Good morning everyone, and thank you for joining us today. As society continues to navigate the shift from a pandemic to an endemic disease, at Intact we remain focused on being there for customers in both good and bad times, protecting our employees in an evolving work environment, and helping to build a resilient society that can grow and prosper. Our ability to do all this is largely due to the momentum in our business and the resilient and strong performance we continue to deliver. This last quarter was no exception. Yesterday evening, we announced that third quarter net operating income per share of CAD 2.87, a 3% increase over Q3 last year, driven by strong underwriting and distribution results with upper single-digit accretion from the RSA acquisition.
With our operations performing really well, a strong balance sheet, and a favorable outlook for capital generation, we're pleased to increase our quarterly dividend by 10% to CAD 0.91, continuing our 16-year track record of annual increases. Top line growth of 68% was obviously driven by the acquisition of RSA, but with approximately 7 points of organic growth reflecting strength in commercial lines across all geographies. The overall combined ratio is solid at 91.3, despite including 7.5 points of CAT losses, double the expected level. Following several severe weather events in the quarter, our teams moved quickly to get our customers back on track. Now let's look at our results by line of business, starting with Canada. In personal auto, premiums grew 27% year-over-year with 1% organic growth.
The combined ratio was again strong at 85.1%. Our personal auto business is solid, and it's well-positioned to operate at the lower end of mid-90s as we integrate RSA. Looking at the industry, we expect muted premium growth in the near term until driving patterns return to pre-pandemic norms. In personal prop, premiums grew 34%. Organic growth was healthy at 5%, driven by firm market conditions, which we expect to continue given the challenges that weather and climate change present. The combined ratio of 93.5% is right in line with our view that this segment should operate sub-95s even with severe weather. In commercial lines, premiums grew 33% in the quarter, including eight points of organic growth. The 91.2 combined ratio was strong, reflecting our profitability actions over time. Looking at the industry, we see hard market conditions continuing.
Our Canadian commercial lines business is well positioned to deliver low 90s or better performance going forward. Moving to our UK&I business, the first full quarter added CAD 1.3 billion of premiums to our platform in line with our expectations. The combined ratio of 93.9 was solid and included 10.3 points of CAT losses, approximately six points above expectations. Personal lines with a 97.9% combined ratio is clearly an area of focus for the team. We already have action plans in place. In commercial lines, the 90.5% combined ratio was strong. Overall, the UK&I business is in a good position, and we're focused on building sustainable outperformance. Looking at the industry, we see softness in personal lines in the U.K. ahead of reforms next year, while the commercial lines environment is hard.
In our U.S. commercial business, premiums grew a very strong 21% in the quarter, with hard market conditions and solid new business contributing. The combined ratio at 92.8% was solid, despite including four points of CATs. This business has very good momentum and the U.S. team is executing on its objective to deliver sustainable low 90s performance. Turning to our RSA acquisition, which we closed in June, the integration and transition are on track across the board. In Canada, nearly all of our RSA colleagues have been onboarded into our HR platform. There's strong traction and engagement with the brokers and affinity partners, which further solidifies our outlook on volume retention. Policy conversions in Canada are well underway and we're on track to begin to shut down systems in 2023.
We're also integrating our claims operations and leveraging our supply chain capabilities to deliver a strong customer experience while realizing synergies. In the UK&I segment, it's all about building out performance. There are three near-term areas we're focused on. First, for personal lines, we've already launched initiatives to increase pricing sophistication and to be ready to compete as pricing reforms come into effect in 2022. Second, in commercial lines, it's about growing in the segments where RSA has already a sound and high-performing offer. It's about building on our strength. Great example is the mid-market in the UK. At the same time, we're tightening our focus in areas where the economics are not stacked in our favor. The third area we're looking at in the UK is to simplify the business operating model and the technology platform to increase agility and help deliver on our outperformance.
On global specialty lines, there's been strong collaboration and engagement across regions. Intact's onboarding into RSA's global network has commenced, which brings in-house the ability to support global customers. Finally, we're spending considerable time assessing the potential capabilities for global franchises, and I've identified opportunities to leverage our expanded scale and expertise to drive meaningful outperformance. Alongside the RSA integration, our teams continue to advance our strategic roadmap. Distribution earnings have become a significant contributor to our outperformance and growth, with EBITDA compounding at over 20% over the last five years. We expect the momentum to continue in 2022 and as we continue to build scale in Canada. In August, BrokerLink acquired Archway Insurance and South Coast Insurance, doubling our size in Atlantic Canada and becoming one of the leading East Coast brokers.
In our direct business, belairdirect has evolved our offer to create a simplified insurance experience for customers by reducing the number of products, forms, and rules by over 50% in the last two years. Our coverage is now easier to understand and coupled with the improvements to our apps to drive digital engagement yields a better customer experience and has driven our industry-leading direct distribution expense ratio to below 20%. The significant CATs experience in this quarter act as a reminder that our customers are facing the devastating impacts of climate change right now. Globally, the last decade was hotter than any period in the past 125,000 years, and Canada is heating at twice the global average. Society's collective efforts to transition to net zero carbon emissions are critically important.
At the same time, we must double down on adapting to the current extreme weather impacts of climate change. This requires an approach that includes government, NGOs, businesses, and individuals. At Intact, we've invested in community efforts to help get critical projects off the ground, including through our significant investments in the Intact Centre on Climate Adaptation. Our investment team recently joined Climate Engagement Canada, an initiative that drives dialogue between the financial community and corporate issuers on climate change risks and opportunities. We're taking important steps to transition our own business to net zero. These clear actions will ensure that we can help society better protect our customers and win in the marketplace. In support of this, I've just wrapped up a few days at COP26, the United Nations Climate Change Conference in Scotland, as a member of the Canadian delegation.
