other item is actually revenue synergies, we really think that as we look at this, the positive surprise is there's even more broker support than we anticipated. The retention's even better than we anticipated. We do think that there is the ability to cross-sell and get bigger share of wallet out of our broker channel and partners over time. Obviously one quarter in, the first few quarters are very much about onboarding the talent, getting them to use the systems, getting them to understand our rates, our underwriting rules, our philosophies, and then that capacity will just keep building each quarter as more and more of their underwriters are trained and come onto our platforms, our systems.
As we roll into next year, we think there'll be a big opportunity for more cross-sell, up-sell. I think that we get more revenue out of that. That would be the second one. The third priority would really be about the talent. I'd love to look here, you know, a few years back and say we were successful in retaining the top talent in the business because particularly in claims and commercial lines and pricing, this is hard to source experienced, you know, capability and talent, and we're very delighted with some of the expertise that has come over. I think if we do that, you go back and you say, "Well, then Travelers will be operating just like Definity, but now we're gonna be a much bigger business.
We'll be more relevant to our broker partners. Actually, not only has it been a financially compelling transaction, but it's been a strategically compelling transaction. Those are the three things, the key metrics I would look at.
It sounds like two to three years is reasonable.
Yeah.
To arrive at that.
It is. I think it is. I mean, I think that, you know, in the early days, you know, there's lots to like about this. The last piece is really just getting all the systems completed. I think that's the final element. Before you do that, it doesn't mean we can't take new products to the marketplace. We actually just launched a couple new products at the end of the first quarter. It doesn't mean we can't move into a larger addressable market with the talent that we've got. All of these things don't require a full three-year integration plan before we start pulling them. We'll be pulling those levers concurrently.
There's a great question just emerged over my left shoulder here on commercial, and I'm gonna ask it, but just not right away, just so the person who submitted that, I'm definitely gonna get to that 'cause that's an important question. Before we do, just a quick summary here. The large companies that I cover, the really large banks and life insurance companies that I cover, and I'd even put Intact in there as well, are very clear about returning capital to shareholders. Now, they are in a different tax bracket to Definity. I don't think we should be going down that road yet about returning capital in the form of buybacks. I think there's a lot more going on here.
I don't think, for myself, I'm not expecting you to talk about buybacks anytime soon, and I think most analysts and investors aren't either. What I will say did surprise me on that call was openly talking about M&A.
I did not expect you to go down that road so soon.
Yeah.
Maybe just for the benefit of everybody listening, what did you say on M&A? I might want to flesh that out a little bit.
Yeah. I think, you know, Mario, on that point, firstly, I would agree with your comment on share buybacks. When I look at our capital, if I just start there for a moment, we're in a very good position, and in fact, we've got more capital than we had anticipated. Part of that is just because of the strong earnings we've had in the last little while, including the CAD 100 million underwriting profit in the first quarter. It also came from the fact we acquired a business with more capital, and a really strong balance sheet. I think that actually works really well. We've done a few things like bring Travelers onto our reinsurance program. We brought on their investment portfolio, which really had no equities. All of that freed up extra capital for us.
Yes, we're in a good position. I think that you go back to our story, and our story is we believe there will be consolidation in the marketplace. We believe we are a good, legitimate participant in that. We believe our platforms enable good synergies, and therefore, we're much more focused on, number one, organically growing the business, number two, moving the dividend up, and number three, you know, more M&A. The buybacks is always the last at this stage of our maturity, let's put it that way. I think we would also say we've shown that we're not, you know, undisciplined in terms of active capital management, you know. It's not like we've just sat on capital since we went public.
You know, we've built a top 10 broker by deploying about CAD 1 billion into that channel and then the CAD 3.3 billion acquisition of Travelers. We have a history of deploying it, and we're very much a deployment story than a return story. We're disciplined. I think the question you raised about M&A. You know, to me, I think the main message is we don't feel like we're sidelined.
