All right, good morning and welcome to day two of the National Bank Financials Conference. Thank you again for joining us. This morning we're kicking things off with Intact CEO Charles Brindamour. Charles, thank you for joining us, and I apologize about my accent there on your.
That was excellent, actually. It improves every year, I have to say, so keep on it. It's with practice that we become good.
I don't think it's that good.
Well, if you want to become Prime Minister, I suggest you speed things up.
I don't think I'll get there. Let's start off with personal auto, obviously a very topical subject for 2023 and now 2024. Top-line growth looked good in Q4, double digits. What are some of the drivers, and do you think that's sustainable in 2024 and 2025?
Absolutely. I think that you've seen the trajectory of the personal automobile business, which, by the way, is about a quarter of Intact now, just to put things in perspective. Lots has changed in the past five years. But it's a business we really like, and I think this environment plays to our strength. The growth trajectory has changed dramatically in the last year. You've seen we've printed north of 12% growth in Q4. We were shrinking our market share a year ago. That's kind of how we operate. We price for trends. We price for the ROE targets that we're shooting for. And then the industry does what it needs to do when it needs to do it. And clearly, people are starting to realize that, yeah, there's been inflation in the system. Many players have had accidents, no pun intended, in the automobile insurance space.
We were able to navigate that, I think, pretty well. Now we're reaping the reward of the early discipline. What do you do in this environment, then, is the question. I would say we're just capitalizing on our position, remaining very focused on trends that are emerging and the change in trends. But where we're putting energy is on things other than price to grow our market share. An example would be we're investing in marketing in this environment. That is a very effective way to grow because the cost of acquisition has come down. People shop more by 30% this year. Our buying ratio is up. Therefore, the cost of acquisition is down. We really push on that. The other thing that we're doing at the moment is that we're really promoting our digital tools.
Our digital sales in automobile insurance are up 2x at the moment. Again, this does not compromise the margins. On the contrary. In the RSA integration, we've rebranded. We haven't made much noise about that, but we've rebranded Johnson Insurance, which is an affinity business, something we didn't have in our toolbox, and rebranded it to belairdirect, gave it the belairdirect toolkit. That business is growing really fast as well. We're trying to pull on all non-price levers while remaining very focused on where inflation is going.
Of course. And I mean, price is a part of it as well. And so can you describe how your customers are responding to the level of pricing relative to maybe your competitors? And one of the encouraging signs in the last few quarters is the number of policies, the units, has been trending in the right direction. Is that something you would expect to continue and turn positive this year?
Yes. Well, you know the PIF number that you're talking about is, in fact, a snapshot of all customers in force. It is, therefore, leading indicator of the growth momentum, sorry, a lagging indicator of the growth momentum of the organization. You want to look at written units in a quarter, which feeds the in force. And that was in Q4 2022, just to put things in perspective unit-wise, we were shrinking by about 1.5 because we felt that we needed to price a certain level, and we don't really look at what competitors are doing when it comes to pricing. Come Q4 2023, I think we were in the 3%-ish zone. So it's a massive delta on top of the rate of the rate momentum. So as I said earlier, Canadians are shopping way more than they used to.
So we're trying to be there with a competitive price, which reflects the inflation. Therefore, our combined ratio is up. Retentions are very strong. Despite the fact that Canadians are shopping way more, our retention is flat at the moment. So I think this is a very good environment that plays to our strength.
OK. Still on that environment, the earned rate is there. Claims inflation feels like it's stabilizing. And if we look at inflation data, it should be maybe even continuing to move lower. So these are all positive tailwinds for the auto business. Is there anything in the profitability picture overall with personal auto that you're worried about today or keeps you up at night, so to speak?
Well, we're always worried. I mean, it's part of the fabric of the firm, but it doesn't prevent us from growing and seizing the opportunities. I'd say that prices reflect well the inflation we're seeing at the moment and the inflation we anticipate. There's a degree of caution in how we operate. We've been very clear on our sub-95 guidance for a couple of years now, and that's the zone in which we're operating. If I unpack the areas we're focused on at the moment to protect the performance of the business, I would say first order of business is quality of growth. When you grow fast, it's fun, but you want to make sure that you're growing quality risk profile.
The thing with Intact is we've developed I think it's 20 years ago a system that's embedded in how our agents, underwriters, work, which identifies the expected profit per customer. It's kind of a parallel system to our pricing algorithm with the same techniques. That is our number one measure, if you want, of quality. But when we say quality, we quantify it, and we measure it at a very granular level. That's number one. Number two, in terms of pressure point we've talked about that. I see Patrick Barbeau is in the room. He mentioned during the earnings call that inflation has indeed stabilized. The thing that we're it remains stubborn, I will say. We're not surprised by that. Inflation and liability is the thing that has picked up, which makes the overall inflation in Q4 mid-single digit.
