Ladies and gentlemen, thank you for your patience. Please do not disconnect. The Intact Financial conference call will begin momentarily. Once again, please continue to stand by. Do not disconnect. The conference call will begin within the next two minutes. Thank you for your patience. Good morning, ladies and gentlemen, and welcome to the Intact Financial Corporation Q1 2024 Results Conference Call. At this time, note that all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on May 8th, 2024. Now, I would like to turn the conference over to Shubha Khan, Vice President, Investor Relations. Please go ahead.
Thank you, Sylvie. Hello, everyone, and thank you for joining the call to discuss our fourth quarter financial results. A link to our live webcast and materials for this call have been posted on our website at intactfc.com under the Investors tab. Before we start, please refer to slide two, precautionary language regarding the use of forward-looking statements, which form part of this morning's remarks, and slide three for a note on the use of non-GAAP financial measures and important method notes on adjustments, terms and definitions used in this presentation. To discuss the results today, I have with me our CEO, Charles Brindamour, our CFO, Louis Marcotte, Patrick Barbeau, Executive Vice President and Chief Operating Officer, Darren Godfrey, Executive Vice President, Global Specialty Lines, Guillaume Lamy, Senior Vice President, Personal Lines, and Ken Anderson, Executive Vice President and CFO, UK& I.
We will begin with prepared remarks, followed by Q&A. With that, I will turn the call over to Charles.
Thanks, Shubha. Good morning, everyone, and thank you for joining us today. The strength of all of our platforms was evident in the first quarter as we once again delivered strong results and made important progress on the strategic front. It is a good start to 2024. Yesterday evening, we announced net operating income per share of CAD 3.63 for the first quarter, up 19% from last year, driven by strong underwriting and investment results. Our undiscounted combined ratio was 91.2%, which reflected solid underlying performance across all geographies. Top-line momentum continued to be strong at 6%, driven by favorable conditions across most markets. Overall, we delivered an operating ROE of 15%, and we maintained a strong balance sheet with CAD 2.7 billion of total capital margin even after significant deleveraging in the quarter.
Let me provide some color on the results and outlook by line of business, starting with Canada. In personal auto, premiums grew 11% in the quarter, up 6 points from a year ago. Top-line momentum was a function of both rate actions in a hard market and customer growth. As the industry further pursues corrective rate measures, we're making the most of our improved competitive position, leading brand awareness and strong digital proposition. The combined ratio was 98.6% in the quarter, which included a 2-point impact from seasonality and 2 points of one-offs from pools and employee compensation, driven by strong outperformance in 2023. The underlying performance was otherwise in line with expectation. Inflation has moderated significantly since peaking in late 2022 and has stabilized in the mid-single digit range for the past couple of quarters.
At the same time, earn rate and insured values remained at high single digits during the quarter. As a result, we're confident that our strong rate actions will support our sub-95 guidance in the next 12 months, and we're happy to grow at this profitability level. Moving now to personal property. Premium growth was 9% in the quarter, driven by our rate actions in a favorable market and continued unit growth. The combined ratio was strong at 82.5%, with no cat losses reported. We expect weather-related volatility, though, and inflation to sustain hard market conditions over the next 12 months. In commercial lines, premium growth was 5% in the quarter, as rate actions and strong retention in most lines were tempered by increased competition for large accounts.
The combined ratio of 87.3% was strong as a result of our profitability actions over time and favorable prior year development in the quarter. With the market remaining hard across most lines, we expect premium growth in 2024 to be in the mid- to high-single digits for the industry. As a result, the business remains well-placed to deliver sustainable low 90s or better performance going forward. Moving now to our UK&I business. Premium growth was 29% in the quarter, mainly due to the Direct Line transaction. The overall combined ratio was 94.6%, solid for a first quarter after absorbing 7 points of cats, more than 2 points higher than expected. The Direct Line business is generating stronger growth than anticipated when we announced the acquisition.
While early, bottom line performance is heading in the right direction, and the integration is progressing very well. We welcome the Direct Line employees on May 1st, and processing of policy renewals on the RSA platform will begin in Q2. Synergies are on track to be realized in the coming 24 months, and overall, the UK&I business is positioned to run in the low 90s. In the U.S., our business grew 6% in the quarter, reflecting healthy rate increases across most lines of business. The combined ratio of 88% reflects our continued focus on growing our profitable lines, as well as underwriting discipline. In the next 12 months, we expect hard market conditions to remain and continue across most lines. Overall, the business remains very well positioned to maintain low 90s or better performance.
As I mentioned at the outset, we made meaningful progress on strategic initiatives in the past few months across all our business units. In Canada, BrokerLink continues to consolidate the market and successfully closed four acquisitions this quarter, representing roughly CAD 190 million of premium. The business remains well on track to achieve its ambition of CAD 5 billion in annual premiums by 2025. Our distribution business remains an important and growing earnings driver. On the digital front, our investments have resulted in increased web traffic, with new business sales up 81% in 2024. We're therefore capitalizing on increased shopping activity across personal lines as competitors take corrective rate action. We also continue to leverage data and AI to improve pricing and risk selection.