This is a once and done deal, and boy, we've done a nice big transformation, and we don't need to do anything else, or we can't do anything else. Our objective used to be top five, now it's top three. We think that as we model our organic growth at a rate faster than the industry, we still need CAD 1 billion-CAD 2 billion of acquired revenue to get there. That's why we think M&A is still on our cards as part of the strategy of how we achieve, you know, that top five. We sit today with about CAD 1.2 billion of financial capacity pre-raising any equity if we needed to. That's why I think we're open for, you know, M&A. We're open for bolt-ons, for sure. We're open for something more scalable as well.
These things take a bit of time. It's like the, the reaction with Travelers when, when I first, you know, was in New York talking to the Travelers, Alan and the team about this. Look, this took a while. It was pretty well one year before we actually had a deal. You've got to go through regulatory approvals. At the pace of our integration and how well it's going, even if we engaged with something very, very soon, there's still multiple quarters before we get to close, and that's why I believe, like, we have the capacity, you know, to not be on the sideline and to keep looking and being an active participant in a marketplace that, you know, we think is more and more likely to consolidate.
What I've said to many people is, if you think about Travelers, I mean, this is a really impressive global organization, huge in the United States, had a nice Canadian business and CAD 1.5 billion. They felt that was subscale to be a leader and compete well in the Canadian marketplace. There are many other companies that size or smaller that I think are gonna come to the same realization that really, you know, scale does matter. Unless you're really focused on being a, you know, an agile niche player, being stuck in the middle is gonna be more and more difficult with today data, scale, technology, supply chain influence, brand, et cetera. That's why, you know, we're still Part of our strategy is M&A.
That last point was an important one. The notion that you could start a conversation today, figure out a deal in a year, and still get six months for approval. It could be a long time. One of the reasons I asked about that is there have been a few transactions in the years I've been covering financials that have gone very poorly.
It's not polite to mention them, but I think folks on this line know there have been some really bad ones. Less so in the P&C space, but clearly in banking and life insurance. When I think about what went wrong on those deals, some of them were just poorly conceived. Other ones, it wasn't a poorly conceived deal, it was just really bad execution.
Yeah.
Things just went wrong when they put them together. When you think about Travelers, this is an awfully important transaction for your company. Help me think through, like, what could go wrong here from an execution perspective, and what you're doing to address those risks.
Yeah. The first thing I would say is, look, this is our absolute number one priority. You know, when we think about our, you know, 6,000 employees, what are they focusing on? They are focusing on delivering the COR business as usual and the integration of Travelers. This is the number one item at the board level. We've got, you know, dedicated teams. We've got external support. Without a doubt, Mario, even though we're still open for M&A and keep building and being innovative and all the things we're doing, this, we're really, really dialed into to make sure this is a success. We do start with the position that this is a market we know. This is an in-market transaction. We understand all the regulatory environments and have those relationships. We have all the broker relationships.
You know, I think that, number one, dramatically de-risks an acquisition like this. To your point, I think that there are really three things that we're focused on that could create some execution, you know, risk or integration risk. The first one's about the systems risk. I mean, the reality is, what we are doing here is we're extracting and migrating from the Travelers, let's call it legacy technology, onto the Definity modern platforms. The good news there is that there's a massive uplift in performance and broker engagement, customer engagement, et cetera, but that's still a lot of work to do, where you actually have to move off multiple legacy systems onto our modern systems. That's deep. We're deep into that phase.
Actually, the next couple of quarters are gonna be really important for us because that's when the conversion starts and all of these, you know, tens of thousands of policies, you know, start migrating over. That is one. Again, we feel very comfortable. We've done something very similar to this. If you go back to, you know, before we went public, we had four regulated insurance companies. We ended up amalgamating them into one, so it was almost like doing an acquisition, you know, back then. Regulatory filings, product changes, broker dislocation, all these management actions. That, for sure, is something we're very, you know, dialed into the systems risk. I think the other one is the people risk, and particularly as you get into the specialized lines of business and claims handling.