In other words, the cost of repairing cars has come down. That's 60% of our equation. 40% of the economic equation in motor insurance is liability. That's picked up a bit. That's something we anticipated as well. So that thesis is playing out. Now, you want to make sure that this is properly understood, calibrated, and priced for. That's what we're focused on. Finally, the other thing that's really important for us is the supply chain and how we manage the claims cost. It's not just about pricing. As such, there's two things that are really differentiating. One, the fact that we have our own preferred provider network, our own 30-ish branded Intact Insurance shops where we have much better control on the cost.
The second thing that's important to understand, especially in an environment where liability inflation is picking up a bit, is that we have a legal group on our payroll of 700 people defending our customers. That's a huge lever about performance and inflation control.
Yeah. No, that's a good point. Maybe last one on the auto story before shifting. I see a lot more news articles about the level of auto insurance premiums. Obviously, Alberta has put in a cap. Can you describe what your view is of, let's say, the regulatory temperature in the key provinces, Ontario and Quebec?
Yeah. We live in a cost of living crisis. Therefore, pocketbook items are important for elected officials. We get that as a firm. And we're trying to drive as much value for money for customers. I'd say specifically in Ontario and Quebec, we're dealing with rational regulators. Those two provinces understand well that if you have a highly competitive marketplace like ours with roughly 20 active participants that differ by province, but it's a very competitive environment, your job as a regulator is to unleash these forces, and people will really provide great deals for customers. And Quebec is probably the province that has shown that the most and the best. It's the province where you can leverage competition to the greatest extent because the regulators are rational and not interfering. And so that's a non-issue here. In Ontario, again, I think excellent dialogue with the government there.
They are rational on the automobile insurance file. FSRA, the regulator, as well. We have a lot of time for them and a very strong relationship. There was a budget last night that referred to automobile insurance. I kind of like what I saw in the budget. The tone was very constructive and talked about the fact that the government was focused on making sure there was not too much inflation in the system, that they would give more options to Ontarians, which we are very comfortable with. There's a focus on theft insurance. There's, I think, an openness to open up freedom of pricing when it comes to territories. Ontario was a bit constraining, I felt. So many of the elements of the budget reflect a rational regulator, a rational elected official that understands how the business works and how best to leverage competition.
Alberta, it is a political issue. I've mentioned it a number of times on the earnings call. There's not really a customer issue. What's building up in the system is a capacity issue. And so if they want this to become political, do exactly what you'll do, what you're doing, because eventually, capacity will be an issue. And when you cannot ensure yourself easily, that becomes an elected official issue, a consumer issue. We haven't yet reached that point yet. But I think if you impose an artificial cap in an environment where there's inflation, that's what you will get, as they did in 2001, 2002, and 2003. And I was involved personally with them to solve that problem back then. And the solution was to put in place a cap, which choked inflation for 10 years.
I wrote a letter to the Premier of Alberta last week, actually, to say, all right, if we focus on facts and data, here are the things you need to be focused on. The thing they need to be focused on in Alberta is legal representation. Legal representation on files is up meaningfully in the past 36 months. You have contingency fees in the 35% to 50% range. That's an inflation pressure that customers don't benefit from. Is this what we want to reinforce in the system? Putting a fake cap on automobile insurance is not how you solve problems. We've given her the operator perspective on what's the issue and how to deal with it. Now let's see what they do.
Yeah. OK. Time will tell. Let's shift to property then. Obviously, a tough year in 2023 with the cat activity, catastrophe activity that was elevated. Maybe you can walk us through some of the adjustments that you've made at Intact to bring this business back to a sub-90% combined ratio.
Sub-90% Combined Ratio.
Yeah.
OK.
That's the target, is it not?
That's our track record.
Yes, exactly.
That's our track record. I think that I'm glad you frame it like that. Last 10 years, 89, 105, I think last five years, 89-ish, including CAD 1.3 billion of natural disasters in 2023. This, in my mind, is a 1-in-15 to 1-in-20 events, not out of the range of possible scenarios, but certainly along a trend of increasing natural disasters, something we've talked about for over a decade. We've been on that for a long time because we feel that there's a big growth opportunity in protecting Canadians against natural disasters. That's about 40% of the product. And what we've done over the last decade, which drove this track record, is change the product.
We've expanded coverage in a way, but made it far more perils-based, changed the data we collect, changed how we price, the sophistication of pricing, the level of pricing, changed the claims model, changed the supply chain, invested our own capital in the supply chain with On Side, which is now a very big business, but will get much bigger, and invested in prevention, and then created the Intact Centre on Climate Adaptation to help the government because for every CAD 1 insured, there's CAD 3 uninsured. Therefore, it's a societal issue. What have we done last summer past the point of helping customers get back on track?