We recently deployed machine learning models in commercial property, with commercial liability to follow in the coming months, and the nationwide rollout of our fourth generation usage-based insurance platform is on track. In aggregate, our data and AI initiatives have helped deliver north of CAD 120 million in annual run rate earnings benefits so far. Building resilient communities and achieving net zero are two important pillars of our strategic roadmap. In April, we published our 2023 social impact report, which details our progress on both objectives. On the climate file, we remain on track to achieve our emissions reductions targets. In 2023, for example, the emissions intensity of our investment portfolio was down 35% compared to our 2019 baseline.
Yesterday morning, we announced a new initiative to build resilience, launching a partnership with Wildfire Defense Systems, a world leader in wildfire prevention and suppression. This offering will provide personal property customers in Western Canada with additional protection at no extra cost. This also contributes to our ability to sustain our long-term sub-90 track record in personal property. Overall, we're well positioned to deliver on our financial and strategic objectives this year. Top-line momentum is strong. The business is operating at a low-90s combined ratio, and the outlook for investment and distribution income remains positive. With our strong balance sheet and business fundamentals, we're on course to grow net operating income per share by 10% annually over time and to outperform the industry ROE by at least 500 basis points every year. With that, I'll turn the call over to our CFO, Louis Marcotte.
Thanks, Charles, and good morning, everyone. We had a strong start to 2024 across our business, with a solid underwriting performance and continued income growth from our investment portfolio. Our operating ROE rose to 14.7%, including a 2.5-point drag from excess cat losses in the past year. Book value per share grew 4% in the quarter to nearly CAD 85. That's 9% higher than last year. We experienced fairly mild weather in Q1 in Canada and in the U.S. Cat losses were CAD 97 million, and most were attributable to four severe weather events impacting our UK&I business. We remain comfortable with our guidance of CAD 900 million of cats per year. The weather events in the U.K. had a significant impact on our exited lines, which amounted to CAD 60 million of losses incurred, well above expectations.
Our exited lines performance was otherwise as expected, with limited earnings impact, and that remains our expectation going forward. Favorable prior year development remained strong at 5.7% and improved by 1.4 points compared to last year, reflecting higher favorable development on prior year cats, impacting mainly our personal property and commercial lines in Canada. The level of prior year development continues to reflect our prudent approach to reserving, and we expect it to be in the 2%-4% range for IFC overall over the medium term. The expense ratio in Canada was 33.5% in the quarter, up 140 basis points from last year. This reflects a payment of higher incentive compensation to our Canadian employees to reflect stronger combined ratio outperformance than anticipated and accrued for in 2023.
This is a non-recurring item and affected our three lines of business in Canada. I'm happy to note that both our UK&I and US businesses have reported lower expense ratios in the quarter. We continue to expect the full year expense ratio for IFC to land within the range of 33%-34%, very close to where it was last year. Operating net investment income increased 29% to CAD 380 million in the quarter, driven by higher reinvestment yields and increased turnover of our portfolio over the last 12 months. For the full year, we continue to expect investment income to reach CAD 1.5 billion. Distribution income decreased 5% to CAD 100 million in the quarter, a lower contribution from On Side due to milder weather over the last two quarters.
Despite a slow start to the year, we continue to expect distribution earnings growth to resume and exceed 10% in 2024, unchanged from prior guidance. Our operating effective tax rate was lower than expected at 22%, as the proposed new tax legislation in Canada on dividends and Pillar Two have not yet been enacted. Overall, net operating income per share of CAD 3.63 for the quarter was up 19% from prior year on the back of strong underwriting and investment results. In addition, earnings per share was up 79% to CAD 3.68, reflecting investment gains from favorable equity markets, as well as the gain on the sale of our U.K. direct personal lines operations. Moving on to our balance sheet.
Our financial position continues to be strong, with total capital margin of CAD 2.7 billion and solid regulatory capital ratios in all jurisdictions. Capital generated during the quarter, as well as the gain from the sale of our direct personal lines business, business in the U.K., easily covered all capital needs and allowed for deleveraging. As a result, the adjusted debt to total capital ratio decreased to 20.5%, largely in line with our long-term target of 20%. Our balance sheet is in top shape to capture growth opportunities as they arise. Book value per share growth of 9% year-over-year and 4% in the quarter reflects the strength of our results. With an operating ROE run rate in the upper teens and supportive capital markets, we expect to deliver solid book value growth going forward. Overall, the outlook remains favorable.
Industry conditions are favorable. Top-line momentum is strong, especially in personal lines. Investment income continues to grow, and distribution income is expected to reach double-digit growth. I'm proud of the strength that demonstrated by the business in the first quarter of 2024. Given the quality of our platforms and robust execution of our strategic roadmap, we are well positioned to achieve our growth and outperformance objectives in 2024 and beyond. With that, I'll give it back to Shubha.
Thank you, Louis. In order to give everyone a chance to participate in the Q&A, we would ask you to limit yourselves to two questions per person. You can certainly re-queue for follow-ups, and we will do our best to accommodate if there's time at the end. So Sylvie, we're ready to take questions now.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If on a speakerphone, you will need to lift the handset before pressing any keys. The first question will be from Paul Holden at CIBC. Please go ahead.