Over here, I actually feel the risk was bigger before close. You know, when we announced this, you know, there were other competitors that tried to attract people, that tried to, you know, win some portfolios, that tried to incent brokers to, you know, move the business away, and they were really unsuccessful. I think we were very proactive on that. We relied on our broker relationships. We were in the field very quickly. Essentially, we feel that that risk window is largely passed. The brokers are committed. The portfolios aren't moving. They're staying with us. Retention is high. The talent is here.
I will say that, you know, the talent seems to be quite happy with joining a Canadian champion and a Canadian business and as opposed to being, you know, in the 12th largest company in Canada and really, you know, part of a much bigger business. They're now in the COR business that's one of the leaders in Canada. I think those are the really the three risks that we're focused on. I would say the people risk is really diminishing. The portfolio risk, the retention risk looks very good. I'll be happier when we get another couple of quarters, you know, done. Then the system risk, we're right in that now and, you know, early days looks pretty good. You know, we have monthly and weekly dashboards.
This is an important couple of quarters for us before we actually, you know, start renewing the Travelers policies under the Definity platform.
Wanna go back, take you back a year now, maybe a year and a bit. There were questions on your conference call and on other P&C company conference calls that went something like this: How is it possible that we've gone through, I think the number we were using was five, six years of very firm pricing conditions? The questions were something like, every single line is firm, markets hard in every line, and it's been so for years and years.
Yeah.
No sooner did we as an analyst community, investment community, start asking the question did that come to an end? It really started in large case commercial. Help me think through what was the tipping point? Why did we go from everything is great to large case commercial looks soft? How did that flip?
Well, I think that, you have to step back for a moment and say, "Well, like how did we get to where we got to?" Right? If you think about it, we had four years of hard market pricing. In those years, you know, what happens is businesses get re-rated, the prices change dramatically. You put loss quality control improvements in the business, terms and conditions favor the underwriters. You get to a position where actually there is very good margin in those accounts. They have the ability to give up some of that margin, 'cause it's above their technical price if you would look at it like that. That's kind of what's happening now, so that is one piece.
I think the reinsurance market also, you know, changed, was very hard in 2023, and then shifted in 2024 and 2025. That provided some additional capacity and flexibility for some underwriters. Some rely on reinsurance more than others. Then I think people in that space said, "Look, I need to defend the portfolios that I've got." It was a very attractive profit pool. Some new capital, you know, came in to target that, and there is capacity to do that. That's kind of, I think, Mario, you know, what we see happening there. You know, we've definitely seen in that segment, and it really is just a segment of the commercial marketplace, intensification of competition.
Personally, I feel there's still a way to go on that because I think there is still, you know, sufficient margin in that segment.
That's, that sort of is a good segue into the next question, 'cause you said it was in that very specific large case segment. The question is, let's see here, commercial competition pronounced in large case, but are you seeing an incremental pressure from MGAs backed by foreign capital in the small case market? That's the first part of the question.
No. We're really not. We are, we're definitely seeing some buildup of MGAs, and we're seeing it on certain segments, and this is sometimes often the more difficult segments like highly protected risk or unprotected, you know, risk where there is a bit more of a friction and a challenge in the marketplace than standard. It's not the standard business. Yes, there is more competition. It's not in the small commercial space. The small commercial space is an interesting one, really to participate in that space, it's very technology-based. It's very similar to personal lines. You have to have this automated underwriting system. It's a flow business. This is, you know, small premiums, a lot of unit count-
as opposed to big business, which is a few policy counts, you know, big premium. You have to have a big claims team to handle the frequency of losses, and you've gotta have broad distribution. If you think about where that large commercial space is and where the competition is, most of the, or many of the players, and particularly the international players, they really just play in that space because they haven't got big Canadian footprints. They don't have supply chain networks. They don't have broad-based claims. They certainly don't even have broad distribution. Their distribution is highly concentrated on the big, you know, national brokers, the top, you know, 10 to 15 brokers. It's not that they couldn't over time go to small commercial, it's just not something you can do quickly. It's a multi-year investment to do that.
I think a good proof point, you know, what we shared on the call, is that in our small commercial in Q1, we're still getting upper single-digit rate increases.