It's our goal to help build a clear roadmap to future-proof society. In conclusion, momentum across the business is very strong and the RSA acquisition has significantly advanced our strategic roadmap on all fronts. Our ability to deliver strong results, react quickly when weather events happen, and make strong progress on the RSA integration and our broader strategic agenda would not be possible without our people. I want to thank them for their continued engagement and collaboration. As we set our sights on 2022 and beyond, we have a clear focus on what we want to achieve.
That is to provide second to none customer experience with an engaged workforce and to continue to deliver on our financial objectives to grow net operating income per share 10% annually over time, and to outperform the industry ROE by 500 basis points every single year. With that, I'll turn the call over to our CFO, Louis Marcotte.
Thanks, Charles, and good morning, everyone. We delivered solid results again this quarter despite heavy CAT losses well above our expectations for a third quarter. I'm very pleased with the performance of all of our operations, delivering a 91.3 combined ratio and net operating income per share of CAD 2.87. These results include RSA's Canadian and UK&I operations, and as expected, the acquisition was immediately accretive, contributing 8% to our Q3 net operating income per share. Underwriting income grew 15% to CAD 426 million, compared to a very strong Q3 last year, as robust performances across all segments continued to reflect the benefits of our actions over time. As expected, prior year development was healthy at 2.6% of opening reserves.
We continue to expect favorable PYD in the 1%-3% range in the long term, but at the upper end of this range in the short term. Net investment income of CAD 191 million increased by 34% year-over-year, driven by the addition of RSA's investment portfolio. We expect a similar level of net investment income in Q4. Distribution EBITDA and other income continued to outperform our expectations, growing an impressive 30% in the quarter, driven by higher variable commissions as well as solid organic and M&A growth. Keep in mind that these earnings are partly offsetting the elevated variable commissions in our Canadian expense ratio. Looking ahead, we expect growth for the fourth quarter to be in the mid-teens following a strong Q4 last year.
For 2022, we expect EBITDA to surpass the CAD 400 million mark on the back of continued momentum in the business. Looking at underwriting results in a little more detail. First, the Canadian segment. In personal auto, the underlying loss ratio of 62.5% remains strong, slightly increasing in the quarter to reflect an uptick in driving activity. Our telematics data suggests that kilometers driven are nearing pre-pandemic levels, but claims frequency remains below historical averages. Favorable prior year development was healthy at 4.7%, reflecting reduced uncertainty around claims patterns during the pandemic. In personal property, the 93.5% combined ratio reflected 17 points of CATs, which is 10 points higher than expected. This was offset by a weather driven 4.4-point improvement in the underlying loss ratio and higher favorable prior year development.
Looking at commercial lines, high single-digit organic growth is driven by rate momentum in what continues to be hard market conditions. The underlying loss ratio of 50.6% was very strong as the benefits of our profitability actions continue. The overall expense ratio in Canada increased 2.2 points to 32%, largely driven by a high level of variable commissions following continued strong underwriting performance. The addition of RSA had a positive impact on the expense ratio thanks to a higher proportion of direct business and the benefit of synergies. Overall, our Canadian business performed very well despite heavy CAT losses. The addition of RSA's Canadian segment had a slightly positive impact on the combined ratio in the quarter. We saw solid performances in personal lines while commercial lines saw a fair bit of non-weather-related CAT losses.
In the U.S., our business is doing very well both from a top and bottom line perspective. Rate momentum continues to be strong in favorable market conditions. Our 93% combined ratio after nine months is aligned with our low 90s expectations after considering excess CAT losses. Turning to the UK&I, I'm pleased with the first full quarter of results. If we normalize the reported combined ratio for excess CATs, we are ahead of expectations thanks to benign non-CAT weather and fewer large losses. It remains early innings, and although it has only been one quarter, we like what we see thus far. We expect this business to run sub 95 in the near to midterm.
IFC's earnings per share for the quarter was down close to 30% due to RSA-related integration costs, as well as the partial sale of shares and impairment losses related to a venture investment that IPO'd in Q1 of this year. After considering the CAD 273 million gain recorded in Q1 and realized losses and impairments this quarter, we are left with a net gain of CAD 69 million on this investment. Our remaining position in the stock today is minimal. As we near the one-year anniversary of the announcement of the RSA acquisition, our view of the financial merits of the transaction remains very compelling. We delivered high single-digit accretion after four months against a strong standalone performance of IFC.
We delivered CAD 24 million in earned synergies year to date and are tracking towards a CAD 85 million run rate by the end of 2021. I'm confident we can beat our CAD 250 million target within 36 months, and this is without reflecting any risk selection improvements to the loss ratio. Finally, we've agreed to an exit of the Danish business on favorable terms. When considering all of these elements, we see the IRR of the RSA transaction tracking near 20% above our initial calculation. Moving to our balance sheet, it's been a busy quarter. Our teams have been working hard to combine our asset portfolios, migrate the asset allocation towards our optimal mix, and at the same time, capture opportunities in the market.
We have also been successful at refinancing of some of the U.K. capital instruments into Canadian debt instruments with positive impact on our financing costs and capital structure. Finally, we have de-risked our Canadian pension plans by purchasing annuities representing approximately a quarter of the total Canadian pension obligations. Our financial position continues to be strong. We close the quarter with approximately CAD 2.7 billion in total capital margin, a healthy buffer to absorb potential shocks, reflecting strong regulated capital ratios in all of the jurisdictions. Our debt to total capital ratio was just below 24% at the end of the quarter. Most of the proceeds from the sale of Codan Denmark will be used for deleveraging. The remainder will be used for growth opportunities or buybacks as per our well-established capital management framework.
We expect to reach our debt to total capital ratio target of 20% well ahead of the initial objective of 36 months. The strength of our results over the past year has led to an operating ROE of 18.3%. With the acquisition of RSA and the progressive return to normalcy, we expect our operating ROE to migrate towards a mid-teens level.
