Good morning, everyone, and thank you for joining us. Today we've got Charles Brindamour, the CEO of Intact. Charles, thank you for doing this early this morning.
I'm glad to be here, Mario.
I'm going to ask that Charles offer some opening comments on what was obviously a pretty strong quarter, the market's reactions. Rare that you see a large-cap financial move 12% in a day, so clearly something was up that day with how investors perceived the quarter and the outlook for the company. Just as a reminder, if you have a question I have my series of questions. If you have a question, just type them into that webcast chat box there, and I'll look over my left shoulder throughout this session, and I'll see your question. But Charles, why don't you get us started with some opening comments?
Very good. Thanks, Mario. I think overall, clearly we've shown not only very strong resilience but an ability to grow in a tough environment, so to speak. And I think that's really what came out. We're operating pretty much in all markets in firm pricing conditions. We've moved really fast to stay on top of trends well ahead of markets. And as competitors address those trends, clearly this is where growth is materializing for us, but not at the expense of the bottom line. All segments performed well. And strategically, beyond the numbers, I think we're in an excellent position in every market where we operate. And as a result, I think that investors saw those very concrete signs come out of the results. It's not just an Intact thing. If you look at the P&C sector in North America, you see similar strengths.
I think that we've shown that we're in a real position of strength in relative terms and in absolute terms starting 2024.
So I felt that what played out this quarter, the impression I had was throughout 2023, there was plenty of evidence that the underlying fundamentals of your business and the P&C industry were strong. But every quarter, it seemed to be clouded by something. It could have been cat losses or the hit-to-book value from the pension de-risking. And what was interesting for me this quarter was we finally saw a quarter where the underlying fundamentals were on display without any sort of clouding effect of cats or something else. And absolutely true that TD Securities in the U.S. now covers U.S. P&C companies, and those results, as they were coming through, everybody looked really solid. So with that as the backdrop, let's examine that one issue on cats first, cat losses.
I understand your philosophy around the reinsurance of cat losses, where capital strength is non-negotiable, but you want to retain some margin. Before I get into the actual question, why don't you just clarify for us: what is your philosophy around reinsurance for cats?
Our most cat-exposed business is personal property in Canada. If you look at our track record, Mario, over 10 years, a decade certainly marked by an increase in natural disasters, a fair bit of headwinds. What have you seen? You've seen the last decade an 89% combined ratio. You break that into five years, you're seeing the same sort of combined ratio. When you throw in 2023, you know, an upper 80s combined ratio in personal property translates into a very high ROE, and that's my starting point. Am I prepared to share some of that performance to shed volatility? We look every year, but frankly, the economics don't stack up. Yes, you want to protect your capital base, no doubt about that, though it is a very strong capital base.
But you've seen in a year like 2023 that despite a 1 in 15-ish, 1 in 20-year type event, we've generated an operating ROE of 14.2%. And so that's the trade-off we're making. And frankly, the traditional reinsurance markets I find expensive when it comes to sharing volatility. There are options available, but I'd rather explain to investors what happens from quarter to quarter. That's the first point. Prospectively, you know, we've done a lot of work to figure out what the next 10, 15 years will look like. And, you know, we'll keep exploring mechanisms whereby we can trade volatility, but at the end of the day, it's protecting the capital base and maximizing the ROE.
There's a related question on cats that just came through that I want to get to. It says, how has your cat loss ratio or cat loss guidance or view for 2024 changed relative to 2023? I think I know the answer to that one, but you've offered a different outlook on cats. Why don't we restate that so people understand what your guidance is?
Sure. Yes, we've guided in 2023 at CAD 700 million, and we're updating the guidance to CAD 900 million in 2024. It's driven by three things in roughly the same proportion. A third of the increase is driven by normal growth and inflation. A third of the increase is driven by putting 2023 in our dataset and introducing prudence, so to speak, or additional prudence in the assessment. And then the last third is to take this 15-year forward look and integrating that into our guidance as we've integrated that into our pricing as well. And this is how you go from CAD 700 million- CAD 900 million.