It's important. I think the follow-up question from this individual was along the lines of, "Are there parts of the commercial segment that Definity will shy away from in this period of increased competition? Do you actually pull back from the large case market?" I mean, I know it's not the biggest part of your business. Am I right in suggesting it's a third of commercial?
It's about it.
Do you simply move away from it?
We believe it's about a third of the industry. But from us, we're less than 20% of our portfolio. We're definitely underweight in it. The answer is yes. I mean, I think if you think about our underlying growth trend, underlying growth trend has slowed, and partly it's slowed because you don't have as much rate going through the system across as you used to because inflation has become lower. What we are doing is we're seeing a mix of business shift, and where we're really growing and winning is in the specialty and in the small commercial. When I look at the unit count growth, we're taking share in small commercial and we're taking share in specialty. That unit count is growing. It's not growing in the large commercial.
In fact, we're actually reducing our unit count in the large commercial. That is because we're not finding as much new business activity that meets our standards and price points. The deviation required is too much, so our new business writings have been down. We have been disciplined with including, you know, walking away from some we think underpriced accounts. That's a bit of the reaction. I think as you get deeper into that cycle of that large commercial, it does change our mix a little bit. You know, we will have lower proportion of that large account.
Let's call it a little under 20%. I don't know exactly where that'll go, but it'll be a few points lower as the mix shifts. I think that's where we can say to the market, "Look, we can still grow in commercial. There's good underlying growth, and we're not seeing margin deterioration," and that is because we're shifting the mix of business.
That's it. You know, let's assume for a moment that that 20% declines to 19, 18, 17. While it's declining, as that mix shift is happening, your top line's not gonna look great, as good in commercial. The underlying profitability might just be fine. Like, underwriting might be great. You're gonna have to keep us-
Yeah.
on our toes there because guys like me are gonna write top line is not growing in commercial.
Yeah. Yeah.
You're gonna have to remind us that it's the mix and it's the underwriting's fine. Am I right in suggesting that?
No, you are. I think you're right, and I think when I look at it, you know, what I'm mostly focused on in commercial, number one, the Travelers portfolio, are we retaining it? We dialed into that, and it looks pretty good. It's actually been getting better month by month. That's my number one focus, is that happening? My number two focus, is our organic growth still high quality, margin contributing? It will be lower than it has before. I think it's gonna be, you know, mid-single digit. It was upper single digit and above that, in previous times. One, we're bigger, but two, the market is a little different, and I'm totally fine with that. I think that's what we should really be expecting. I step back and I say, "Well, you know what?
In this environment, in commercial, which has got a bit more difficult than it was a couple of years ago, the best thing we can do is we've just acquired a CAD 1.5 billion block of let's call it new business. That's the Travelers. That is the best way we can add value, is by focusing on retaining that, optimizing that with hands down, as opposed to competing in the open market file by file to win unit count growth. That is really the priority. That being said, the Definity story is still resonating. There will be organic growth, but it won't be at the same pace. The underlying growth rate won't be at the same pace as it has been in commercial for the past few years, and that's, w e're totally fine with that.
As the cycle, you know, matures and we find the middle market, or the it's not the middle, sorry, the large in the commercial normalizes, and then we've got all the capabilities and all the products to cross-sell in that and grow back into that. I think that'll then get us back into, you know, upper single-digit, you know, growth when that market's ready for us.
That's an evolution from the company that I met four and a half years ago, 'cause the company I met four and a half years ago in your offering memorandum talks about really strong growth in commercial, which you delivered.
Yeah.
Prior to the Travelers deal. You're trying to massage us into the next stage of Definity now, where commercial doesn't grow at 12%.
I think that's right. I think it depends on the game, the market, and what the cycle is, where the opportunities are. The reality for us, what we're mostly focused on is that margin. We want to run this in the low 90s, we will protect that. If it means that we slow the organic underlying growth to mid-single digit for a period of time, we're totally fine with that. That's the right thing to do. I still think with these new capabilities, once you roll another year or 18 months down the line, there'll be more opportunities, and we'll probably go back up into, you know, stronger growth. For the next 18 months, I'm mostly focused on retaining the Travelers business and mid-single digit growth in commercial lines and holding that margin.