Given the pace of earnings growth, further bolstered by RSA's earnings and synergies and the strength of our balance sheet, we have increased our dividends by 10% this quarter, and we expect to resume our usual dividend increase announcement at the Q4 earnings release in February 2022. As society cautiously moves towards a post-pandemic new normal, our priority remains delivering on our strategic roadmap. With the RSA integration well on track and strong earnings momentum supported by favorable market conditions, we are well-positioned to emerge from this pandemic with continued strength and outperformance. Together with RSA, we have a highly resilient platform with significant growth potential, and I am confident in our ability to continue to create value for our shareholders. With that, I'll give it back to Ken.
Thank you, Louis. In order to give everyone a chance to participate in the Q&A, we would ask that you kindly limit yourselves to two questions per person. Of course, if there's time at the end, you can certainly re-queue for follow-ups. Michelle, we're now ready to take questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the 1 on your telephone keypad. If you would like to withdraw your question, please press the star followed by the 2. Please stand by for your first question. Your first question comes from Paul Holden of CIBC. Please go ahead.
Thank you. Good morning. Wanna ask first off, maybe you can dissect a little bit more the trends for personal auto, just in terms of, frequency and severity. I guess there's some particular concerns around severity trends, for the industry. Maybe you can address that and how you're thinking about that, going forward.
Thanks, Paul. I think that's an important question. You know, driving is definitely very close to normal, if not at normal. Patterns of driving, though, are different. Maybe I can ask Isabelle to share her perspective on what we're seeing from, you know, a driving point of view and to a certain extent, you know, frequency. I think more importantly, maybe Patrick can give us perspective on what we're seeing from a severity point of view in claims. We've been on that for years, as you know, and Patrick will provide his perspective. Isabelle, why don't you kick this off?
Sure. In terms of driving and frequency, driving stays close to about 5% below historical average for a few weeks now, but we still see fluctuations week over week and one region versus the other. Frequency is also still below pre-pandemic level, but it has been at its highest since the start of the pandemic entering into September. We're following a lot of mobility indicators, both internally and externally, and all those indicators are showing consistently higher driving in 2021 versus 2020. What we see also is that return to the office weekdays congestion, especially the morning rush hour and public transit indicators are steadily increasing since the end of the summer, but we see it's taking a bit longer than anticipated to return to the pre-pandemic levels.
We believe that's what is explaining in part why frequency is still below historical levels, even if the driving is pretty close. As people continue to return to the office in the coming months, we expect the driving activity to continue to rise, and we'll be following that very proactively to adapt our strategy. That's what we see in terms of-
Thank you. Yeah. Thanks, Isabelle. Patrick, I mean, we've been observing inflation in personal automobile for some time. Why don't you share with us what you're seeing now and what was there before, maybe?
On the severity side, it's important to take into account, as you pointed out, Charles, some mitigating actions that we've been taking, as well as some offsetting factors that we currently observe in the supply chain. In severity, first of all, it's important to mention that on the injury side, we see no severity increase there. This is reflective of our prudent approach in reserving since the start of the pandemic. On the short tail line, so the physical damage, we do see a 5% increase in severity when we compare Q3 this year versus same period last year. It's driven by two main factors. The first one, Isabelle talked about the driving habits that create less concentration of driving in the rush hours, especially in the morning.
That creates proportionately more severe accidents. There's less of the small bumper claims in the mix, and that in itself is driving about three points of that overall 5% increase in severity. The remaining 2% continues to be driven by the technology in cars. When we say that, we mean that the parts are costing are higher, but also the complexity of the repair process that create more costs. We've identified that at least three years ago and have started to implement mitigating factors in the way we handle the claims as well as in pricing. You know, there's a lot of indicators on the price of new and used cars.
We see as well here in Canada, double-digit inflation on market values on these cars and even higher figures in the 20s for some makes and models. This is where we have some important offsetting factors. This has very limited impact currently on our severity, the severity of our claims. Because, you know, when a car is declared total loss, which is when we have to replace the car, buy a new one or a used car, we sell the damaged car for the parts. We've seen significant increases there in the recoveries. Net-net on the total loss, when I look at Q3, the total loss severity is actually slightly down in Q3 this year versus last year. We're reflecting these trends in our actions.
We continue to leverage the tools that we have to mitigate some of it. This is why when we look forward, we say this business is well positioned to operate in the lower part of the mid-nineties on a go-forward basis.
Thank you. Thanks, Patrick . That work for you, Paul?
It does. It's very, very helpful. I mean, partly given that answer, what I wanna ask is a bigger picture question. Louis just said that your expectation is for the ROE to migrate back down into the mid-teens, which has been your long-standing target. I would ask today, given increased scale advantages, the investments you've highlighted that you've made in the business over time to increase your competitive moat, and then just more favorable earnings mix, I would argue over time, like, why isn't that ROE objective pushing to something a little bit higher?
Yeah, Paul, the objective is to outperform the industry's ROE by at least 500 basis points every year. We've built out clearly our leadership position in Canada and the strengths we've invested in, namely pricing, risk selection, claims, supply chain management for the past couple of decades, are driving the outperformance. Keep in mind, you know, we're building a business in the U.S., and I think the U.S. team has done a great job to create outperformance over a four-year horizon, and I'm very pleased with the trajectory there. I think in the U.K., you know, we need to build outperformance. As such, you know, when I think about the objective, there's a lot of momentum in the organization. No doubt about it. We've invested in our strengths.
The sandbox in which we're operating is bigger, and we need to create outperformance across the platform, and that's what we're focused on. Louis, I don't know if you wanna provide additional color here, but you know, not going to guide towards a point estimate. Louis.
Yeah. Maybe, I think if you listen to the guidance in terms of long-term expectations for the combined ratios as we get back to normalcy, that tends to migrate towards the mid-teens ROE. That's consistent. I think we're trying to guide everyone here into the guiding or the gliding of our ROE towards that mid-teens level compared to where it is today. The other dimension we need to keep in mind is the NOIPS growth objective as well. We got to balance a bit the two here. I think the mid-teens target that we're aiming for is consistent with the NOIPS growth target that we're trying to achieve as well.