I'm going to paraphrase the next question as it relates to cats. It's something, it's a logical question. They're saying, "We understand that the reinsurance is there to make sure that capital strength is never threatened. You made the point that you'll explain the volatility to investors to the extent that you need to. But is there a level at which the cat losses, while not threatening capital, could start to hurt investors' perception of the company? Is there a level that you would consider doing more reinsurance even though it was beyond anything to do with capital and it's just to protect the earnings volatility? I understand the nature of the question. It's a tricky one.
Yeah, yeah. I think for me, Mario, these things are all connected. I spend a lot of time with investors. And if I feel that our cost of capital is going up because the capital providers, fellow investors like me, are more concerned, then we'll need to make sure and work on solutions to bring that cost of capital at a level that is reasonable. And this is where I think the exchange with investors is really important. At this stage, you know, I like the ROE profile of that business. Then from a risk management point of view, Mario, bear in mind here that there's not only reinsurance. And the things we've been focused on as a firm include adding additional streams of profit that are not correlated with natural disasters.
And I'll just use On Side as an example, for which the profit profile is inversely correlated with natural disaster. This will go into our Monday morning ROE, so to speak. That is the ROE before the underwriting business kicks in. The second thing I'd like to point out is strategically, if you look at the moves we've done, Mario, in the past five years, personal prop in Canada used to be 22% of our business. It's now 17%. And we also, I think, need to keep that in mind. The shift towards commercial lines and specialty lines certainly changing the profile in terms of natural disaster of the organization as a whole. And, you know, we'll keep moving in that direction. So there are other tools if volatility becomes a concern to manage that before sharing your margin with someone else.
I'll get off this cat question line of questioning right away, but there is one more that just came through. It's just if you could review the company's retention policy and how it's changed over the last couple of years.
When it comes to reinsurance, we've increased our base retention from 2022- 2023 by close to 25% because the reinsurance market got real hard and tight in 2023. And retention levels in 2024 have increased in the U.K. from 125-150 and has been roughly the same in other jurisdictions. In fact, we were able to reduce our overall retention in this market. So no major change from that point of view going from 2023- 2024.
I understand. Okay. So let's now move on to a different topic altogether. And I see some questions coming through, but they're going to fall into a later part. So if you submitted a question, I'm going to get there. It's just not time for it yet. I want to focus on the U.K. So big transformational transaction through RSA done a couple of years ago. And from the moment you bought it until just like last quarter, you've done nothing but tinker with it. And tinker meaning some big changes. Maybe tinker is the wrong word.
My team doesn't feel like it's tinkering. I'll tell you that, Mario, but these are your words.
These are big changes that have played out in RSA from the day you purchased it to today, culminating with that most recent sale of direct lines, rather personal, in the U.K. business. The question is, is there much more to do? Are you done fixing up the U.K. and exiting lines in the U.K.?
I'll just say that there's been a lot of heavy lifting. Investors are exposed to, you know, what's in press release mostly. There's been lots there with a focus of outperformance in the U.K. and focusing the organization in the U.K. on the areas where we think we can win in the U.K. What have we done? We've exited the Middle East. We've exited motor. We've exited the home and pet business, including partnerships. We've done a big pension buy-in in 2023 and really strategically totally shifted this organization towards the part of the market, which is big, by the way, which is most profitable, which is the SME and mid-market space and the specialty line space.
That's why our perspective is that the forward ROE of the U.K. business is probably a mid-teens sort of range, and we think will be in the sort of low-mid 90s combined in 2024, migrating to 90% combined is sort of the target and good opportunities to grow. What investors don't hear as much in the U.K., Mario, is we've introduced our values. We changed the leadership framework. We've replatformed a number of systems. We've introduced a new rating and segmentation model, changed the definition of success, changed the relationship with regulators. It is a completely transformed organization.
And we felt in 2023 that actually the footing now in the U.K. was strong enough that we were ready to really double down on the space where we feel we outperform, which is commercial lines in the U.K., a franchise that very much has a footprint that looks like what we're doing here in Canada in the SME and mid-market space, which is the best space to be in commercial lines. So what is left to be done, Mario? Integration. There's not strategic repositioning going on. It's just bringing the Direct Line business on our platform while we modernize the commercial lines, backbone of the organization. It is to advance the segmentation sophistication by bringing some of our techniques. We have boots on the ground in the U.K. We have a number of AI squads here in Canada that are focused on the U.K. market.