Okay. Before I move on to some of the other segments, I do wanna touch on one thing, the extent to which the next big, or and let's call it organic, move for Definity could be into the specialty space. I mean, I know you're a specialty player.
Yeah.
Does Travelers give you some capabilities to push a little further into specialty?
It absolutely does. I think that was one of the things we liked about their business, is they were more advanced than we were. They had more intellectual property. They had more products. They had, you know, a strong reputation in that large commercial specialty lines. Whilst we did, you know, specialty, their appetite and their capabilities are broader. If you take something like, you know, D&O, we might have done D&O, but mostly non-profit D&O, and they'd be doing larger for-profit D&O. We're really rounding out that appetite. There are new things like ocean marine we didn't do, technology, you know, we didn't do, things like that. We've got a much better cross-border facility, capability now than we had. That really helps us quite a bit.
Again, number one priority, let's onboard that, let's get that onto our kind of platforms, and then let's start kind of cross-selling. I think the cross-selling is a nice opportunity because many of our existing customers buy that product from somebody else. We have the relationship with the customer, we have the relationship with the broker, that should, as we go forward, you know, produce really nice, strong, you know, growth for us in that specialty line. You know, I think because it looks like the integration's going so well, we really thought about that as a 2027 initiative, but it's likely we'll pull that forward a bit.
Okay, I wanna flip over to the next segment, auto. I got the impression from the call, and I think I got this right, and help me flesh this out a little bit, that auto would decline as a proportion of Definity over time. It would not be the growth story for Definity. Help me understand why you said that on the call?
Well, I think what we're saying, look, the big strategy has been we've always wanted to grow the other parts, personal property and commercial lines at a rate faster than auto. That's gonna vary by market conditions, you know. We've had a period of time of really good growth in auto. We've had really good rates in auto. We're happy to take that. The long-term plan is to have a more balanced portfolio. If you go back many years, well, several years, we had over half our business in personal auto, and it's now down to, you know, let's put it closer to the 40% range. Would we like that to become a little lower? Yes, over time. Really, the big driver of that is actually gonna be M&A because it's hard to move that.
Personal auto always has, you know, a mid-single-digit loss cost trend. Therefore, you typically cover that with rate. It's a portfolio that just keeps, you know, growing, at least in revenue if not in unit count growth. The other item is, you know, Sonnet, which is coming on stream. That's gonna get better over the next couple of years from a growth contribution, you know, aspect. It's not that easy to kind of limit the size of auto.
I see.
It's what moves the needle is mostly M&A. I think if you look at something like, you know, Travelers, commercial lines was 30% of our business, and I think by the time we end, it's gonna be 33% of our business now, right? A third. We are trying to shift a bit in that direction. It's not that we don't like auto, it's just simply that there is generally a regulatory cap. You know, it's hard to do on a sustainable basis much better than a 95% on auto. On the other lines, like commercial and personal property, we know we can do much better than that, than that.
Let's talk about the auto environment. It remains reasonably firm.
Yeah.
I don't see any real risk to that in the near term. How do you feel about auto?
No, totally the same as you. I think that, you know, we see inflation is stable here. In fact, it's come down because you had that theft issue a couple of years ago. The theft issue seems to have, you know, solved itself, that's actually reducing some short-term trend in the loss ratio of that. It's stable. Look, there's still some uncertainty. There's geopolitical events going on that are impacting energy prices. We've got to see exactly where we land, you know, on tariffs. That may change the trend. You know, we're not convinced that it will. We haven't seen any of that flow through yet. It's been absorbed in the supply chain. That's a good start.
I do think that overall, the industry will respond to that, and I think you've seen that over the last couple of years. Should there be a tick-up in inflation, the industry will respond. Most of the players are still closer to 100% combined ratio they need, therefore rate. Actually we've seen a little bit of a slowdown in rate taking recently, and I think there are two reasons for that. The first reason would be that big rate was taken last year, like double-digit rate as people try to catch up, you know, with trend. That's earning. The other issue is that most of the smaller players don't have the capacity to do multiple rate filings as well as reform filings. If you remember, we're all programming our systems for Ontario, you know, midyear and Alberta start of next year.
