Good morning, ladies and gentlemen, and welcome to the Definity Financial Corporation 3Q 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 need assistance, please press star zero for the operator. This call is being recorded on Friday, 10 November, 2023. I would now like to turn the conference over to Dennis Westfall. Please go ahead.
Thanks, Joanna, and 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 definity.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 MacDonald, EVP of Personal Insurance and Digital Channels; and Fabian Richenberger, EVP of Commercial Insurance and Insurance Operations. As usual, we'll start with formal remarks from Rowan and Phil, followed by a Q&A session, where Paul and Fabi will join to help answer your questions. With that, I will hand it over to Rowan to begin his remarks.
Thanks, Dennis, and good morning, everyone. Last night, we reported third-quarter earnings that reflect a resilient performance in an active catastrophe period for the industry. Severe storms and wildfires affected communities across the country this summer. Our catastrophe response team stepped up for our customers. While these events had a significant impact on underwriting income, we continued to leverage our strong broker proposition to drive overall premium growth of 9%. Our efforts to diversify and strengthen the earnings profile of the business were evidenced by strong commercial insurance results and a growing contribution from our insurance broker platform. Overall, we delivered a solid underlying performance, which, combined with robust net investment income, resulted in third-quarter operating net income of $ 17.6 million or $ 0.15 per share.
Our 102.5 combined ratio included 13.5 percentage points of losses from cats, more than double what we would expect for a 3Q. Auto results reflected continued normalization and frequency, elevated claim severity arising from theft and persistent, but now stable inflation. Results in commercial insurance represent another strong underlying performance in addition to lower than expected level of cat losses. On a consolidated basis, underwriting results benefited from a 2.4 percentage point decrease in our expense ratio, which Phil will expand upon in just a moment. Turning to the top line, growth of 9% was driven by commercial insurance and personal property, as our strategy to diversify our mix of business away from regulated auto has been successful.
We continue to expect top line to reflect our disciplined approach to managing growth through the cycle and for our significant rate actions in auto to return more balance in personal insurance growth in the coming quarters. On a per-share basis, book value was 9.6% higher than a year ago. Continued strong operating results outside of cat losses drove an operating ROE of 8.8% over the past twelve months, illustrating the benefits of our diversification strategy. Although we've been successful in actively deploying capital in our broker distribution business, we continue to have a significant amount of financial capacity, putting us in a strong position to fund our strategic growth initiatives for the coming years.
Turning to the industry outlook on slide 6, 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 7 illustrates our key financial metrics. Growth, combined ratio, and operating ROE were largely in line with our targets on a year-to-date basis, though unusually high cat losses in the 3Q pushed our combined ratio above expectations. We are confident that we have the growth platforms to outpace the market over time and will continue to protect and improve company profitability along the way. You'll see on slide 8 that we continue to diversify and strengthen the earnings profile of the business.
We closed the acquisition of the Drayden Brokerage in early October. In 12 months, we have built an insurance broker platform approaching $ 1 billion in annual premiums, with repeatable distribution income, which complements our underwriting operations. The addition of Drayden provides immediate scale and market-leading presence outside of Ontario, where McDougall and McFarlan Rowlands have well-established operations. Each of these brokers have experienced management teams, highly valued brands, and generate robust operating margins. 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 4.6% in the 3Q of 2023, largely driven by an increase in average premiums, which reflect the multiple rate increases we took earlier this year in both our broker business and. We are committed to taking a disciplined approach to growth and have taken further rate increases in Sonnet, Ontario, and expect to maintain our pause on all Sonnet marketing activities in Alberta for the foreseeable future. Now, we are focusing on other areas of the business where we see opportunity for more profitable growth. Our reported combined ratio of 98.9% in the 3Q was 2.6 points higher than the prior year, but in line with our expectations.