Thank you. Good morning. First question is related to personal auto. Just wondering if you can give us an update on the written premium rate versus the earned rate and claims inflation trends. I would suspect claims inflation is starting to go trend more positively based on used car prices, probably where parts are trending, as well as more modest labor inflation, but wondering if that's the right conclusion or not?
Thanks, Paul. That's the right conclusion, but let's ask Guillaume to give a perspective on the results and trajectory of rates, and then Patrick can give us a read on the inflation. Guillaume?
So Q1 was good at 98.6%. As we mentioned, there's four points that needs to be reflected there. Two for seasonality, one point for pool, one point for variable compensation. Respectively, we state again that our confidence to achieve some 95% with the rates earning double digit now in a single digit inflation environment. So let me expand a bit, and I'll let Patrick go after. On the cost side, inflation is sustained but stable at mid-single digit for auto, very similar to the prior two quarters. On the premium side, written rates and insured value reached double digit within Q1, with our earn rate level staying in the high single.
We expect to stay at that similar level of rate throughout the year, with most of the rate change already approved by regulators where it's needed. Overall, profitability, profitability outlooks remained unchanged. If inflation was to drop from current level, it would obviously be good news, but we're not banking on that. So we're very comfortable with our profitability position in PA and happy to grow in this environment, and the growth at 11% is a proof point of that. So maybe Patrick can give more color on inflation.
Yeah, Paul, on the inflation side, it has been sustained but stable in personal auto overall for two, three quarters now in the mid-single digit range. If I zoom in on physical damage, both car repairs and total losses continue to show inflation in the mid-single digit range. Market values for used cars, as you pointed out, and new cars have been stable for over 6 months, but it's still slightly up compared to a year ago, creating some inflation still. The availability of the parts is close to pre-pandemic level, but we still see around 5% inflation on parts. And from a labor perspective, it's just below in the 3%-4% range, the inflation on labor itself.
Theft is still high, but similar to a year ago, so no impact on the inflation or on the severity year-on-year this quarter. We've seen also a bit more total losses as a proportion of PD claims, which is contributing to the fact that inflation is sustained despite some improvement in the cost of parts and, and market values. On the injury side, we still observe mid-single digit inflation as well, similar to prior at least two quarters. It is mainly coming from third-party liability claims in Alberta and Atlantic due to an increased level in legal representation. And on the accident benefit claims, we still see no severity increase at all, which has been the case for a couple of years.
Paul, I think, overall, we like what we're seeing from a competitive landscape point of view as competitors take corrective actions. Our competitive position naturally improves, but the rate trajectory, it's good. It's approved by regulators. The inflation is in the zone of, you know, what we expected, and, we feel good about that line of business.
Great, thanks for that. And then second question is just related to investment income, and I guess probably for Louis. Just I would have thought maybe with higher for longer interest rates and bond yields doing what they have in recent months, maybe there would have been some upside to prior guidance on investment income, but you're clearly sticking with your prior guide. So just wondering again if there's any kind of offsets there or additional items we need to think about. Thank you.
Listen, we've kept our guidance. It's in the CAD 1.5 billion range. It moves a bit because rates have not changed as quickly as we thought they would last year, but it's marginal in the total. And, we've accelerated deleveraging, so that goes a bit the other way. So net-net, we're in the same ballpark, and that's why the guidance has not been changed. So we are very close to current interest rate movements, but, it doesn't have a material impact on the overall investment income. So that's why we're sticking to the same, same level. I will note that the turnover that we've accelerated over the past, probably two years, slows down a bit because we've captured as much of the upside as we could there.
What's left are essentially bonds, where the book yield and the reinvestment yields are the largest, are bonds that are in the fair value to OCI, and to capture more yield, we'd have to sell them at a loss. At that point, the equation is not as attractive as it was for fair value to P&L bonds. That's why the acceleration is sort of slower than last year. But it's still, when you look at the overall growth for the year, it's 15%. That CAD 1.5 billion will be 15% higher than the prior year, so it's still a meaningful tailwind on our results.
T hanks for your time.
Thank you.
Thank you. Next question will be from Doug Young at Desjardins. Please go ahead.
Hi, good morning.
Good morning. I wanted to dig into just the competition in Canadian commercial market, and I think you highlighted, you know, large case, you're seeing increased competition. Hoping you can dig a little into that. And then what are you also seeing in the SME and specialty lines? And I guess where I'm trying to go is, like, you know, we've seen, you know, investment returns increasing. We've seen pretty good results across the top, the Canadian commercial market. Are we starting to see any signs of the cycle kind of turning or, you know, improper, you know, irrational competitive forces in any of the lines of business?
Doug, your question is specifically focused on Canada. I'd say, you know, it's what we're observing here compares, I think, to what we're observing in other countries where we operate. Hard market environment, uneven across lines, and here, as we pointed out, large accounts is where, you know, we've seen a change, and that's put a bit of pressure on the top line. Just keep in mind, the bulk of our business in Canada is SME and mid-market, where the environment is still quite good. Darren, do you want to provide a bit of color?