That's a massive technology undertaking, and many people just can't do both. So I think what you're seeing and what companies like us, like ourselves are doing, is we feel we're rate adequate. We like our rate position. What we are doing is segmentation filings. The segmentation filing, if you do it right, is as efficient as any significant rate filing.
Remind us, you referred to the midyear change. Is it July when folks-
Yeah.
like me, an Ontario driver, will be able to skinny up my policy if I choose to? Maybe just remind everybody.
Yeah.
What's coming down the pipe there?
In Ontario, it's mostly around more choice. You will have some choice. I think that we don't anticipate most people like to reduce coverage. For some people you have that choice to do. The renewals will go out with the full coverage. If you want to opt out of them, you could do so. That's why we don't think the take-up will be up. If it does, you know, it's probably less than CAD 100 savings. They're not that material. You know, even if your policy, let's say average policy, CAD 1,500-CAD 2,000, if you gave up CAD 100 for the segment that chooses it, there's a commensurate, you know, reduction in trend or coverage and loss costs.
you know, we think this is good for a portion of the Ontario population. Choice is always good. We're not actually anticipating a material top or bottom line impact, you know, from that. The Alberta ones that come next year are much more significant. There is, you know, a bodily injury trend in Alberta that has been growing significantly. That's why the system is effectively moving to a no-fault system that will reduce those bodily injury costs, the legal costs, and that really does actually take cost out of the system. Those reforms are actually, you know, much more meaningful, I think, in terms of impacting the combined ratios.
Yeah, I had a conversation with a broker about the Ontario reforms, and it's almost not worth the effort. I'm almost surprised at how much attention this got when it. At least for a driver like me, I don't think I'm gonna go through the effort for a CAD 75 savings, which is what it worked out to.
The, you know, the brokers that we discuss with, and of course we have one we own, they're not anticipating a big take up. In prior reforms we've had these type of choices, people are quite reluctant to take a choice away. What you might find it is on some of the new business, because new accounts-
Sure.
may say, "Well, I'm looking for a slightly lower price and this would be the one." We're, that's a big communication, you know, focus for us.
Okay, let's flip over to property for a moment. As you describe, like a really, really good property quarter.
Yeah.
Was it as simple as just the weather cooperated? As simple as CATs being low? Like, what made property so good? Wasn't unique to Definity. It was just a great property quarter.
Yeah. Yeah, it's an interesting one, but I think that a couple of things happened is, number one, yes, year-over-year the CATs were lower. The major CATs, weather CATs were lower. That's because we think last year was actually an unusual year. It was very elevated last year. When we look at what our modeled expectations for weather losses are in Q1, it was a little better, but not dramatically better than what we expected. It, it did help us, but it wasn't the only or the main driver of the quarter. I think a lot of it from our perspective has been the work we've done over the last couple of years where, you know, we have put new product in place. We've got the segmentation right. You know, we de-risked the higher CAT zone areas.
There has been a lot of, you know, value, escalation, indexation, as well as rate changes through our product. In the industry as well, that doesn't surprise me that it was a pretty, you know, solid quarter. If you just step back, you know, what we expect on personal property, we expect a reasonable first quarter. We have CAT exposure in Q2 and Q3, we typically have a very strong fourth quarter. We really need to make our money in Q1 and Q4 because there is the CATs to fund, you know, in the middle two quarters.
Taking personal lines together, auto and property both seem pretty solid right now. Do you see any meaningful risk that we could go into a soft market the way we did in large case commercial? I know they're very different markets.
Yeah.
Personal lines very different from what we're talking about in large case. Do you see any meaningful risk in the next 12 months we could be having that conversation?