Severity was up from a year ago, though inflationary cost pressures are now stable and were down slightly from the first half of the year. Industry Pools impacted the composition of our Q3 auto Combined Ratio compared to a year ago. While only a small drag in the quarter overall, pools negatively impacted the change in core attritional results by approximately two points, while benefiting prior year developments by a similar amount. Lastly, personal auto wasn't immune to cat losses, with a 2-point impact in the quarter. As we discussed in recent calls, theft continues to be a challenging issue for us and the industry, accounting for approximately 10% of our total auto loss costs and 6 points of loss Ratio points over the last 4Q s. In response, we are continuing to implement both underwriting and claims initiatives aimed at addressing theft and auto recovery.
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 both top and bottom line results in 2024. That said, we continue to expect this line of business to remain in the upper 90s for the next two quarters, reflecting anticipated levels of winter seasonality. Turning to personal property on slide 11, the story this quarter is clearly one of catastrophe losses, which accounted for nearly 40 points of our reported combined ratio of 123.3%. As we previously communicated, we experienced 10 events that reached our definition of a catastrophe. Wildfires in BC represented the largest of these, and was the only event to breach our reinsurance retention threshold of $ 40 million.
Our results were helped by our multi-year aggregate reinsurance treaty, which is designed for periods such as this, where multiple smaller events occur and reflect the full utilization of the treaty limit for 2023. We will again have this protection in place in 2024 as the final year of our 3-year arrangement. Beyond cats, ongoing actions to improve the underlying results are paying off as core accident year results improved 4 points from the 3Q of 2022. This improvement gives us the confidence to target the mid-90s combined ratio for the personal property line of business on an annual basis. We reported strong top-line growth of 11.8% for the quarter, benefiting from firm market conditions, driving increases in average written premiums, and the continued success of winning portfolios of business in the current market environment.
In the upcoming couple of quarters, we expect our actions to improve and protect profitability, including the short-term impact of having slowed new business in cat-exposed regions during recent events, will somewhat dampen our current pace of growth. Beyond this, we remain confident in our ability to outgrow the industry over time, supported by strong broker relationships and scalable platforms. Moving on to slide 12, you will see that double-digit growth in commercial lines continued in the quarter, with gross written premiums of 13% versus the prior year. Growth was driven by strong retention, a great achievement in a firm market environment, and further scaling of our small business and specialty capabilities. We believe that we can maintain growth at a similar pace into 2024.
Commercial lines combined ratio was very strong at 86.6% in the quarter, compared to 93.9% in the same quarter a year ago. The result was driven by an improved core accident year claims ratio and lower catastrophe losses. We continue to 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 9% in the quarter, while profitability at a consolidated level reflected the unusually high impact of catastrophe losses, resulting in a combined ratio of 102.5%. Our expense ratio decreased by 2.4 points from last year due to a couple of factors.
First, the negative impact of cats on our loss ratio had a corresponding favorable impact on expenses in the form of lower quarterly accruals, both contingent profit commissions and variable compensation. Second, expense management initiatives, including the reduction in Sonnet marketing expenses from our targeted actions in Alberta. More sustainably, a reduction in commissions from the consolidation of our insurance broker platform benefited the expense ratio by about half a point. We continue to focus on disciplined expense management and leveraging our growth momentum to become more efficient overall. Operating income was down, but resilient, benefiting from the expansion in net investment income and a growing contribution from distribution income, leading to an operating ROE of 8.8%. Diversified earnings profile gives us confidence that we can more sustainably generate operating ROEs that are inherently less volatile and with the expectation to grow over time.
Slide 14 shows our investment portfolio in greater detail. Our net investment income again increased substantially in the quarter, up nearly 29% from Q3 of 2022. This 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 now expect full year net investment income of approximately $ 170 million, recognizing the strong first three quarters of the year, while also taking into account the impact of the recent cash outflow for our investment in Drayden. As you can see on slide 15, our financial position remains strong. We are well capitalized with over $ 580 million in financial capacity under our current legal structure, and subject to the continuance of Definity under the CBCA, could add close to another $ 600 million in leverage capacity.