And then it's executing the exit of PL as well. And I think you've got 24 months' worth of work there, but you should not expect big changes in terms of the footprint. We're down to execution at this stage. I'll tell you, Mario, you know, we thought about the RSA acquisition for a long time for two reasons. One, I mean, Canada was a no-brainer. Yeah, but the pension fund was a concern of mine. And then our ability to win in the U.K. was the second concern of mine. And I would say 24 months in or 30 months in, those two things have been dealt with at this stage. And I'm convinced there's no doubt in my mind we'll have the best P&C asset in the U.K. in 24 months from now.
You did retain the claims reserves of the personal lines. Yeah, can you help size the risk for us? Is this meaningful? Could there be a slip-up here that investors would be surprised by?
No, I don't think so. I mean, you know, it's P&C insurance. But keep in mind that personal lines reserves are fairly short-tailed. When you think of, no pun intended, I didn't mean to say pet and short-tailed in the same sentence, but home, pretty short-tailed, pet as well. Motor is very small. So the only thing to watch for in my mind in the runoff, which is now in exited lines, would be cats, natural disasters, while they're still in forced business running off. That is the thing to watch for. Otherwise, we feel pretty good about the strength of the balance sheet there, and we've strengthened the balance sheet at exit as well. So not overly worried by that. We just cat is the main fluctuating factor.
Pulling together now Direct Line with this sort of refreshed U.K. and specialty lines business you have, pulling those two together because obviously they belong together, what does that profitability look like in terms of combined ratio and ROE relative to the commercial and specialty that you have in Canada and the U.S.? Is it equally as profitable? Is it a different kind of business?
So the combined ratio in the U.K. should be 90% when we put all things together. The Direct Line business in year one and two will migrate towards the performance level that we're expecting for two reasons. First, we're rationalizing the footprint of that business. There are areas we're not comfortable with. We knew that from the get-go. But there's some work to do in terms of refocusing it on areas of the commercial lines portfolio where we have control of pricing, reselection, and claims. In other words, delegated arrangements and things of that nature we're shrinking. Same we've done in the RSA business. And second, we're building prudence. As this business is being renewed on our portfolio, we're building prudence on the current accident year just so that it is reserved in a fashion that's very comparable to what we normally do.
This creates a bit of a drag in year one. It's all part of the guidance we have provided. But in my mind, within 24 months, it's performing at the 90-ish% sort of combined ratio level. The SME and mid-market space is a very good space. The cycles are not as abrupt as they are for large commercial lines, which is not a big portion of our business, not as profitable as specialty lines. I mean, specialty lines, we think we can operate sub-90%. And we're investing in all the jurisdictions, in particular in pricing, risk selection, by bringing some of the AI models in specialty lines to make sure that the performance remains in the 80s, where SME and mid-market is more of a 90-ish% performance, but a business we love.
You would stack it up with the businesses in North America then. It's as high quality a business model as North America would be.
Yes, I would. I would say, Mario, you know my take here is that the markets compare, the difference is it's competitive, but there are not as many competitors in the U.K. SME and mid-market space as there are in North America. Not that it's not competitive. It's very competitive, to be clear. But there's no dominant players in the U.K. really that really stands out the way you would see in North America. I like that dynamic too, given we're not locals.
Focusing on specialty for a moment, it's become an awfully big part of your business. I remember this company 10, 15 years ago. Specialty wasn't this big. And so maybe just help size it for us. How big has specialty become for this business 10 years ago to today? I mean, it's a big business now.