We do not see that. You know, we really don't. I think we look around what's happening in the world, we see what's happening in the U.S. We're very different. The regulation, we didn't get the rates nearly as high as some of the other markets have done. We didn't print 80s and 70 combined ratios. There just isn't the room, you know, to do it. I think, you know, the relationship with the regulators is about stability. That's highly unlikely.
Like, I follow you entirely on that. The uncomfortable thing is during U.S. reporting season, when Progressive, Allstate, and others are reporting some, like return of premium in the case of Florida, I look, again, I look over my left shoulder and I look at the quote screen and I see stocks going down that it doesn't apply to. I appreciate your comments, and the market sometimes makes connections that aren't there.
Yeah.
I think it's just an important point for you to make on your calls that there is a difference there.
We do, I mean, in individual investor calls we often have that. We get that kind of question, the read across to the U.S. As we've said in many things, you know, it is a different market in Canada, and I don't think it's as simple as just a read across. I think that's a very good example, as is the small commercial one where we have a structurally different market, you know, in Canada. No, we absolutely are not anticipating that. Look, Mario, we got so many forward-looking indicators. We're tracking the market. We're looking at trends. We're really not seeing anything that concerns us.
You know, for someone like me that sits and looks at the entire financial service industry in Canada, I have a unique place of covering the banks, the life cos, and the P&C, for anyone listening and paying attention at home, the read through from U.S. banks to Canadian banks is pretty strong. It's mild on the life insurance space, and it's almost non-existent in the P&C space. This is after a lot of years of watching U.S. institutions and how they feed into Canada. It just doesn't flow well. I don't gain anything from looking at Allstate's auto exposure to read anything into Definity's. I just wanted to offer that for those listening at home. It works in the banking space. It works mildly in life insurance. It does not work in P&C world.
I just wanted to offer that. Let me, let me go into sort of a different direction now. Now you've got this big business. We're a few years removed. What do you think Definity feels like in five years? I, and I'm thinking of it from a mix of business perspective. Is this a big commercial player with, like, a growing specialty line, a really big property business? I, you addressed this a little bit when we talked about auto. The, is that what this feels like over the next five years? Because the growth, it, it seems like we're headed there, a big commercial player with, smaller personal lines.
Yeah. Again, it goes back to, you know, where the opportunities are. Number one is I think we go back and we had a 10-year plan. We're into year two of it now with our board, where we triple the company. That's all looking, you know, pretty good. That does mean everything is moving forward. Personal is going up, commercial is going up, distribution is going up. That's the way we see it. I do think the point about we're likely to see more M&A opportunities come from the commercial line side. There's more opportunity that I think is going to capitulate over the next, you know, a couple of years. That's exciting for us, and I think we could play that.
I think the other thing that we're seeing is really in the broker world, a concentration of markets. Our share of wallet is going up. Even in personal lines, the organic growth is big. We keep winning portfolios. In fact, even though we're doing Travelers today, which is a huge portfolio we're bringing on, we're still winning portfolios, which is part of our normal course of business, where brokers are saying, "Look, I can't do what I used to do. I can't deal with a dozen or 15 insurers. You know, I've got to have integrated platforms. You know, I've got to have the modern technology." Of course, table stakes is great claims and a competitive product and price. That's coming.
I think all of those grow, but I do think we're well on the way to triple the company. You know, I think that there's lots of space in Canada. You know, we're still, you know, what is it, 7% or 7.5% market share. You know, until we kind of double that, we've got lots of focus. We don't need to take our focus off the Canadian marketplace. I do think the commercial element will be one of the stronger, you know, growth players in that area. I think the other one for us too, we still like our broker distribution. You know, that, you know, generates now, what is it, a little over, you know, CAD 100 million or so of earnings a year.
It was 95% last year, growing 20%. Good first quarter. There's still bolts on programmatic acquisitions there, so that, you know, continues to come. I think the other issue is clearly, you know, I think one of the earlier points you made, when we brought on Travelers, we brought on a big investment portfolio.