These figures do not include our acquisition of Drayden, which closed in early October and represents a capital outlay of approximately $ 200 million. Substantial financial capacity and the regulatory approval process for our planned CBCA continuance nearing completion, there is significant flexibility available to support our ongoing reinvestment in and growth of our business. 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. With that, I'll turn the call back over to Rowan for some final thoughts.
Thank you, Phil. Before moving to Q&A, I wanted to provide my view on the situation in Alberta. We mentioned in the past that the province represents approximately 14% of our auto business, but more than 25% of Sonnet's auto premiums. In response to the government-mandated rate pause announced earlier this year, we've essentially turned off all Sonnet marketing activities in the province, given rate inadequacy. While the rate pause will expire at the end of the year, the government has now introduced new measures that allow it to continue to control rates and profit margins. I believe these measures threaten the attractiveness of the personal auto market in Alberta, while the government's actions to intervene in the market require us to consider how we deploy capital in the province.
As we assess our go-forward response for Sonnet in Alberta, we've committed to work with the government on regulatory improvements to the auto products so that further intervention is not needed in the future. In closing, I think the resilience of our operating model was illustrated this quarter, and I'm confident in the inherent momentum of the business. We delivered strong revenue growth in the quarter and year to date, and we are pleased with the strength of our underlying insurance performance. Distribution income is building nicely and provides a new, more stable income stream. Net investment income again benefited from our proactive actions to capture yield. Putting 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.
Thanks, Rowan. Joanna, we are now ready to take questions, and I'll ask that everyone please limit the number of questions to two before then queuing.
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 touchtone phone. You will hear a 3-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Jeff Fenwick from RBC Capital Markets. Please go ahead.
Hi, good morning. Just wanted to follow up on your comments on Alberta. I just wanted to get your sense there, like, how would you describe the likelihood we see measures introduced aimed at reducing claims costs, to hopefully help ensure adequate competition in the province? Or do you think we may see some capacity getting pulled out of the province if the current rate regime persists?
Thanks for the question, Jeff. Rowan here. Yeah, look, I mean, I think that this is recently new breaking news, and so we do need to understand the details from the government, and we have been, through the industry, in touch with the Alberta government and the regulators as well, who also are waiting, you know, for some of the details to be outlined. I mean, I think when you step back, you could look at this and say, well, the fact that the rate freeze or the rate pause has been lifted is a good news story. But unfortunately, there is now a cap that will be imposed for some definition of a safe driver, which will be a substantial part of the portfolio.
One of the concerns we have is that when you think about that percentage of 3.7%, which is meant to reflect CPI trending, what we do know that over the long haul, the loss cost trends in automobile are higher than that. So that's why we think that, you know, that's not going to be inadequate over time. Of course, there are other things that are happening as well in the province, and as an industry, we have suggested reforms to the government. They have put reforms in place in the past, and that would be certainly helpful if product reforms go forward. One of the more short-term impacts are that generally the product reforms that you put in place tend to address accident benefits and bodily injury claims and not, you know, automobile physical damage.
And really where, you know, the short-term pressure of reflecting this inflationary environment is on, is on actually the short-term, claims than the, actual physical damage. So I think as you step back, you know, this just it can be seen, I believe it, as good news. And I do think that there will be some views that the market is, at least in the short term, less attractive than other jurisdictions across the country. And that's why I think, you know, people will have to decide what they want to do. When I just step back for a moment, you know, for us, you know, both the broker business, auto, and Sonnet Auto represents about 6% of Definity's premium.
We feel that our broker business, being so much more mature, is clearly in a different position than the Sonnet portfolio. And the Sonnet portfolio, in the grand scheme of things, is still less than 2% of Definity's premium, but it's material for Sonnet. And that's why, you know, we have, you know, reduced our marketing expenses dramatically there. The portfolio is actually contracting as you have a normalized, you know, retention ratio. And so for us, we've got to just understand the details and then decide, you know, how we move forward. And I don't think we're gonna be unique, quite frankly, in that approach, Jeff.