Okay. Fair enough. I'll leave it there. Thank you.
Your next question comes from Geoff Kwan of RBC. Please go ahead.
Hi, good morning. You know, you've had this dynamic now where the pandemic's helped the claims ratio, and that in turn has increased your expense ratio from the higher variable commission, and which has also resulted in higher distribution income. My question is, relative to the pre-pandemic levels, like, what has been the net impact on the ROE from these different variables?
Thanks, Geoff. Well, first of all, the expense ratio is up, you know, not down because of variable commission. That's the first point I would make. I think that, you know, as you think through what we've done in the pandemic and you go back to March 2020 when the pandemic started, we put in place right at that moment, a relief program that was risk-based and needs-based, and provided our customers close to CAD 650 million of relief effort. You know, a big portion of that has been earned already, you know. Beyond some of the relief provided, rate adjustments where appropriate, again, based on a risk and on a needs basis.
It's also important, Jeff, to keep in mind that we've put up in commercial lines north of CAD 100 million of reserves for pandemic. You know, in balance, at this stage, if you take a long-term perspective, the net benefit is there's no real major net benefit here, given the relief we've provided, given the impact that the commercial lines cost of COVID has been and some of the rate adjustments that have been put in place. Louis, I don't know if you want to provide additional color on this front.
Well, I would say the variable commissions are up. Keep in mind they're a bit sharing some of the benefits we have from the better combined ratios. Then we get some of it back through distribution.
The net effect of the higher CPCs is largely offset by the distribution income. It leaves a net benefit of just the better performance net to us, and that's positive to the ROE. It's clear. We have not necessarily tried to match the exact ROE benefit with that dynamic. Given the strong combined ratios we've delivered despite higher CPCs, that's positive. We capture the distribution income in our ROE calculation. I think net-net it's positive. It's just I wouldn't be able to peg a number specifically to the pandemic portion of it.
Okay. Just my second question is just as we're starting to see more growth in terms of sales of electric vehicles, you know, what sort of work or what have you done to give yourself comfort around appropriately pricing auto insurance policies for EVs to avoid, you know, negative surprises down the road?
Yeah, it's interesting, Jeff. First of all, it's not a big portion of the car pool. I'll just say that. Second, there's a very different profile in terms of claims, both frequency and severity, within the electric vehicle category, where the patterns are very different for the more expensive electric vehicles. It's hard to generalize. I'll ask Isabelle to share her perspective on that because she's pricing for these differences.
Yes. We've thought about in the past our pricing segmentation that is quite precise with machine learning, but also with the data we have internally. Despite the electric vehicles being a small proportion of the pool of vehicles, we're working with our claims colleagues to look at the data we have, and we price each make, model, and year individually, and that include the electric vehicles as well. We're able to be very segmented in our pricing to reflect different types of costs we may have for those vehicles, and that's what we've been doing in the past and continuing to do the more we get information and data on those vehicles.
Okay, thank you.
Your next question comes from Michael Phillips of Morgan Stanley. Please go ahead.
Thanks. Good morning, everybody. First question is on casualty loss trends. I guess, what are you seeing today there, and what do you think? Where do you think that's headed over the next year or so? And how does that differ for your U.S. business versus your Canadian commercial and casualty business?
Yeah. Thank you. Again, another pattern we've been on for a number of years. I'll ask Darren to share his perspective on that. Maybe Patrick, you can chime in if there's anything to add.
Yeah. Thanks, Mike. I mean, you're right, relative to one. This is one that we've been watching for quite some time around social inflation, both in Canada and in the U.S. Social inflation is not a new topic for us. It's not incrementally increasing. That's not our observation at this point in time. It clearly is more relevant though for our U.S. operations than our Canadian operations, where our book in the U.S. is more heavily skewed towards casualty-type exposure. So it's very much relevant to the U.S., so we're watching very carefully. I mean, it exists, it's in place, but nothing of material concern.
In fact, if I look at sort of our loss trends that we have in place at the moment in the U.S. relative to the rate that is flowing through the book, we have a meaningful gap at the moment between our loss trends and our rates that are flowing. We're quite comfortable from that standpoint. From a Canadian standpoint, obviously, we've been watching this one quite some time. It's obviously been very, very relevant on the personal auto side that we've been fighting, obviously, in terms of longer tail coverage for some time. Obviously, on the commercial side, it's more property influenced compared to the U.S. But nonetheless, we're still watching very, very closely social inflation.
Similar to the U.S., nothing material, no real sort of net change in the environment of late. Again, there-
I think the
We're also still continuing to push quite strong rates as well. Then obviously lastly on the U.K. as well too, very similar from a Canadian standpoint, strong rates, watching both property inflation, social inflation, but good margin versus loss trends at the moment.
I think on the U.S., the point, there's a few points that need to be made. First of all, the duration of the liabilities in our U.S. book is actually very short. It's less than in the Canadian book. It's a little more than two years. That's the first point. The second point that I would make is when we bought the U.S. business, we've shut down three lines of business, you know, in the months following closing. The lines of business that we've shut down are the lines of business that have been most impacted by casualty inflation in the U.S. We saw that.
We had, I think, a reasonable read on older accident years development and felt that we couldn't compete in a number of sectors, whether it's healthcare, whether it's architect and engineers programs, and so on, and we exited these lines. I would say, you know, our footprint in the U.S. now actually looks really good, short tail, and we have a few lines of business where we're going through, you know, a curtailing of the portfolio lines that are under profitability improvement, and they would be lines that have been more exposed to casualty inflation. We've been working on these lines for three years. These would be lines we have not exited, stayed in. We feel we have a good shot at winning, but we're working hard on the inflation there.
Patrick, do you wanna share your perspective from a claims perspective?