You know, that again has moved our investment income up 60% in the first quarter. Lots of sources of growth for us. I would look at the company and I would say, you know, we'd love to be a top three player. We'd love to be bigger in commercial today. I think that the specialty capabilities that have come with Travelers, you know, has advanced our ambitions by five years. I think that's what's partly exciting with that transaction.
You mentioned brokers, and this is sort of a related question that popped up moments ago, and it was about the broker channel and the extent to which the broker channel could be harmed by AI or disintermediated away. What are the brokers saying? When you meet with brokers and you talk about doing a deal with a broker, are they selling because they see the writing on the wall and, like, what are they saying about AI and how it affects their business?
Yeah, if you speak to a lot of brokers, they don't say that, you know? I think that, you know, we just went through, you know, our quarterly business review with our own broker and we asked the same stories and looking at for the evidence. Interesting, one of the conversations was, well, the day before, one of the farmers walked in with a couple of thousand dollars, a hundred dollar bills and paid his premium, you know, he's not buying insurance through ChatGPT. You know, this is still small town, you know, Canada. That being said, look, I think that our view is the reason for brokers selling is actually not about the fear of AI. I think it's more about, you know, demographics and size and scale that's required.
We've seen concentration in the broker force actually outpace concentration in the underwriters. With that comes size of sophistication and scale. This is a big opportunity, and I think when we look at AI, certainly could talk forever about what it does for Definity and we're leaders in it, and we've been doing this for well over a decade. It's pervasive across our business. In the broker side, it's the same thing. There's a lot of friction, there's a lot of paperwork, there's a lot of admin. All of that's getting automated. AI tools being deployed into that channel. The leaders are actually getting more margin, not less margin out of it. Will there be disruption?
I think the view would, from our side, be certainly not on the complex, you know, commercial side. It's more on the discovery side of personal loan lines. Where it's more commoditized, there has to be some element of disruption there. We think it's manageable. You know, what AI could do today is not that much, but we have to extrapolate what it could do in a number of years. It fulfills a function on the discovery very much like what aggregators do, and aggregators have only had only a meaningful impact on the marketplace. Most customers, you know, 40% of people today are still clicking, you know, to a broker for that advice and service. This is the most important asset a home, you know, individuals own, et cetera.
You know, our view is there'll be some disruption, but overall, this is an enhancement, I think, in terms of the capabilities deployed through the broker channel. So we're not very worried about that. What it might do is actually accelerate some of the pipeline. If it does accelerate the pipeline, I think that's an excellent position.
Interesting.
if you are a big, you know, consolidator.
Okay. I'm gonna shut this down at five to. There's a minute left. I'm gonna give you a number. I'm gonna ask you for an over-under on this number. Are you over or are you under this number in three years? It's for your ROE. This is the game I'm playing on my own here. The over-under number is 14% ROE in three years. What side of that bet would you take, the over or the under? I'm not holding you to it. This is just.
Yeah.
What would you say?
Phil is gonna kill me for kind of getting drawn on this. Look, I think, Mario, on that one, what I would say is you can see where our ROE is today. That's been helped a bit by four quarters of decent kind of weather. You know, we're probably halfway in our target of, you know, 10 to below teens. We have another half a point of expense ratio improvement coming through. Over the next two years, we've got another point of claims ratio coming through. If we do the job we said we would do, and we expect to do on the Travelers side and get that 200 plus basis points, then we're gonna be a little higher than your number. Now, there's a lot of things that could move that. We're in a CAT business.
A CAT could easily move that 1.5 points, you know, either way. We have a high degree of confidence that these organic levers were actually at or better than we said we would do. From what we could see today, Travelers looks to be an outstanding acquisition for us. There's still work to be done, and it's, you know, not an easy environment, and these are complicated things to do. Assuming we do the things we think we can do, I mean, we've been very confident that we can get into that mid-teens. I think that, you know, that's certainly our target.
I'll take the over then. I know you can't say it. I'll take the over on that. Rowan, thank you very much for doing this.
You're welcome.
For all of us that joined us, good luck on the integration. Thank you, Rowan.
Thanks so much, Mario. Much appreciated. Thank you.
Have a good afternoon.