Yes. 10 years ago, we had about CAD 500 million of specialty lines business in Canada. That specialty lines business was actually embedded in our Main Street regions in the Canadian landscape, in our mid-market business. My team and I sat down about that a decade ago just to see where else outperformance could be created. One of our conclusions was we were underrepresented in specialty lines. Yet this business was running in the upper 80s. This CAD 500 million was running in the upper 80s. We thought, you know what? We need to create a division, put people fully and solely accountable on specialty lines so that it's not a side consideration, and really grow that business. That's what we did. This became our entry point in the U.S. because you'll remember, you've been covering us for many, many years.
Yeah, we didn't want to go to the U.S. in personal lines. We didn't think we could come in as a main street operator because scale would be an issue. But specialty lines offered an opportunity to win in very specific segments, create a North American platform. That was the first big move. First, create accountability in Canada. That was around 2015, 2016. Second, build a North American franchise.
OneB eacon.
Exactly. Then outperform in North America. And fourth, now with the RSA, very nice side benefit, global capabilities in specialty lines. The answer to your question is CAD 6 billion out of CAD 22 billion is specialty lines. And frankly.
500 million 10 years ago or so.
Yes. Yeah. This is running at 88% combined. My own perspective is we're just starting there.
The market size is enormous.
The market size is enormous. Like in the U.S., you know you're in the few hundred billions of dollars. Globally, you're talking of close to $400 billion. We have manufacturing capability in 70% of the global market. Our thought process is get bigger and better where your footprint currently exists. We have a network of partners for the other 30% to follow customers wherever they want to operate.
Presumably, this business, is it fair to say this business could grow faster than some of your other lines in the next five years or so?
Yeah, definitely. I think this is the business where we have many growth levers. If we leave M&A aside, Mario, because in Canada, you know we could get meaningfully bigger through M&A. I think there's a very good organic growth profile in the Canadian business. But in specialty lines, first of all, we're small in the U.S. Second of all, there's plenty of room to grow our specialty lines franchise in Canada by using our distribution. Third of all, plenty of room to grow in the U.K. We've got a European presence. In the U.S., we haven't really used our distribution firepower yet. And finally, those global capabilities have not really been put to work so far. We've been integrating these businesses, investing in segmentation, connecting the dots, aligning the teams, and so on. And so I think the organic growth profile of that business is really good.
It's very important for me to run this sub-90%, though. That becomes an incredible earnings engine for the organization.
So you've got this faster-growing business with better combined ratios, higher ROEs, a lot of room to grow. It immediately has me go to the next step, which is to say, what could go wrong? Meaning, are there diversification benefits in specialty from being around the world? Or is there a high degree of correlation? When something goes wrong in specialty in Canada, it goes wrong in specialty in the U.K. or in the U.S. Help me understand the nature of diversification in specialty.
Yeah. Mario, I'll say something that'll be surprising. Diversification is not really part of my thought process. It's a side benefit. Our thought process is you have to outperform everywhere you play. So one shouldn't think that the whole specialty line strategy is a diversification play or Intact. It is a side benefit. There's no doubt about it. I highlighted the whole personal prop 22%-17% mix difference. That's not the strategy. It's just a side benefit. The thing in specialty lines that I like is beyond winning at the customer level, because you have many swim lanes, we have 20 verticals. When you see that things can go wrong, you can just shut one vertical down, as we've done a few times. You can't do that, really, in personal lines or in main street commercial lines.
In specialty lines, you have this additional lever, which is to de-emphasize or overemphasize your verticals. 20 of them we have globally. What can go wrong? I mean, inflation can be an issue in your lines of business where you have liability exposure. That's one thing. I mean, inflation and liability could have an impact on a portion of your lines. There tends to be a degree of correlation between inflation across markets. It's certainly not one. The U.S. is far more sensitive from an inflation point of view. We have a 2.2-year duration, liability duration, in the U.S. That's one way to manage that risk. But I would say that is one area. What else can go wrong? You know it's P&C, but there is diversification within the 20 verticals, beyond the geographic diversification.
I think the bigger strategic issue for me, Mario, is that six years ago, we had one country. Now we're in the U.S., in the U.K., with a footprint in Europe. And more important to me is to demonstrate outperformance everywhere we play. We've done that in the U.S. And you know we've been cautious at deploying capital in the U.S. So the risk in specialty lines is you're not able to outperform in all the markets where you play because you have a few markets to look after. You know it's the risk of losing focus. And I'm very focused on the risk of losing focus, I would say. But overall, it's a very good business and that's why it's so highly valued if you look at specialty lines focused companies.