Yeah, very much aligned with what was already shared. Maybe the only additional point I would make is we have a competitive advantage in the way we handle casualty claims. We have a team that will reach with the internalization of RSA about 600 lawyers and law professionals that handles more than 80% of these claims internally in Canada, and we've started two years ago to internalize a portion of the U.S. as well. I think that helps us manage these trends, but also understand very well the driving forces and where it's happening.
Yeah. Very good point.
Okay. Great. Thanks very much for all the details. Thank you, guys. Second question would be a little more higher level kind of industry, maybe possible question, but how it relates to you guys. In the past year, we've heard more, certainly in the U.S. of desire for OEMs to offer insurance, whether it's GM or Tesla or whatever else. How do you think about that? Is that something that you see there? If so, to what extent, and is that more of a threat to you guys or an opportunity in partnerships, or just how do you think about that trend?
You know, Mike, we've been focused on disruption potential for over a decade. That's a theme that we've been focused on, which has shaped really many of the actions that we're taking today. Our perspective back then was, and it's still very much the case, that disruption will take place at the distribution level more so than at the manufacturing level. That's our thesis at least, or that's the basis on which we operate. I would say OEMs would be potentially one of those elements that could disrupt distribution. You know, have we seen anything concrete meaningful at this stage? No. We're certainly prepared for that. It's really hard to manufacture a P&C product, quite frankly. Pricing, risk selection, claims management, prevention, and so on is hard to replicate for players.
The OEMs, as you know, in particular in the U.S., have been in that business before and largely got out over time. Doesn't mean they can't come back, but it's not clear to me that this is the most prevailing threat. Anything that can disrupt this distribution of the product, we're focused on. What have we done about it over the last decade? Well, in retail, we've built the strongest brands in the marketplace in which we operate. We wanna make sure that when Canadians think about P&C insurance, the first two brands they think about are Intact Insurance and belairdirect. The second thing we've done is we tried to digitize our distribution footprint and our customer experience. As you know, we've invested in digital for many years, seven, eight years aggressively.
The other element that we've done is we've built our own distribution arm with BrokerLink, which, you know, which is north of CAD 3 billion dollars of revenue. We have partnerships with a number of consolidators. It is contributing to our earnings while it's creating strategic optionality, which is really good. Then invested in ventures as well to make sure that we were in the flow of this, of disruption. I think when I put all that together, we remain hypervigilant about disruption and distribution, but feel like we've got many toolbox or many tools in the toolbox to deal with that. Now, if you start from the premise that disruption will take place at the distribution level, then as a manufacturer of the product, you wanna make sure that you're second to none.
That's why we've invested heavily in our predictive power capabilities, in expanding our dataset in AI. That's also why we've invested aggressively in the claims operation to make sure that we manage claims ourselves, to make sure that we're deep in the supply chain, so that when people wanna disrupt distribution, they wanna make sure that Intact is on board. From a manufacturing point of view. We're you know, preparing for this. OEM, I think, is just one of potential disruptors in distribution, but we feel that we've created good optionality in the organization and built strong competencies to fight disruption if and when it comes.
Charles, thank you very much for that.
You're welcome.
Your next question comes from Jaeme Gloyn of National Bank. Please go ahead.
Yeah, thanks. Good morning.
Morning, Jaeme.
First question, still in personal auto with driving seeming to begin to normalize and severity a little bit higher. Can you talk about the timing for when you might start to think or even or maybe you are in the process of filing for rate hike approvals in various provinces? Can you just sort of talk us through where you are on that stage?
Yeah. Isabelle, why don't you share your perspective on that. Maybe talk a little bit about seasonality as well in personal automobile, which I think is relevant for people to assess the sort of run rate and where this is going.
Yes. As you mentioned, driving is normalizing, but there are still a few things that continue to evolve and we're really focusing on following those trends. Frequency remains below historical level because people are still readjusting their driving habits, and we've been proactive throughout the whole pandemic to follow this and readjust our rating strategy accordingly. It's not only that we made one move in our rates and that we're waiting for the new norm to adapt. We've been continuously adapting it throughout the situation. That's maybe one point to clarify. We also see, as Charles mentioned, seasonality in the auto lines of business that have impact on frequency. We're entering into the fourth quarter with the winter period where we can see spikes in frequency that are related to weather events.
Just to give you a perspective on Q4, we expect around three points of unfavorable seasonality relative to personal auto lines of business. That's also something that we'll need to take into account. A bit like Patrick mentioned, on the severity side, while we've been at this for many years now, we also need to make sure that we follow the trends and readjust to the new norm that may comes out from the pandemic. All that to say that we've been quite active during the pandemic to adjust our rating strategy to this.
We're continuing to be very proactive and in communication with regulators on what we see to make sure they are aware of our relief efforts, of our strategy as well, and the gradual approach we wanna take going forward to reflect the new normal.
As I said, Jaeme, at the start, you know, we provided a fair bit of relief as a one-time relief payment to Canadians. Done the same thing in SME. Adjusted rates where we felt that driving patterns would be different for an extended period of time, but we've done it in a way where we can react very quickly from a pricing point of view should driving patterns shoot up. We did not put ourselves in a position whereby you price 12 months out and then three, four, five months into your pricing cycle, driving has shot back up. The regulators, I think, have been constructive in this process, understanding that this environment is very, very, you know, it's a new zone, and as such, we've created optionality.
We've given a lot of relief so far, but not all through rates, some of it, as I said, through, you know, one-shot payments, 'cause we felt rating is tricky here because you price for 12 months and the world is changing.
Got it, understood. Second question is on the U.K. performance in this quarter. Looks good on the combined ratio, but I wanna focus in on more on the premium side of the equation. Looks like flat in personal and reflecting hard markets in commercial. I was just hoping you could give us a little bit more color and frame how premiums look this quarter versus the industry growth rates, and then frame some of the dynamics that are at play and how we should expect premiums to evolve in both personal and commercial lines in the U.K.