Okay, that's helpful. Thank you. And just my other question was just on the CBCA approval, just any updated thoughts on timing-wise taking so long, but also in terms of pursuing major or it's called transformative acquisitions, do you feel like you can only try to pursue those after you get approval, or have you been willing to pursue it if it did or has come up, prior to getting the approval to convert?
Yeah, thanks for that, Jeff. I won't estimate of the specific timing, but we do believe at this point now, we're nearing completion of the process. So if I was to use a sporting analogy, I'd say we feel like we're in the bottom of the ninth at this point, and, you know, we're looking forward to getting that process completed. And as I've said before, we don't control the outcome or the timing, but we're very confident at this point that we're at the late stages, and that process is coming to an end. In terms of the acquisitions, I'm looking at transformative opportunities. You know, obviously, the near-term impact of the ICA restrictions is on leverage. It wouldn't restrict us on preference shares or equity raises.
But also, if you think of the time horizon to actually complete a deal, once you go through regulatory approval, you know, we'd estimate that the CBCA process will be out of the way, you know, long before we'd be through that. So we haven't seen it as a hindrance to any of the current deals. Obviously, you've seen we've been very successful on the broker side, and it hasn't inhibited our views of, you know, pursuing any strategic opportunities.
Okay, thank you.
Thank you. The next question comes from Paul Holden from CIBC. Please go ahead.
Thank you. Good morning. So I want to talk a little bit more about the margin outlook for personal auto. So I think you mentioned sort of high 90s for the next two quarters because of seasonality. I don't know if there's any data points you can give us on to help us sort of think through the entire 2024, maybe some updates sort of on where premiums earned versus premiums rates fit, and also claim inflation trends. Just help us think through what kind of margin improvement we might be looking at for next year.
Yeah, thanks for the question, Paul. I mean, I think if you just sit back for a moment, that we're definitely feeling much better about the personal auto environment than we were, you know, over the last couple of quarters. And what we have seen is that essentially the normalization has occurred, and that we're seeing now flattening trends in severity for sure. And then whilst there's still a little bit of a tick-up in frequency, particularly if you look at it year-over-year, you know, that is now getting to be, you know, quite marginal. And so I think when you think about those trends, looking at slightly higher frequency and kind of flattening, but still elevated severity, you get a loss cost trend, which is in that you know, middle single digits.
Now, when you then say, you know, how do we think about that? You know, we've taken a significant amount of pricing and rate. And so in the 3Q of this year, our original rate is now in the 13%-14% range, and that will continue into the 4Q, of course. And the earned rate has been building all year, and it's now at about 6.5%. And so you know, we're getting very close to that crossover period. And as we've kind of called before, we think in Q4, we will have actually crossed over where the earned rate will be outpacing the loss cost trend in margin, and therefore, you start developing, you know, a margin contribution. And everything looks pretty solidly report, you know, trending into that direction.
You know, our guidance has been that we'll be in the upper 90s, and that continues to be the case because as you get more power from this earned rate, we actually do go into a seasonal period where Q4 and Q1 are seasonally, you know, higher. So that's probably why you don't see a faster margin improvement. But then as we get into the rest of, you know, 2024, that mathematics, you know, kind of work its way through. So, you know, I think that would be the kind of high-level trending we're seeing, and, you know, it feels like it's now normalized. We're comfortable and confident that the, that the inflation has stabilized, and so that's important.
And then, you know, the other point that I might just ask Paul to touch on, with these significant rates that have gone through, we know the mathematics are gonna work for us. It then just depends on what the more competitive market looks like and-
... Any color you could add on, on that point?
Yeah, thank you, Rowan. And so as we've called out before, we felt we were a little bit ahead of the market in taking such significant rate on our auto portfolio. And what we've seen is a response in the marketplace where double-digit rate is flowing through many of the markets. That has reflected in our results, where we're starting to see a tick-up in new business and in retention rates, which essentially gives us some confidence that the market as a whole is being rational and flowing through the loss cost into the need for additional rate. We expect that to continue to be quite firm for definitely for the rest of this year and into most of next year. We expect that those hard market conditions to continue.