Yeah, sure. So just some context around the large account space for us in Canada, between CL and SL, that's less than 10% of our portfolio. That did create a drag on growth of about 0.5 point in the quarter, so not overly significant. And then I'd also highlight another 0.5 point drag following our rate segmentation strategy, where we're losing a higher degree of unprofitable accounts versus past years. So that's favorable from a loss ratio standpoint and mix going forward, but obviously has a 0.5 point impact on the quarter. So on average, about 5 points of rate flowed through, pretty even across both P&C and auto. You add on amounts of insurance increases, that's about 8% on the P&C side. So again, continues to be a favorable market and looking to grow that.
Thanks, Darren. And I think, Doug, you know, our, our perspective is definitely, you know, investment income has been better for the industry. It's not a new phenomenon at this stage. There's been inflation in the system. We're keeping our eyes on, on the liability side of the equation. Natural disasters, cost of reinsurance, you know, you've got plenty of factors here to sustain rational, competitive behavior, and that's really what we're seeing and making the most out of that environment. That being said, it's not because the performance is really good in our portfolio, that we stop looking for opportunities to improve the quality of the portfolio. Deploying machine learning in commercial prop, you know, is one example of that. And our strategy in commercial lines is super segmented.
In fact, we have a very clear view of which customers are the worst 10% performing customers, and we work on those extremes throughout the cycle. I think that's what Darren has just alluded to, that had a 0.5-point drag. But overall, this environment plays to our strength.
Appreciate the color. And then just on personal auto, and I won't ask about industry pools, I promise. But I guess more my question is, what gives you the confidence about the low double-digit growth? Because you did increase your outlook is... And this might just be simple math in terms of what's in the system, you know, is there more to it? You know, how are you feeling about discussions with the regulator? And maybe you can kind of weave in there, you know, any updates in terms of your thoughts on the Alberta market.
So that was six questions into one, Doug, but-
Pretty good, eh?
Pretty good. We'll tackle the question. I mean, first, from a rate point of view, as Guillaume said, when we say, we're, you know, close to 10%-ish, it's approved by regulators. Second, there's still a delta between what's written and what's earned at this stage. And third, while inflation has been stable for a couple of quarters, the trajectory is definitely downward. We need to keep an eye on liability, no doubt about it. And there's a lot of action from a competitive point of view, where people are taking corrective measures. So you put all that together, you strip the noise out, and, you know, we like what we see. I'll let Guillaume give a bit of perspective on, you know, part of Doug's question.
Yeah. Thanks, Charles. So I can maybe tackle the Alberta portion of that question. Our book is in good shape in Alberta. Let's not forget that it's five percent of IFC, and even in personal auto, we have 70% of our book that's in Ontario, Quebec. Quebec not being regulated, Ontario being a good market to operate in right now. So we're comfortable. In January, we've been fast out of the gate to take rates allowed under the rate cap and protect rate adequacy there. So we'll be able to continue to navigate that environment in the foreseeable future. But we continue to believe rate cap is not the right approach to control premium. It's really just creating instability in the market with some competitors reducing appetite or even withdrawing capacity.
So for the government to really reduce auto premium for Alberta, they really need to find a way to take costs out of the system, and I think they understand that. That's why they recently launched a public consultation around the themes of affordability, simplicity, and care for Albertans. So we're happy to see that. We engage with them to discuss actions like a product reform. And we've shared a reform plan with the government focused on access to care, and removing legal costs out of the system in an effort to find viable solution, for the sustainability of the industry in the province. I mentioned legal cost. We've seen over the last couple of years, legal representation nearly double, in the 24 months after a claim is opened. I think Patrick was referring a bit to it.
The severity of litigated claim is about 8 x higher than non-litigated. So the combination of that put pressure on cost, and that's what we need to take out of the system. So really looking forward to the next steps following that consultation there.
Thanks, Guillaume. And I think, you know, you talked about being quick out of the gate in January, but I'd say on Alberta and the inflation we've seen in that system, we've been pretty quick on rates like a few years back. And I think that's an important differentiator. On the inflation side of things, you know, we've put a fair bit of emphasis when we exchange with you guys and in previous earnings call on the supply chain and the body shops and the impact body shops, et cetera. I mean, one of the strategy we've been working on for, you know, a couple of decades is insourcing the legal work to be much better equipped to deal with pressure and liability in provinces like Alberta.
Today, it is close to 80% of legal work that is done by our own legal team in-house, close to, Patrick, is it 700?
Yep, 700 lawyers and-
Lawyers
-legal professionals.
So which is good, both from a loss adjustment point of view as well as from an indemnity point of view. I don't know if we missed part of your question, Doug, but, you've got it.
I'll leave it there. Appreciate the time. Thank you.
Thank you.
Next question will be from Tom MacKinnon at BMO Capital Markets. Please go ahead.