Yeah, high level, I mean, look, it is early, you know. Since closing, what have we done? I've talked earlier in my remarks in terms of putting action plans to improve pricing and risk selection. Okay. That is critical as far as I'm concerned to create outperformance in the U.K. The team has built a lot of good momentum. These results that you're seeing this quarter are not the product of the actions we've put in place this quarter. They're the product of the work of the team over the past few years. First point, pricing risk selection improvements. Second point, rationalizing the footprint of the organization. We wanna make sure that we play where we can win, and we wanna make sure that we play where the economics are favorable to us.
There's a number of elements across the platform in both personal and commercial lines at the moment where we're trimming positions in certain distribution relationships and so on. And then the third element that is coming is the pricing reforms in personal lines in early 2022, that one needs to take into account. There's a big dislocation at the industry between new business pricing and renewal pricing, new business pricing being lower than renewal pricing. The regulatory change, which I think is quite good, will level up new business and renewal pricing. This will create, I think, opportunities in the marketplace. But the personal lines environment in the U.K. in certainly in the first part of 2022 will likely be quite dislocated. When you put all that together, I see a couple of things.
In commercial lines, you're in a healthy hard market environment. We're curtailing our position in certain segments, but I do expect healthy growth in that line of business and an expansion, you know, of our margins there in commercial lines, not inconsistent, I guess, with where we are in the cycle in relationship with the inflation, both in Canada as well as in the US. Personal lines is a whole different ballgame for the three reasons that I've mentioned. You know, we are curtailing the footprint, we're bringing pricing improvement, and then there are the reforms and the team's perspective, and they've been very disciplined this year. That's why you're not seeing much growth in personal lines. We're just not dancing with the market gyration here. We have our eyes firmly focused on the combined ratio.
We have our eyes on creating outperformance, and I do expect that we won't see much growth in personal lines in the near term as regulations work through the system and as performance improvement measures roll out in personal lines in the U.K. There might be growth opportunities as a result of the reforms, and if there are, we'll be there to capture them. We are in a moment where we wanna make sure we're positioned to create outperformance, and as such, I wouldn't bank on rapid growth in personal lines in the near term. Thank you.
Your next question comes from Brian Meredith of UBS Securities. Please go ahead.
Yeah. Good morning, Charles.
Good morning, Brian.
A couple questions here for you. I just wanna dig in a little bit more on the physical damage severity in personal auto. Appreciate the answer with respect to used car prices up, but you're selling the scraps obviously for more money, so that helps offset it. That also would imply that parts inflation is potentially a pressure on severity as well. Are you seeing that from parts inflation as well as other supply chain issues like getting cars fixed and back on the road, additional rental car prices, those things? Are you seeing that? I guess this as a follow-on to that, does Intact have things in place to help mitigate that and kind of have an advantage over the industry, you know, in mitigating the severity?
Yeah. You know, I think it's really good to go one layer down, Brian, 'cause you're right. There's stuff happening in the supply chain that is changing the mix a little bit, and I'll let Patrick provide his perspective, you know, on labor and the state of the repair industry. Probably worthwhile, Patrick, going back on a number of the measures we've put in place two, three years ago to deal with the inflation that we've been focused on in physical damage, just to give a sense to Brian of the advantages that we have from a claims management and a supply chain management point of view.
Right. Brian, on the parts side, in Canada so far, we don't see a ton of disruption in terms of availability of parts. For sure, like many other industries, this industry is facing a hard labor market and but so far it hasn't had a ton of impact on our costs. The frequency overall being lower, and the way we approach our Rely Network, so we have good capacity within our preferred providers. So that I think is one of the key advantage that we've built over the years, and we have good capacity not only for current levels of frequency, but even as it returns towards normal. That's one, I think, key important aspect.
On the used car parts, there's a portion of the salvage I focused on selling the salvage cars for parts.
There's also an auction process where some of these cars are actually bought and repaired because of the demand in the. It's not only all of it used in parts. With regards to some of the other advantages and actions that we've taken, a big portion, an important part of what we've done in the past two, three years is leveraging our data and deploy it to the front line of claims. One of the key elements in controlling costs in this environment with higher technology, more complex repairs, is to be able to make quick decisions right from the first call or the first notice of loss with our clients in terms of will we repair that car or will we declare a total loss and replace it.
Because then you can direct the client more efficiently at the right place, avoid multiple towing costs, storage fees, and all of these things that also increase the length of time we have to provide a rental. By leveraging our data in claims and the data lab, we've deployed tools that can quickly identify this. We've seen savings actually with these actions on the rental, towing, and storage, which are, at the end, also a significant part of the repair process.
Great.
I think that's worth also mentioning that, you know, ordering automobile parts is something we've been doing to fully leverage our scale over time. We've been doing that for many years, but that certainly comes in handy in a world where there are inflationary pressure.
Makes sense. Then my next question, sticking with personal auto, 1% organic growth, obviously there's some headwinds with respect to BC, but I'm just curious, you know, are you being more cautious with growth in Canada personal auto, given the integration of RSA and maybe some uncertainty with respect to claims inflation? You know, why isn't this a time that you're really trying to get some organic growth?
Well, yeah, I think that if we could get more organic growth at the conditions we think are right from an adequacy point of view, we would, Brian, you know? No doubt about it. We're well positioned. We've done a lot of work in automobile insurance for many years. We think that we're priced adequately, and we'd love to grow. I think part of the issue, you know, if I peel that onion, I would say there's not a lot of. I don't want to use the word traffic because that would be confusing, but shopping is down, retention is up.
Mm.
Historically high. Shopping is down. And as such, the cost of generating sales is up, meaningfully. That's the first thing that one needs to take into account. At least that's how we think about the business. That's the first point. The second point is that when you price a product, you price 12 months out using, you know, three year, three to five years of historical data. Right now, how much credibility do you put on the driving patterns you've seen in the last six months? Some people put a fair bit of credibility and took aggressive rate actions. We didn't. We reflected risk. We provided a ton of relief.