That's very helpful. Thank you. And then my second question is with respect to the investment portfolio and income flowing off of that. Can you just provide us what the market yield is versus the book yield? And I know Drayden is gonna have some impact in terms of the potential investment income there. I guess what I'm really trying to get at is if the entire book had rolls over at current market yield, what's kind of the upside?
Yeah, thanks, Paul. The so current market yield is about 5% on the portfolio, and current book yield is about 4. So we're still maintaining about 100 basis point gap between, you know, those current market values. So I would say there is still opportunity as we move forward into next year to capture some additional yield in that, rising rate environment. Now, obviously, that's where current yields are, and they've been pretty volatile. And as you've seen, we've been pretty proactive in deploying capital, into some of the broker acquisitions. And so, you know, the pace at which we deploy cash out of the portfolio may impact, you know, the accumulation of future interest income.
But certainly, we still believe that the rate environment is supportive right now to capturing additional opportunity and, you know, generating that higher level of return, overall for the company.
Okay, helpful. Thanks for that.
Thank you. The next question comes from Jaeme Gloyn, from National Bank Financial. Please go ahead.
Yeah, thanks. I just wanted to dig in on the Alberta portfolio a little bit more. Could you give us a little bit more detail on how the broker market is performing in Alberta in 2023? Like, has this been a profitable business for you so far year to date? And, you know, obviously, if that's the case, the view is that you would sort of maintain your share or continue to grow it slightly into 2024. So a little bit more color on how that Alberta portfolio and the broker segment is growing and how profitable.
Yeah, Jaeme, that's, that's a great question. And, and actually, it's a good description of the situation for us in Alberta. So the broker portfolio is far more mature, as Rowan mentioned earlier, and we were fortunate to, to get the rate approved that we needed in advance of the most recent rate pause. And so we feel that it's progressing, well and generating a required profit. The, the challenge, of course, is how long will this, the rate pause continue and how much will it impact? And so there are loss cost trends that, that, continue, as we have mentioned. And so the long-term aspect is one that we'll continue to look at very closely, but in the near to medium term, we're quite comfortable with our positioning in that marketplace with that portfolio.
Okay, so prospects for growth in Alberta and the broker market are still present?
We still strongly believe in the Alberta province in terms of investments. As we've mentioned, we've recently closed that Drayden acquisition. We continue to be a strong participant in that marketplace, and we are actively working with the government and the industry to look at solutions for making that a rational marketplace. So we'll continue investing in that space and the broker, you know, based on the back of our success on the broker side.
Okay, got it. And then, just a clarification question in personal auto. Did I understand from the prepared comments, pools had a negative impact on the core by about 2% and then PYD by 2%? So was it a 4 percentage points combined impact from Industry Pools? And can you describe a little bit more about what was within those pools and driving that outcome? And it seemed like you took a bigger share than maybe your overall market share would imply.
Yeah. Thanks, Jaeme. Now, maybe I'll step back and just provide some clarification. So, think of it in two ways. What did it do to the actual quarter itself? And then what did it do, or what did the pools do to the year-on-year comparison? So if you actually look at Q3 distinct and the 98.9% combined ratio for the quarter, there's about a 1-point drag from pools in that number. So excluding pools, the core portfolio was just under 98%. So there's 1 point drag in there. When you look at the year-on-year comparison, the overall drag itself isn't that different. But where it does show up is some geography between core accident year claims ratio and then prior year claims development.