Yeah, thanks very much. Just a bit of a follow-on with respect to the commercial lines and the increased competition you're seeing in the large accounts. I mean, what, in your opinion, is driving this increase in competition at that level? Is it broker-driven, company-driven? And why wouldn't that eventually trend down into the SME? What makes you feel comfortable that you're not gonna be seeing any increased competition in more of the commercial lines that you deal with? And perhaps any color on as to what lines you're seeing this increased competition in within commercial and specialty? Thanks.
Thanks, Tom. I'll ask Darren to give a bit of color on where in the large account space we've seen bumps and why. Then I'll provide you a perspective afterwards of why large versus the rest of the market.
Yeah, as we said, the impact in Q1 was in commercial lines. If you remember-
Large commercial lines.
Large commercial lines, sorry. If you go back actually to Q1 of 2023, we saw the same thing in specialty lines in large accounts. That did not continue beyond Q1. So the market is still, I would say, lumpy, for lack of a better term. It is relatively broad. It's not consistent across different pieces of the portfolio in the large account space. It is very much account-by-account driven. So, I wouldn't say, Tom, some significant underlying trends here, in particular, verticals. It's a little bit different in the U.S., where it's clearly a financial lines story in the U.S. The remainder of our lines are mostly hard. We see a little bit of that pressure in financial lines in Canada, but as I said, it's relatively sort of here and there, account by account.
So no material trends that we're concerned about at this point in time.
So Tom, if I just come back on the context of large versus mid versus SME. Of course, in the large segment account, when you lose an account. It's a large account, and therefore, it moves the needle from a top-line point of view. It's a market that is more lumpy, as Darren said, because there's a lot of delegated authority on the front line. And the behaviors that you see in hard and soft market are far more pronounced in large segments. That's why our strategy, when it comes to building commercial lines, which is 55% of IFC today, is one that is focused on mid-market and SME. That's the space 90% of our business in Canada, that's the space we're focused on in the U.S., and that's the space we're focused on in the U.K.
And the NIG/Direct Line acquisition is a testament to that strategy. Why do we like that space? First of all, the law of large numbers work much better. Second of all, you can use the law of large numbers in advancing sophisticated pricing and risk selection, strategies. Third of all, there's less delegation of authority, on the front line. And, and fourth, that's a business we know really well, and that's why strategically, we -- that's the place we, we've been doubling down on, and we'll continue to do so. And I think if you look at IFC's global footprint in commercial lines, it's pretty unique to be, solely focused on the, on the mid-market business.
Okay, thanks for the color.
You're welcome.
Thank you. Next question will be from Mario Mendonca at TD Securities. Please go ahead.
Good morning. First, a detailed question on auto and then something more broad in nature. There have been recent reports about increased incidence of impaired driving. I think this is mostly Ontario. What I can't tell from what I'm reading is whether this is just a social issue or whether it could rise to the level where it starts to affect profitability for companies like Intact. Firstly, is that something you've seen, and does it matter at this point?
Not something we've seen. Doesn't matter in aggregate at this point, but we'll keep a close eye on that, Mario, but not something that has surfaced in our operations.
Okay, something a little more broad then in nature. It's been my observations over the years that companies, once they are operating at this level, which is—this is a compliment of course—companies running at a pretty robust level right now, and everything seems to be working as planned. When companies find themselves in situations like this, they often step out of their lane and maybe get a little bit more aggressive beyond their, their more traditional operations. We saw that when the company went to the U.S. and again in the U.K. As you sit there today, do you see any room for the company to depart from its more typical operations, either geographically or perhaps strategically? Is there any room for this, or, or is there an appetite for this?
We don't need to. There's no appetite for this. I think, Mario, if we, you know, run with that point, the size of the opportunity of Intact in 2017 was CAD 40 billion, and the size of the opportunity of Intact today is CAD 400 million.
Million.
Billion. Sorry. Good point. I'm glad the CFO is there.
Yeah.
So it's 10x, Mario, and I think, you know, if you look at 2023, you'll see that Canada outperforms in all segments. If you look at the U.S., we outperform, and if you look in the U.K., we also outperform. And I expect the U.K.'s outperformance to actually expand in the coming period. So for me, macro, you have a 10x opportunity without performance pretty much everywhere, so I see absolutely no reason to step out of that sandbox, quite frankly. And, and I think as Darren highlighted, even where we have outperformance, even in a hard market, we're still working on improving the quality of our portfolio. And that's why I think when I look at our two financial objectives, whether it is outperformance and expanding that or just fueling earnings growth, I feel pretty good about the next decade.
That's clear. Thank you.
Thank you. Next question will be from Jaeme Gloyn at National Bank Financial. Please go ahead.
Yeah, thanks. First on the commercial, just a quick clarification. In Canada, is the delegated underwriting authority, are they competing on price or terms or both? And then, some maybe some more commentary around the U.S. commercial business in terms of where you're being disciplined in pricing, and some more overall commentary on that.
Thanks. I think, when you say delegated authority, to be clear, I assume you mean what we refer to in commercial lines, because we don't delegate authority to brokers as a principle. Others do and might. This is not really our strategy, and I think it's important to make that distinction. We do have a delegated authority portfolio in the U.K., but otherwise, that's not something we do. In the large commercial lines, I think if we then go there, I think your question is, you know, coverage limits, price conditions. Maybe, Darren, you can provide your perspective, and then maybe a perspective on the U.S. as well, broadly speaking.