We understand that if the world changes in three to six months from now, and we're pricing 12 months out, we have to have some degree of caution. As a result, you know, our ability to sell is maybe not as good as it's been historically. There's, you put all that together, Brian, there's the cost of generating traffic, there's how competitive one is, and then there's how much you think you should charge for a world that, you know, will gradually return to normal over the pricing period. You get, you know, a sluggish growth in commercial, in personal lines in the near term, let alone the fact that there's not much rates going around. You know, that is the issue.
If we could grow more in personal automobile, we would, because we're comfortable with how that business is positioned to perform in the mid to long term. You know, the dynamics in the marketplace are such that it's not easy to grow. Isabelle, I don't know if there's any additional color you wanna provide here.
I think you said it right. I think with the right momentum on pause, for sure it's not the main driver of growth these days. I think because of that as well, our retention is holding very strong, but that create less moment for shopping for customer in the market in general. Maybe I would just add, we also see less new vehicle sales versus historical in the last few months. That's also reducing the shopping moment for customer. We believe also it's one driver of why we're seeing less people shopping for insurance than historical.
Makes sense. Thank you very much.
Your next question comes from Mario Mendonca of TD Securities. Please go ahead.
Good afternoon. Charles, it would seem to me that over the next 12-18 months, a lot's gonna change. One area in particular that I'm focused on is personal lines in the U.K., where the change could be the most sort of fundamental. What I'm going with is, does your company... Does Intact have to be a personal lines player in the U.K.? Is there some either regulatory reason or maybe it's relevant because it helps to absorb overall costs in the organization. Do you think Intact needs to be a personal lines player in the U.K. at all?
It's a key strategic question, Mario. You went, you know, straight to, you know, what I think is an important question in relationship with the U.K. Keep in mind we're number two in home insurance. We're very strong in pet insurance, and both these lines of business are performing really well. I would consider that this is a position of strength to a certain extent. We're very small in motor. Keep in mind we're, you know, I think 17th or 18th, I forget exactly what position we are. Motor is 1% of Intact Financial's revenue base. 1% motor in the U.K. I think, you wanna make sure you're, you can win in that segment, no doubt about it. But I think there are strengths in personal lines.
The exercise we're going through with the team right now is how do we position ourselves to win in personal lines in the U.K.? How do we position ourselves to outperform? You know, can we win? How do we position ourselves to outperform pricing, risk selection, claims? A no-brainer. But then can you outperform and grow, is the question. Is outperformance generating adequate return on capital? These are the questions that are on the table, Mario. We closed the deal in June. We've put in place near-term profitability improvement plan. Auto is 1% of Intact Financial's revenue base. Personal lines is 7% of Intact Financial's revenue base.
There are strengths there, but we're actively engaging with the team to make sure that the business in the U.K. is positioned where we can win, where we can outperform, and where we can generate a return, you know, that compensates for the risk that we're taking. I think your question is definitely one that is looked into. I do think there's strength and we wanna build on that.
One sort of related question then. In the U.K., is there a bundling dynamic between auto and home that would necessitate keeping an auto business to maintain the strong position you have in property insurance?
No. No, much less than Canada, in fact. You know, in Canada, we have far more overlap between personal automobile, home insurance. In fact, we have a single product for, or, you know, single offer for both products in the Canadian marketplace. In the U.K., there's a much greater dichotomy is our observation between both these products. I don't from the basis of customer experience, I don't see the connection there. The question is, you know, you need both to have a solid, credible personal lines platform with distributors. I think that is the bigger question as opposed to whether customers look for a base. Can you cross-sell? I think you can, but I'm not seeing ton of evidence that it's been done effectively in that market.
Thank you. Appreciate it.
Your next question comes from Tom MacKinnon of BMO. Please go ahead.
Yeah, thanks very much. Good afternoon. Sort of progressing a little bit on that questioning, what have you learned now? It's been probably like five months since you closed the RSA deal, in particular for the UK&I. What kind of businesses have surprised you either on the upside or the downside? You talk about being more comfortable with your RSA accretion targets and more comfortable with achieving your cost synergies targets. To what extent is some of that attributable to your outlook on the UK&I and, you know, which businesses are sort of surprising you either on the upside or downside with respect to that? Thanks.
Yeah. I'll ask Louis to chip in. You know, if I start at a high level, you know, what are we very pleased with from an upside point of view is the quality of the people we have on the ground in the U.K. Second to none, there's a lot of strength there, and we wanna build on that. I think that, you know, I'm impressed and thrilled about the opportunity that exists in the mid-size commercial lines business in the U.K., the opportunities that exists in the regions. You know, we built our Canadian business as a very deep local footprint where we work with brokers, you know, to have a very deep presence in the small and mid-size space. You know, we insure one in four businesses in Canada.
We understand the regions, we understand the brokers, and we understand the SME space. RSA in the U.K., first of all, super strong brand, very well respected. I was with brokers actually last night, talking exactly about the competitive set in the U.K. and the opportunities that exist in mid-size. You know what? I think there's a meaningful commercial alliance opportunity. The RSA team has a very strong regional franchise, very strong regional platform. Clearly that is an area of surprise in terms of upside, not so much in terms of performance, because we knew, you know, what the sort of performance we were looking at coming in this transaction, but rather size of the opportunity.
The areas where that need work, we had a really good sense of as well, and I would put them in three buckets, and these are three buckets where we're focused. First motor. The performance in automobile insurance, better referred to as motor in the U.K., needs a lot of work, and there's a lot of actions focused on that to improve that performance. The second area is at the small end of commercial lines. There's a fair bit of dislocation in the marketplace, and there's work to do on the performance of the very small end of commercial lines. We're focused on rationalizing the footprint there.