So if you look on slide 10, you'll see that the core accident year claims ratio year-on-year went up 4.6 points. Of that number, 2 points was pooled. So in other words, if you exclude the impact of the pools, the underlying accident year went up only 2.5 points year-on-year. That's actually a very positive story for us, because it shows that the rate actions that we've been taking are starting to earn through, and they're starting to close the year-on-year gap from an accident year performance. Now, because the pool's impact year-over-year wasn't that much, what happened the opposite way is that the prior year favorable claims development moved, not quite 2 points, but more or less the other way.
So the impact of that, negative variance on core accident year was more or less offset, on prior year payroll claims development. So you basically, if you want to exclude it, you'd knock two points off, both of those numbers. It's a bit of a wash, overall. So key takeaways, about a 1-point drag on the distinct quarter, the underlying book, more like 98% for the Q3 of this year, and then year-on-year, the core accident year claims ratio tighter than you'd see on that, representation, the 2.5 points year-on-year variance, improving trend and starting to close in on from what we'd seen in earlier quarters. Just a bit of color.
I appreciate. Yeah.
Yeah.
Go ahead.
Just a bit of color. If you look at the full year on the pools, it's pretty much a wash. This is a bit of Q3 timing going on. It's creating some noise in the individual numbers, but on an overall basis, we don't see anything unusual opposite market share or anything like that.
Okay, understood. That's good color on the underlying core accident year, too. Thank you.
Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star followed by the 1. Next question comes from Mario Mendonca from TD Securities. Please go ahead.
Morning. I don't normally spend a lot of time on the tax rate, but they, they obviously stood out this quarter, and I think I understand your explanations as it relates to cats and dividends received from Canadian corporations. What I'm asking you to think through now with me is, if we look forward a year and we tax the Canadian dividends in a different way, you know, in line with the budget, the 23 budget, what would the tax rate have been? Would it have been materially higher, in a quarter like this?
Thanks for that, Mario. Not materially, no. So if you, if you just think of it from a dollar perspective, if that change happens and all of those dividends become, become taxable, it's about $ 8 million impact on an annual basis. So it's about $ 2 million a quarter. It usually impacts on a more normalized quarter, a couple of percent of the overall tax rate. It looks weird this quarter, because you've got obviously the, the impact of the cat losses consuming the contribution from underwriting results. So I, I think the step back is if that change happens, it would be about $ 8 million on an annualized basis, about $ 2 million a quarter.
So not material, at all to the overall numbers, but certainly, that number bounces along each quarter based on just the contributions of operating income, come from the different sources.
I see your point about the quarter tends to exaggerate the effect a little bit, but the two points itself-
Absolutely.
Let me move on to something a little different. I always look at this company, Definity, as having a ton of excess capital and capital flexibility. That's the sort of the whole point of the, of the demutualization. But I did notice that this quarter was different. Your, your MCT was off about 12 points, and I think your presentation shows that, you know, a fair bit of margin was eroded this quarter. Is there anything on the horizon that would make you, Do you see a scenario where you'd have to slow the pace of growth, direct written premiums, just essentially slow the pace of new business to accommodate a slower growth in your, in your capital margin? Or is that really far, like, not really plausible in the, in the current circumstances?
Yeah. Thanks, Mario. No, I don't think in the near term we'd have any concern around that. Really, what happened in the current quarter is you had, like, 2 perfect storms coming together a little bit. Obviously, the catastrophe losses were very high. So if you think about the current quarter, you know, we had 13.5 points of losses. Normally, we'd only have about 6. So that's actually a meaningful impact on the current quarter. And at the same time, you saw those rising yields coming through the investment portfolio. So combination of both of those is what caused some of the compression. On the MCT, you know, the 200% you referenced, that's what we leave down in the operating company. That can move around a bit.
Our natural kind of level, though, is maybe like 190%-200% operating range. So we actually usually dividend out excess capital into the parents so that it's available for deployment. And obviously, you saw we did the Drayden deal post-quarter end. So there is a bit of a disconnect between making sure the operating company is well-capitalized, which we obviously focus on, and then the overall financial position of the company. And that financial capacity metric, we think, just gives a thorough representation. Sometimes there's just, you know, you're trying to manage your expectation of how the quarter will close before it actually has. So sometimes you just, you know, the level at which you draw out or leave in can bounce around a little.