Yeah, sure, Jaeme. I mean, you're right in terms of in that large account space, you will see a number of competitors who will delegate, as you say, terms, conditions, and price. We have next to none of that at all. The only place we would have that is in our own MGAs. But again, they really are an extension and a function of us, so I don't really call that true delegated authority. Or where there's really high-end expertise at the MGA, for example, resilience when it comes to cyber, would be another place as well, too. But again, highly defined expertise with a well-defined underwriting box and pricing box. So from a U.S. standpoint, market conditions really have not changed materially since 2023, and it's really defined in sort of two different boxes, so to speak.
We have prolonged hard market conditions in most lines, and you can think about commercial auto, property, marine, whether it's ocean or inland, general liability, umbrella, consistent trends that we've seen over the last few quarters. We're getting there over 7% in rate, growing nearly at double-digit rates there in the U.S. in those particular business units. When I think about areas of weakness in the U.S., again, no real change in story, it's financial lines. Think about public D&O, think about cyber, and there, we're playing defense. And in fact, in Q1, we actually shrunk the book by 10 points. So it then, it does illustrate how we're managing the market environment, how we're managing the cycle. But broadly speaking, we see the market as still continues to be favorable and, but hasn't materially changed since 2023.
I would suggest that the focus also on casualty inflation as well, too, in the U.S., will be another tailwind, so to speak, of those market conditions continuing very much throughout 2024 as well, too. So I don't expect material changes in the U.S., at least within our particular portfolio.
So your question on, you know, is it price, is it condition, et cetera? When we see irrational behavior in large commercial lines, it's primarily price.
Okay, that's clear. Thank you. And then second question is going back to the announcement from yesterday with Wildfire Defense Systems, and just hoping to get a little bit more granular on this in terms of, I guess, you know, how did the relationship come about? Was it you approaching them, them approaching you? And then maybe add a little context in terms of what you're expecting that relationship to deliver, perhaps maybe from, like, a financial standpoint, like thinking, okay, wildfire catastrophe losses were X in 2023, and these defense systems in those provinces could reduce that by a percentage of X percent. Something along those lines. Is that something you've worked through and can share with us?
Guillaume, you, I think, work with your team and your colleagues on that relationship. Maybe you want to provide some color.
Yeah. So how it came, basically last year was a heavy cat season, as you know. We paid more than CAD 1 billion in natural disaster. So we took a pause and analyzed in depth what the global warming scenario would have on our business. We talked to you guys about that last year, and that's basically concrete actions that's coming out of it. Part of that CAD 1 billion was wildfire in Alberta and B.C. That was very intense last year, and the winter condition, warm and dry this year, are conducive to what could be another challenging wildfire season. So that's why we wanted to act now on that.
And we negotiated for the past few months with WDS to launch that pilot project to help customers in B.C. and Alberta protect their own from wildfire. So it's widely available to pretty much every homeowners in Alberta and B.C., outside of maybe B.C. coast, the islands there, and really the northern end of the province.
Insured by Intact.
Insured by Intact, definitely. And benefits are twofold. So first, financially, we expect that it's gonna reduce the frequency and severity of wildfires. So I won't get into quantification, but it's gonna reduce volatility as well. In years where there's no wildfire, it's not a meaningful cost, and there's gonna be no cap to offset that. And in years where there's a lot of wildfires, then that's where it's gonna help really reduce the volatility. So that's the financial part. And secondly, I think it fits with our purpose in trying to build resilient communities.
Overall, that's really the objective, the story there, and it builds into our track record of a strong sub-90 combined ratio over the last 10 years, and we're doing what is necessary to keep it that way.
Thank you, Guillaume. I think it is also a continuation of our strategy to insource supply chain, but also, help customers get back on track, with the experience we provide. On Side is a good example of that, which now, almost 70% of our claims in home insurance are done by Rely partners. Half of that is with, our own provider On Side, and, so all that is consistent with that thought process.
Thank you very much.
Thank you. Next question will be from Stephen Boland at Raymond James. Please go ahead.
Morning. First, just a short numbers question. Just in personal property and commercial, you know, you mentioned or the PYD is elevated. Can you just maybe highlight what years that, you know, you're seeing the, you know, that positive or that favorable development coming from? Is it COVID or is it pre-COVID? Just maybe a little bit of color there.
Sure. So maybe I can take this one. So overall, the PYD in Canada is up 1.6% to 6.3%, so very healthy. A reminder that Q1 is typically the quarter that we have most PYD activity, so that's not unusual. And I will say, in 2022, looking back at history, the percentage was 6.5%. I would call out 2023 as a bit of an anomaly because we had unfavorable developments in our personal property business, so that hurt a bit the ratio. But I think we're back to something closer to historical averages. So it's not totally surprising for us, given Q1 and our historical performance. Of the 1.6 points of increase, we attribute about 1.1 to prior year CATs.