You know it's not a totally after the OneBeacon deal, which was many years ago, that the company would not have pushed a little further into the U.S. with maybe another transaction. I would have been surprised. Can you talk about why the U.S., although successful, is a pretty small part of Intact right now? It's almost an afterthought for me when the company reports.
Well, that's because it's performing really well. If you look at you know the U.S. performance, it's an 80s performance with double-digit growth. And I do feel that we should have more organic growth in the U.S. because, from a distribution point of view, I think we're leaving money on the table. By that, I mean, in the U.S., it's 12 verticals. Globally, it's 20 verticals. We don't leverage well the relationships between the 12 verticals, the broker relationship between the 12 verticals. We don't add enough relationships with brokers fast enough. And therefore, this is a big area of focus for us as a firm. This is pure organic growth. You don't need to touch the margins to generate that sort of growth. And I think that the growth profile of the U.S. is really good. Then there's consolidation. There's two ways to do that.
One is, can you buy distribution? By that, I mean MGAs. It is a great way to grow because you're not really putting your balance sheet at risk. It's a way to lean into more distribution relationships, grab distribution profit, and eventually add up to your manufacturing offer, so to speak, and put more manufacturing capital on the table. We've done that last year with the acquisition of Highland, which contributed to the growth in the U.S. We want to do more of that. Then there are manufacturing acquisitions. There, I think there's a wide range of companies. I do find that where the fit is the best, I don't like the price points right now. But it is a long game. And in time, you'll see transactions with us in the U.S. There's no doubt about that.
OK. I want to flip to Canada. We spend a little bit of time now in the U.K. and in the U.S. We're leaving Canada for a moment. We'll get to Canada in a moment. But there is one question here that is relevant to me, too, because I care about this. There have been more, let's call it, non-core or below-the-line items impacting the company's reported earnings and book value growth from this company recently than we've seen in the past. And this got some attention on your call. And it's getting a little bit of attention here, too. The question is really in the context of the U.K., but it applies to everything, really. Help us think through the period of time over which these, let's call them, non-core charges will impact book value growth.
Maybe describe the nature of these charges and when you can see a period when they return to a more manageable level?
Fair question. If we start with the overall capital generation of the business and book value per share, you see that we've generated in 2023 CAD 1.6 billion, roughly, of fresh capital. Capital margin is CAD 2.7 billion, very strong capital position. Book value per share was flat. It is a concern of ours. I'll give you a bit of perspective as to why it is the case. A portion of it is interest rate, which has put a bit of pressure on the book value per share. Another element is the pension buy-in, which was dilutive by about 5% to the book value per share. I would say, strategically and economically, I would make that call tomorrow if we had the opportunity to make it again. Not great for book value per share when we did it, but the absolute right thing to do.
Then you have integration costs, which go under the line as well. I think if you look at those three things, the book value per share in the last year has been flat. Now, we have to keep in mind that if you look at the book value per share over the last five years, it was north of 11%. Over a decade, it was close to 10%. So when you do a large transaction, take RSA, this was hugely accretive to book value per share. But then you need to integrate it. There is a strain. It's been a big strain in 2023. The pension buy-in certainly was a big portion of it. If you look at it prospectively, you probably have another 24-ish months of integration cost flowing below the line.
In exited lines, you know, as I said, in my mind, it'll be largely natural disasters, if any, beyond, you know, what is priced for. But I do expect that what's below the line will migrate to a very small number in short order. And in the U.K., we don't expect that to be of any significance in 2024 other than natural disasters. And so we want to make sure that the AROE and the OROE are as close together and converge as much as possible.