You know, big picture, I think we're a long way off having the concern from a capital standpoint, on anything in terms of, our organic growth potential. We think that's a long way off.
Thank you. The next question comes from Tom MacKinnon from BMO Capital Markets. Please go ahead.
Yeah, thanks, and good morning. 2 questions here. The first, just really about Sonnet. I think you used to have a 2023 breakeven outlook, then moved out to 2024, given the Alberta situation. Is there any potential for this 2024 year-end breakeven for Sonnet to be pushed out any further?
Good morning there, Tom. It's Rowan. Look, I think as far as Sonnet's, you know, continuing, it, it's moving along the way we would have anticipated. You know, we did, as far as, a year ago, kind of say that the targeted breakeven would be at the end of 2024, and that was really driven at the time, mostly about the inflation period in the first quarter, where we were and the changes to the, to the macro auto kind of cycle. And so I guess, you know, that, that issue and the Alberta issue, which, you know, being 25% of Sonnet's auto portfolio, and it was actually a larger percentage, at the beginning of the year than that, is certainly not helpful, you know, to Sonnet.
But there's a number of actions that we are working with the regulator on as far as that product and province is concerned. But outside of that, you know, what we are seeing is, you know, Sonnet's still on its path to profitability. We're focusing on margin and overgrowth at this stage of the business. You know, shaping the portfolio into higher quality segments, particularly all the work we've been doing on Definity. An example is Definity in Q3 grew 27% year-on-year. So that shows you, you know, that traction that is gaining lots of traction. It's now in aggregate over 25% of the total, you know, portfolio.
And so there's no change in our, in our kind of guidance there, to, to the Sonnet kind of outlook at this stage that we, that we have. You know, if there's any kind of caveat we have around that, it really just depends on our outlook for 2024 with respect to Alberta. You know, if we, if we can find a, a good solution to go forward, then I think nothing changes really in our guidance. If we have to take a more extreme action, then we'll have to reflect on the implications that that has. But, but overall, it's still, you know, trending the way we had expected it to be, by and large.
Yeah, and then thanks for that. And then the second question, given that, I think your tone was that the regulatory approval has not been any hindrance to looking at deals, I wonder if you can share with us what you're seeing out there with respect to broker acquisitions or the acquisition of an insurance company, pricing trends within that. I suspect the broker acquisition that those are becoming increasingly expensive. Any flavor or any comments you can share with us with respect to what you're seeing in the marketplace in terms of pricing of potential deals or availability?
Yeah, and look, we are active. You know, Tom, that's part of our, our strategy. And, you know, it probably wouldn't surprise you that there's more activity on the, the broker side than there is on the insurance carrier side. I think, our thesis is that there will be more opportunities, for consolidation on, on carriers, you know, over time. And we think some of the market pressures, and things like a tighter reinsurance market, things like greater broker expectations for interfacing on technology, importance of scale, is all leading in to, you know, we think an environment where we will return to more of a normalized, you know, consolidation. And as you know, over time, the industry typically, trades a consolidated by a couple of points of market share. So, you know, we're active.
We have a very experienced Corp Dev team, and we will see and update, you know, when we can, on that one. I think on the broker side of things, you know, this is clearly a big part of our strategy that we've deployed, you know, this year. We've been successful in deploying capital. We like this business because of the stable, high margin, you know, earnings. We also like it because it gives us access to a high-quality portfolio. So as an insurance company, you know, we get two streams of income, both the distribution income plus the underwriting income, and you've seen that actually starting to help the stability of our earnings. So good earnings diversification. In terms of your comment about, you know, pricing, I think it's pretty stable now.