And one should not be surprised, given the volume of CATs we've had over the past six quarters, to have more development when time passes and we see the files develop. So that should not be a total surprise, but it is 1.1 of the 1.6 increase. And then it splits out unevenly between lines of business. Personal property is capturing about 1.7 impact from those prior year CATs, while commercial lines is about 1.3. So that gives you a bit of a bit more precision and granularity on the impact of the lines of business. If I push it down one level, by line of business, in commercial lines, it was elevated in the quarter at 11.5. I will refer again to historical averages here.
When I look back 5, 10 years, in Q1, you would expect 8-9 points of PYD. So having 11.5 with prior year CATs, going back to close to historical averages for us is not, you know, totally unexpected. And, given our general prudence on reserving, you would expect a favorable PYD, particularly in Q1. So, you know, there is a bit of movement there. I think there's good reasons, but otherwise, feel very good about where PYD stand.
You only have to go back two years to find 11% PYD in Q1 in commercial lines, you know? It's not like it's wildly out of the range.
Okay, thanks.
Okay.
My second question is about Alberta, and obviously you mentioned the public consultation. I'm wondering if you have any comments on the reports that were commissioned by the regulators. The IBC has come out and said they're definitely flawed. Maybe you could just talk about the reports themselves, what your thoughts are, and is there, you know, is this a real risk that Alberta does this based on your conversations with the regulators?
I'll ask Guillaume to provide his perspective, and then I'll throw my perspective afterwards. Go ahead, Guillaume.
Yeah. So there were two reports that were commissioned by the Government of Alberta that were recently released, comparing different insurance regime to the Alberta one, contained one actuarial analysis and one economic report. So the actuarial analysis is deeply flawed, and overstates the benefit of moving to various regime, especially, a public no-fault regime, which is showcased as having the greater, greatest benefit. For instance, it totally ignores one-time investment like IT, which any insurer would have to make, even if it's a public one. It also used an industry premium that is 27% higher than the average premium in Alberta today, as a starting point, which obviously then overstates benefits when compared to, other regimes.
That being said, the report also clearly outlines the negative consequences of moving to a government-run insurance monopoly, killing thousands of jobs, in the private sectors, forcing taxpayers to pay CAD billions to subsidize auto insurance. So that's kind of the report. Overall, we're looking, as I said, to share our reform plan with the government, focused on access to care and removing legal costs, and we're waiting to see what the consultation will give.
Yeah. It's pretty clear, in fact, that the Alberta marketplace is best served by private industry, and I think everybody recognizes that. So I'm not concerned about that myself. I don't need to add much. I think Guillaume is exactly right. We looked at the report together, and it's a bit of a joke from an actuarial point of view. But I think there are pressure points in the system. We've made them very clear, and I think we have very concrete recommendations. Looking forward to working with the government on that.
All right, that's great. That, that's a pretty clear view. Thanks, guys.
Thank you. Next question will be from Lemar Persaud at Cormark. Please go ahead.
Yeah, thanks. I, I just want to close the loop on this Alberta auto discussion. So it seems to me like there's no, clear silver bullet to auto reforms in the province, and, you know, profitability could be challenged for quite some time. Is that kind of the bottom line assumption we should be taking away, on Alberta? And then finally, would it be fair to suggest that there's no real downside risk here to the, the sub-95% combined ratio outlook in, personal auto if these reforms do kind of get dragged out into the future? Thanks.
So I think, you know, the good news is that inflation is coming down, and it's not that far from the cap that currently exists in Alberta. We don't think the cap is sustainable. We think the cap is a bad idea. That's why you're seeing capacity issues in the Alberta marketplace. But we think that we're in a very good position from a rate point of view, to navigate this environment and potentially grow as there is pressure in the system. So in terms of upside and downside around the sub-95 guidance, we spend a lot of time at mapping the range around that.
But I would say that, you know, if you're earning close to 10%-ish and the inflation is in the mid-single-digit zone, you have room to absorb downside and maintain the guidance, and that's why we express confidence around the guidance, the guidance that we're providing. Guillaume, would you agree with that?
Totally agree. Nothing to add.
Great, thanks. Then maybe just on distribution income, I'm just curious, what gives you guys the confidence in this 10% growth range for 2024, despite the, I guess, tough start to the year? Like, does this assume more normalized weather conditions? What if weather conditions remain favorable? Like, could the lag from On Side be enough to pull down distribution income from that 10% growth range? Thanks.
I think what gives me confidence is the strength of the team at BrokerLink, and what they have in the pipeline, both organically and from a consolidation point of view. But I'll let Louis provide his perspective.
Well, that's absolutely true, and I will say all of our other brokers in the network as well. So the results here, we were not totally surprised. We weren't expecting growth in Q1, so that's why the only shortfall is really the On Side shortfall. Now, On Side, of the total earnings from distribution is a small portion of it. So the fact that it's, there's a bit of a lack of earnings in Q1, doesn't really take a huge weight over our overall expectations. So Q1, we weren't expecting a lot of growth overall, and there's two trends opposing each other. One, declining CPCs, as you know, over time and following the pandemic, that's a bit of a headwind, but we're offsetting it with growth, organic growth and acquisition growth.