Just as a side note, you said something very relevant there that in the previous five years or 10 years, book value compounded at 10% or 11%. That is precisely what investors will point to when they talk about why Intact trades at a price-to-book multiple so far above many of your peers. The argument is not just that the company has these very relevant structural advantages, but you've exploited the structural advantages to drive that kind of book value growth. And the company is often referred to by investors as a book value compounder. And when I match up Intact's book value per share growth over the long term with every other large-cap financial services company I cover, Intact's at the very top. And so I just want to hammer home the point. The reason why the stock trades this way, in some respects, is because of that past.
I think getting back there is kind of, I think, important to investors over the long term.
Yeah. I agree, Mario. I'm an investor. I totally get it. I would say, you know, frame differently the organization as an incredible moat. People can talk about moat. We quantify it. That moat equals 670 basis points of ROE advantage over a decade. That's important in my mind. With that moat, we were able to grow the operating earnings per share at about 10%, a little above 10%, over a decade or over five years. I think that translates in the book value growth that you've seen. But I think those two elements are really important beyond just book value per share growth.
Not at all. Let's flip over to Auto, Canadian Auto. It's odd that we're 30, well, almost 40 minutes into this. We're getting to Auto now. It's a testament to how much this business has changed, frankly, over the last 10 years. To think that I'm only getting there now tells me this business is really big and different now. I think Personal Auto Canada accounts for, on a total company basis, it might be 25% of gross written premium. I think that's the number. It used to be like 50% just a few years ago. That's also come down a lot. The business looks different to me today than it did a year ago. I'm referring, really, to the top line. That top line growth in Personal Auto came as a bit of a surprise to me.
I think it was 12% Direct Written Premium growth this quarter, a big number. Can we talk about some of the dynamics that are driving that kind of growth? And I always look at that relative to nominal GDP growth. That's a big number ahead of what normally you might see. So let's talk about how you can grow that top line relative to what normal growth would be.
Yeah. So we start with generating a certain ROE. We're very focused on trends emerging on a weekly and monthly basis, right up to my level. And that's the starting point. It's adequate pricing, OK? And we do that faster than most. It's part of our DNA. The problem with this, in a very competitive industry like ours, keep in mind you're competing with about 20-25 competitors in a product, in a province all the time. Very few industries are as competitive. So we start with price. And as a result, if people are slow to price in inflation, we lose market share. We're fine with that. But then when people realize that there's inflation in the system and they start correcting, it takes a while. And our competitive position improves. And that's the first point.
I think that what you've seen in the last six months, a dramatic shift in the growth profile of the organization, is others have started to move. And that is number one. Number two, Canadians shop 30% more than they did about a year ago.
Wow.
There is a cost of living crisis. People are trying to save money. I wouldn't say that automobile insurance is a top-of-mind issue for consumers at the moment. The broader cost of living is. We're seeing shopping behavior, not just in our industry, in other industries, shoot up meaningfully. This is a point in time where our competitive position improves. People are shopping. We've invested in marketing more than we otherwise would to take advantage of this environment. Then we're leveraging our digital value proposition, where digital sales have doubled in the last year. It's really a function, Mario, of not using the price lever to compete, wait out for the rest of the market to react to the trends, and fully use all the toolbox, all the tools we have in the toolbox. It is working.
Now, we need to, you know, people often talk about the trade-off between a point of ROE and a point of growth. We're risk takers, right? I mean, what we're selling comes with a risk. And we remain prudent. That's why we're using all the levers, but price, to expand our position in the market. And at the moment, it's working.
For sure. Let's talk a little bit, then, about the relationship between Earned Rate and inflation, how it evolved throughout 2023, and what you think about 2024, and then maybe tie that into a Combined Ratio outlook in Personal Auto.
Yeah. I'm glad I finished the previous answer with caution.
For sure.
But the written and earned rate levels right now, Mario, have moved exactly where we said they would. And you're seeing, I think, in Q4, it's something like 8.6%-ish %, some insured and rates combined. And if I look at what's in the pipeline, I expect we'll be in that zone throughout 2024. Then the question becomes, what happens to inflation? Two quarters in a row, Q3 and Q4, we're in the same sort of zone, mid-single digit inflation. What are we seeing now that is in Q4? You've seen that the cost of repairs and the cost of total losses, which really represent 60% of the cost equation, have improved meaningfully compared to a year ago, where inflation was in the low 20s in that zone. Inventories of cars, new and used, are up meaningfully. Parts are available in ways that compare to pre-pandemic.