But certainly that's what we've seen, you know, through this year, there doesn't seem to be a tremendous big difference direction up or down of these levels. I would say that the valuation of high-quality brokers is certainly elevated to what they would have traded for a few years back, but it certainly seems stable, and I think it is very much dependent on the quality, you know, of the assets. And, you know, the assets that we've been successful in adding to our broker platform are all top-line assets. They're all very profitable. They have been very sizable, and of course, you have a scarcity issue around those quality businesses.... I think that that trend is going to continue, and I would say we are pleased that our proposition is resonating.
You know, we have not been the high bidder in the transactions we've done, partly because, you know, it's a really unique solution that we bring into the marketplaces. And, you know, that continues to have a healthy pipeline. And in fact, we've, you know, McDougall has done a couple small deals in the quarter, and, you know, that's going to continue. I think that programmatic, smaller bolt-on, trend, is finding quite a bit of interest in the marketplace. So I think we're quite optimistic in terms of continuing to build that channel out. You know, we were really pleased of how much progress we've made this year. I mean, you know, when we first acquired McDougall, we'd hoped to double that over a, you know, five-year period.
We've pretty well done that faster than we thought, and we see, you know, good opportunities in that area. And again, we think this is also very, it's definitely accretive to us and very supportive to driving us into our targeted operating ROEs. So we like that, we'll continue with that, but of course, we're still very focused on insurance carriers as well, which we know we need to do to, you know, get ourselves up to that top 5 ambition. So more to come when we can.
Yeah. Thanks for that answer. Appreciate it.
Welcome.
Thank you. The next question is a follow-up from Paul Holden from CIBC. Please go ahead.
Thank you. Thanks for taking my, my last question. I just want to drill down a little bit more on the overall picture for personal auto. I think it's important just given your commentary around Alberta and the obvious challenges there, particularly for Sonnet. And I guess really what my question is, sort of putting together, you know, the premium rate earned you've highlighted versus the claims inflation for the total portfolio and then the drag on Sonnet volumes from Alberta. Is it correct to assume that the overall outlook for underwriting income for all of personal auto is still positive despite the headwinds in Alberta?
Yeah. Thanks, Paul. It's Paul here. Yeah, I think, again, a pretty good description of the outcome, as Rowan had mentioned, with our earned rate increasing toward the end of this year. And actually, it continues to increase into next year. So not only does that crossover period occur at the end of this year, but then we expect that continuation of the earned rate to offset the trend and make up a little bit for that Alberta drag. Of course, as we've said before, the Alberta drag is not finalized, the degree to which it may be or may not be contributing, simply because the regulation or the direction that's come out recently hasn't finalized all the details.
So we're going to continue to work with the regulators and with the government in Alberta to understand the real implication to the portfolio. But, you know, this has been going on for the better part of this entire year, and what we've been doing is proactively managing our portfolio to adjust for that. So we haven't stood still. We've redirected assets and capabilities to other provinces. We've continued to focus very much on our commercial and personal property lines. And so we look at this as an entire portfolio. You've asked specifically about personal auto, exact same thing. We have operations in most of the provinces, and we manage this actively throughout the provinces and with the inclusion of new products, such as our UBI Sonnet Shift product, which I've mentioned in previous quarters.
So we'll continue to actively manage this portfolio, adjust accordingly to the Alberta scenario, and maintain our guidance around profitability in this portfolio.
Yeah. Thanks for that, Paul. That's great. And I think, you know, the way I would kind of summarize that, you know, Paul, is firstly, you know, you take into consideration the size of Sonnet Auto. It's not huge, but it is running at an underwriting loss. And so as, you know, we contract that line of business, effectively, the size of the loss reduces. Then on top of that, you build on Paul's comments, which is rate earning and premium growth, you know, you know, picking back up. It's clear to us that the question about, you know, will the earnings in the auto portfolio, you know, improve going forward? Absolutely, it will. You know, we're past the trough, and our personal auto will become a bigger contributor again to the portfolio.
Thank you. I think that's, yeah, I think that's a very important point. Okay. Thank you for that.
Thank you. There are no further questions. I will turn the call back over for closing comments.
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