The third bucket, which we knew would be challenging, but we're focused on rationalizing the footprint there, is that there's a number of distribution relationships in both personal lines and commercial lines where the economics are not stacked enough in favor of our operations, and we're shrinking the footprint there because we need to be focused as a firm. These would be the three areas where, you know, I would say upside, but but work is needed to create upside there. I think there's a big growth opportunity in mid-size commercial lines in the U.K. The specialty lines business, whether it's the London market business, the marine business and so on, I think the connections that we're creating now with North America will give us access to a broader pool of customers.
That's why the global SL capabilities in my mind is an opportunity. I think this is an area where the competitive set is thin as far as I'm concerned. The environment or the ecosystem is really conducive to us stepping up our global capabilities, and we're focused on that. The numbers, you know, they're in line with what we thought are better. I'll let Louis give his perspective on that.
Thanks, Charles. Yes, the numbers are better. The team in the U.K. was already on the path of improvement, so we're sort of trying to make sure we keep on that path and make the corrections we think are required here. Maybe one area that is attracting a bit of attention too is the technology, you know, in the U.K. and what needs to be done to deliver on the outperformance targets we set for ourselves. If I come back to synergies, the confidence, you know, is really coming from all the markets that we've added to our platform. You'll remember that most of the synergies are coming from Canada. The confidence is both how we're executing in Canada, how we're executing in Europe.
And that drives the comments of, you know, being feeling confident that we could beat the target of CAD 250 million. Just, you know, we see the execution so far. I talked earlier about having CAD 24 million already earned after four months. Run rate at the end of the year at CAD 85 million. It just makes us more confident as we work closer with the teams both in Canada and in the U.K., that those targets are achievable and we look, you know, to try to beat them.
Yeah. As a follow-on, I think that CAD 250 million doesn't include any kind of loss ratio potential improvements which you were able to get when you bought OneBeacon. Is there anything you can share with us, just in the first four months of RSA in terms of any kind of loss ratio improvements?
You're right, they are not included in the CAD 250 million. I will say this is really what's being done now in terms of putting our minds together, developing the strategies, and trying to generate additional loss ratio improvements. At this point, I will say I don't think there's a lot of visibility in the very short term, but we certainly think there's gonna be some upside in the mid- to longer-term to improve the loss ratio. We're not quantifying that yet. It's still a bit early.
Yeah, I think that's exactly right. I think, Tom, the deal was not predicated on loss ratio improvements, and our guidance, you know, is on what the deal was predicated on. Now clearly we have action plans to improve performance, but, you know, we wanna make sure that we have good visibility on it before we start putting, you know, numbers on the table. In the meantime, I think Louis been clear about the IRR now that we see on this transaction. It should convey confidence that we're well on our way.
Okay. Thank you.
Your next question comes from Lemar Persaud of Cormark. Please go ahead.
Thank you. My first question is just continuing along the discussion on the synergies. I'm wondering if you can help me understand which geographies are outperforming your expectations the most. Is there anything you can do to help us ring-fence around how much your synergies are expected to come in at? I'll tell you where I'm going with this. Like, when I think back to Louis' comments on CAD 85 million run rate synergies by the end of 2021, it sounds like this outperformance can be pretty substantial, extrapolated over 36 months. Also, when I think back to the announcement of the deal, it always felt like the assumed synergies, particularly in the UK&I, was relatively conservative in nature.
Anything you guys can offer on that would be helpful. Thanks.
On the first part of the question, we are tracking, I would say, ahead of schedule. That doesn't mean that the quantum will be, you know, hugely different than the target we set, but the timing might be a bit better than we anticipated. You know, I say we're giving accretion numbers right now that are earlier than what we initially anticipated. You'll remember our guidance was, you know, upper single-digit by 12 months. I think we're there faster, and we're there against a strong standalone performance from IFC. I think this drives a bit the perception that, you know, the IRR is a bit better than we thought at the beginning because we're going faster than expected. But I would not necessarily change the targets.
It's just the timing at which they'll be met that I think is going faster than we had anticipated. In terms of the markets or the geographies where they're being delivered, I would stick to our initial, you know, guidance around three quarters being in Canada and the rest being in the U.K. You have to remember here, we did not have a business in the U.K. to start with to generate the synergies. Most of the synergies for that part of the acquisition were sort of head office synergies, corporate or common costs, group costs that we could eliminate because they would become redundant. In the operations themselves, harder because we didn't have an operation of our own to blend with.
That's why it was heavily weighted towards Canada. If you look at Canada, it's, you know, six points, I would say, of combined ratio, when you take the synergies we're targeting. That is very consistent with the prior big acquisition, which was AXA back in 2011. It's a similar quantum, if you want, and that's well on its way to being realized within the timeframe we set for ourselves.
Thank you. My second question is, just on distribution. Again, it continues to be stronger than expected. I wonder if you could break down how much of this growth was organic versus M&A. More broadly, what factors could cause this growth to slow?
The breakdown here, just simply said, if I take 29%, you know, quarter-over-quarter improvement, two-thirds of that is additional variable commissions. Two-thirds is, I would dare say, pretty much organic. A third is recent M&A activity for both our BrokerLink business as well as our broker financial services business. The majority of it is organic, but there's a fair contribution from M&A. I would say the market is fairly active these days. There's a lot of activity going on the M&A front. Our perception that momentum will continue is supported by both the performance of the business as well as the market environment.
Thanks. That's helpful.
There are no further questions on the phone line, so I will turn the conference back over to Mr. Ken Anderson for closing remarks. Please go ahead, sir.
Well, thanks everyone for joining us today. Following the call, a telephone replay will be available for one week, and the webcast will be archived on our website for one year. A transcript will also be available on our website in the Financial Reports and Filings section. Lastly, our fourth quarter 2021 results are scheduled to be released after market close on Tuesday, February eighth. Thank you again. This concludes the call for today.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for participating and ask that you please disconnect your lines.