In other words, we don't see the same sort of backlog in the supply chain that we've seen. And as a result, that part is in the mid-single digit sort of inflation range. Injuries in the last two quarters have picked up a bit. That is the 40% of the equation that saw no inflation in the past few years.
I remember that well.
This has picked up, you know, in Q4 in the mid-ish single digit zone, priced in, reserved in for, the thing to watch as far as I'm concerned. And I've been talking about that, Mario, for a while. I said, we're not seeing inflation. But this is what one needs to watch. Because when you miss inflation on injuries, it takes a while to fix.
It's the long tail, the long tail business.
Yeah. That's it. That's it.
By definition, it hurts for the long term.
Yeah. So even though we have pricing power, it hurts longer. There's no doubt. And so that's the part we need to watch. But overall, you're seeing mid-single digit inflation at this stage. You know and we expect it'll fluctuate around that in 2024. And as a result, we're comfortable with our pricing position at this stage. We've delivered exactly what we said in terms of guidance, which is you know mid-90s, 95%-ish. I think it's 94.7% in 2023. We expect we'll be in that zone. You need to bear in mind seasonality. Q1 is our highest seasonal quarter by a few points, Q4 a bit. And then Q2 and Q3 are better than the average. But we expect to be in that zone as well. And we watch the quality of our growth is really important. Growing is one thing.
But you want to make sure that the profitability profile of customers is consistent with your performance targets.
Here's a question that came in early, but now ties in better to what we're talking about. The notion of the question is that there were a lot of what they're referring to as excess COVID-related reserves during 2020 and 2022 that have helped to make PYD look more flattering right now. The question is, how much longer can we expect to see this flattering level of PYD? The implication is, have you chewed through all of those excess reserves that were established from 2020- 2022? That's the nature of the question.
Yeah. It's a very good question. We were guiding overall to 2%-4% sort of PYD level. We said we'd be at the top end of that range for the foreseeable future. It's not a line-by-line guidance. Automobile was above that. And what I've told investors, or my colleagues and I have told investors, is that frequency is not back to the level it was pre-pandemic. Driving is, but frequency is not. Driving patterns have changed. And as we build the current accident year, we're exercising prudence in reflecting where frequency stands today. And we continue to reflect you know conservatism as we build the current accident year. That's why we think it's important to look at both current and past or current accident year and prior year development together in Personal Automobile. We do feel strongly about the strength of the balance sheet.
I don't think it's a perpetual profile, for sure. But we have, I think, a strong balance sheet at the moment. Frequency remains favorable in this environment.
Now, pulling that all together, and this question has come up on your call on a couple of occasions. It's coming up because it's the nature of the questions that, I think, as analysts, we hear once in a while. Based on the outlook on earned rate, which is somewhat predictable, inflation, which is trending the way it is, strong PYD, it really does speak to a combined ratio that's better than your outlook. You can kind of play with numbers on your model. You do get numbers that are lower than 95%. That's ultimately what, when I play with my model, that's what I'm coming up with. When you say 95% or mid-single digit, are you sort of building in some cushion there for something that could go wrong? I think that's the nature of the question that people are asking.
I've used the word caution around that guidance on the call last week for a reason. I do think that Personal Automobile is a hard line to price. There are lots of moving pieces. There's a degree of caution in the guidance, yes. I think caution is really warranted in Personal Automobile. Mario, I don't want to take you back to 2017. I don't want to go back to 2017. There were a couple of years there where performance was not where we missed something. The whole industry missed something. We moved fast. We've learned from that. We remain prudent in automobile insurance because it is longer tailed. There are lots of moving pieces. When frequency changes, it has a direct impact on the profile of the claims you're seeing. As a result, reading severity is tougher.
And when you've got supply chain issues, et cetera, trending severity is tougher. And that's why we're saying there are lots of moving pieces here. And we want to remain prudent. And that's how we feel, frankly. If those assumptions were fairly static, I would say, yes, I think we can beat that. But this is the segment of business, maybe after U.S. casualty, where the pieces are the least static. And as a result, we want to exercise prudence in our guidance.