And we map out the whole year fairly precisely, and other than On Side, the rest is expected to grow and offset the shortfall in Q1. So that's why we're confident. It's pretty baked in. It's not relying on weather. We know what, you know, what's in the pipeline from an acquisition point of view. We know what's in the pipeline in terms of CPCs, new CPCs and the ones that are declining, so we have a pretty good visibility on the rest of the year. It is a seasonal business, keep that in mind. And last year, you'll remember the first half of the year, we didn't have as much M&A activity, so now it is sort of picking up, and that will flow into our results this year. So level of confidence on that front is quite high.
Thanks.
Thank you. Next question will be from Nigel D'Souza at Veritas Investment Research. Please go ahead.
Thank you. Good morning. My first question for you, going back to investment results. Just wondering if you could provide some color on what drove the quarter-over-quarter decline in your market-based yield. I wasn't expecting that, given that reinvestment yields are still comfortably above your book yield. So any color there, and then also, you know, your guidance implies that operating net investment income will remain essentially flat for the remainder of the year. So just wondering if you could elaborate on that.
Yeah. So keep in mind here, just on the second end, the- we're up 30% in Q1, and we'll be up 15% for the whole year. So the rate of increase year-over-year remains robust, but just shrinks as the quarters pass by, as last year's, we've been accumulating more investment income. So it's a bit stable, but you have to run from a Q4 run rate investment income going forward into this year, and it's fairly evened out throughout the year. It's not perfectly even, but over the year it's about the same run rate. So but that will equate to a 15% increase in investment income in dollars year-over-year.
Then from a market yield, market-based yield, you must be comparing sequentially the numbers, and the only reason I see here is an increase in the portfolio itself that would have declined a bit, the market-based yield. And that figure, because there is a denominator that moves because of interest rates and capital markets, is a bit less relevant than the actual book yield versus market or reinvestment yield that we use. And so that is where the upside is. We still have a book yield that's probably 90 bps below the reinvestment yield, so as bonds mature, we'll be able to reinvest it, reinvest them at higher yields. The market-based yield is just two factors. There is the investment and the market value of the assets, and it's a bit less. It's directionally right, but less specific when you compare quarter-over-quarter.
That's helpful. Then my second question was on a change in presentation next—starting next quarter on the net impact of discounting. So I want to understand that's going to be excluded from your net operating income. And I was just wondering the rationale behind it, because when I think about the prior standard, it was included in net operating income, and IFRS 17 just changes the classification of the unwind of the discount into your investment results. So why, why now in terms of that change in presentation, since it was included in net operating income in the prior standard, despite the impact from interest rate volatility?
Yes. So thanks for the question and pointing it out. We chose to reclassify it following, I will say, the publication of all the 2023 earnings from all the players under IFRS 17. You will have known that historically, we try to put as not operating the movements that are driven by capital markets, whether it's interest rate changes or market based changes because we're trying to isolate the pure operating and underwriting business and not include interest rate changes in that performance. The investment income will pick up interest rate changes, but not the movement within a quarter, and we've historically have always had that in the non-operating section. With IFRS 17, we got a bit trapped with some noise from the interest rates movement being captured in operating earnings.
In our minds, it would have been evened out, it would level out at zero impact. But the reality is, the formula is a bit different and it causes noise, and we think the noise is just causing disturbance. It's not huge numbers. It was CAD 1 million of offset in Q1, so it's not, it's-- that's where we expect it to be. And therefore, think it's cleaner to put it into non-operating results. It will be fully disclosed, so you can track the number, you know, in any way you want, but we just think it's cleaner to have the operating results excluding the impacts of market rate changes or capital market impacts. But that's very consistent with what we've done in the past, and we're just refining our presentation going forward.
I guess just to clarify, that specific net impact from discounting, that was included in net operating income under IFRS 4. T he rationale makes sense, but, you know, why did you not exclude it previously? I guess is my question, because the same rationale applies.
The formula in the past was a formula that was symmetric, and there was actually a fairly close correlation between the buildup and the unwind. With IFRS 17, they changed the rules, and there's not as close a correlation, because we have to use a weighted average in one case and an opening value in the other one, and that creates noise, and therefore-
Yeah.
Our preference to move it down.
Yeah, and keep in mind, this is a one-year standard. We want to make your job easier, and we want to make sure we talk about the same things we're using to manage the business, and we felt the noise that this created, was not, not very helpful. There's nothing really more to it, than that. It's a new standard. We tried it for a year, and we want to move to something simpler, and that's, that's why we made the call.
More comparable to our peers in Canada as well.
Also, yeah.
That's helpful. That's it for me. Thank you.
Good.
Thank you. At this time, we have no other questions registered. Please proceed.
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. Transcript will also be available on our website in the Financial Reports and Filings section. Our 2024 second quarter results are scheduled to be released after market close on Tuesday, July 30, with the earnings call starting at 11 A.M. Eastern the following day. Thank you again, and this concludes our call for today.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.