OK. Here's the obligatory regulator question. And it came through moments ago. Could you compare the regulatory environment in Personal Auto in Alberta versus Ontario? And is there a risk that Ontario could head down the same path as Alberta?
There's always a risk. But I think there's Alberta, and there's the rest of Canada. The regulatory environment rationale. People understand where inflation is coming from. People understand the risk associated with injuries. At the end of the day, the liability product is the government's construct to a certain extent. And I think people understand that. Second, when I look at the Net Promoter Score, which is customer satisfaction across the board, whether it's transactional or whether it's at the moment of claims, these are in a pretty good zone. This is not. There's a broader cost of living crisis, don't get me wrong. But automobile insurance is not a top issue at the moment, as it was 20 years ago, Mario, or 22 years ago, when availability was an issue. Affordability was also an issue across the land.
It was a function of injury inflation in a way because of personal injury, that legal community really getting involved in these claims. This is a very different landscape from that time. Reforms over the last 20 years have taken place. Alberta is primarily political at this stage. I don't think there's a big risk that this filters to other jurisdictions. It's always there. It's not one that keeps us up at night at the moment.
OK. There's only a couple of minutes left. So I want to conclude with a broad observation and then ask you to comment on that observation. So as I look at your MD&A, and every quarter, you have this big, meaty MD&A. And sometimes I can get through it in the night you report. Other times, I wait a day and I read it then. And what I'm really caught by is every segment that you talk about, whether it's the three segments in Canada, the U.S., the U.K., every segment, when you give us your look at the quarter and your outlook, it concludes with, and conditions are firm. It's a hard market. And what's amazing to me is that every single segment, you conclude with the same conclusion, that it's a firm market, it's a hard market. And you see that persisting.
The comment I'm making is, that's not normal. For me, it's not normal to see everything in firm conditions. What created this? Like, have you seen this in your career and your experience with the company? Have you seen a period where everything is firm? At some point, it's got to give. I guess that's the broad observation. Any comment you can offer would be helpful.
Sure. Mario, if I start with the MD&A, I have to give credit to my team for producing what I think is a very transparent and open document about our business. And one, I'd prefer not to share with our competitors. But I think it's a great document.
I agree.
You're right. You're right. It's a moment in time where markets are playing to our strength everywhere. There's not a weak, in aggregate, a weak spot. Now, keep in mind, there's a high degree of correlation in commercial lines and specialty lines markets globally. Why? Because of the reinsurance market, you know because of natural disasters, which have been true across the board, and inflation. So it's no surprise, Mario, that all our Canadian commercial lines biz, our U.S. business, our specialty lines, and U.K. business are correlated from a pricing point of view at the moment because many of the root causes for this pricing cycle have converged. I think the surprise to me, not that it's surprising, but why it's firm everywhere is what happened in personal lines in Canada in the last six months, where inflation driving has really picked up. And the market started to move.
This tends to be a more competitive marketplace. It is still very competitive. It is often not correlated with commercial lines because you have different factors at play. It is the case right now, other than natural disasters. That's the space we're in at the moment. We're trying to make the most out of it while improving customer engagement we have with brokers and then creating outperformance while growing in this environment. It's a good place to be.
Yeah. I think that's somewhat being reflected in the way the stock performed as well. It's clear that the underlying conditions are very favorable right now. The structural advantages, what you call your moat, combined with a pretty strong underlying environment, supports the kind of performance we're seeing. Let's put it all together. That's the way I view it.
That's the way I view it as well. So I'm glad we share perspective. And that's why our two measures of success, ROE outperformance, at least financial measure of success, ROE outperformance and operating earnings growth north of 10% per year over time, we feel very strongly about those when we look out the next 5-10 years.
Thank you, Charles. I appreciate you taking the time. To everyone who participated and listening in and sent questions, thank you. Have a great afternoon, Charles. Thanks again.
Thank you. Thanks, Mario. Bye-bye.