We asked ourselves, what if the planet warms up by 3 to 5 degrees by 2100, which is a pretty bad scenario, and model what the next 15 years would look like to 2040 by perils, and reached the perspective that we would be able to manage and protect Canadians in the exercise? This would be a matter of pricing first and then tweaking, in a way, all the elements I've just mentioned that generated the track record that were there. But we feel like the actions we've taken in the last decades position us well to grow in this environment and maintain this sort of track record.
One observation I would make is that if you look at the outcomes along the probability curve of each of these forecasts by perils, the thing that stands out for us is that the less likely scenarios, the 1 in 10, will punch harder. As a result, the average is easy to price, but there'll be a bit more volatility, which means the cost of capital for home insurance is going up, which means that the target rates of returns have to go up. That'll be baked in in pricing. We, every year, look at options to reduce volatility. But it's always a trade-off between how much margin are you prepared to give away against volatility. It's a trade-off we have trouble we don't like making because we don't mind volatility so much. We feel that our investors understand that on a quarterly basis.
Sometimes you can have natural disasters beyond what you expect, of course.
Let's jump overseas to the U.K. commercial market. It's a market you've described that you like, very similar to Canada. Market share in the U.K. commercial market is 5%. I think you're top five, top six. Is that the level you want to be? Is that the market share you want to be? Or should we see something more aligned with where Canada is, given what you like about that market? And maybe remind us about what it is specifically that you like about U.K. Excuse me.
Well, I will take you back maybe a year and a half ago. We entered the U.K. in the summer of 2021 and changed the leadership, brought our values, established a new framework for leaders, replatformed a number of systems, in fact, bridged an investment gap, raised the fence in those companies from a security point of view, and redefined how one should price. I mean, that's the level at which we started. What is good pricing? What should you target? What's the governance? In the exercise, ask ourselves, where can we win here? If we win, will we make enough money to justify spending time here? We concluded that, in personal lines, that would be a stretch. In motor, it was a no-brainer. I think we've been too slow on pulling the trigger there.
And then in personal lines, and you've seen last year, we've exited these three buckets, home, pet, and motor. The other thing we did last year is that we had a big pension plan in the U.K. Interest rates shot up. We put pedal to the metal and did a buy-in transaction to dispose of that pension plan, which then puts the U.K. business in a very strong position. And what we liked in the U.K. is the U.K. mid-market commercial lines business. And we like the specialty lines business that we have in the U.K., which has been operating in the '80s as well as in Europe. So we thought we need to double down on the commercial lines mid-market business that's broker-distributed primarily because our performance is already good. It's over two years, 91% combined ratio business without being really good at it.
So we thought, if we up our game, that'll be a great business. And the competitive set, we're not afraid of. And so we thought we need, however, to really focus the team on that. And then we need to scale it up. Because we felt there was outperformance already, that's what led us to say, let's buy a Direct Line business. Obviously, we didn't make that call and call them, and it was done. I nurtured that relationship ever since we bought RSA. And I do feel like we are in an excellent position now. But to your question implies, will you do something else in the U.K.? Can you take it from 5 to 15 to 20 to 25? The answer is, we're not there. The answer is that in the next two years, we need to be really focused on integrating those businesses.
When we do a transaction, we integrate systems, people, culture, governance, defense mechanism, capital management, everything. It is the first time they do an integration in the U.K. We have boots on the ground. It's a person from Canada who's actually leading the integration in the U.K. with our local team. The chief underwriting and pricing officer is also from our Canadian stable. We're trying to build an integration muscle and to create real sustainable outperformance. When my team and I conclude this is done, then we'll look at adding to our position. We have not reached that conclusion yet. But I'm just back from the U.K. I'm very confident we'll get there.
OK. Wow. Something to keep following up on. There's also a small I don't know if it's small, but there's also relationships in the European commercial market, select countries. Can you share some thoughts about your views on those countries? Are there others that you should be looking at and potentially expanding into, I guess, overall views of the European landscape for Intact?
Yeah. So GBP 300 million, ballpark, give or take CAD 500 million, spread between four markets. And so it is a part of the manufacturing capabilities of the U.K. London market business. So there's a dependency in specialty lines on Europe. So what we're doing in Europe is we are refocusing what these guys do. They're in the commercial lines business and specialty lines business. We're really turning their footprint into a specialty lines footprint so that it is part of our global specialty lines operation. This is a business that's running in the mid-80s Combined Ratio, so think ROE north of 20%, and growing at about 5%. And I do think that this will be a very good part of our overall global specialty lines business.
The thing on global specialty lines that I don't think we've talked about enough, but that people should understand, is that the global specialty lines platform, the commercial lines platform in the U.K., and a big portion of our Canadian commercial and specialty lines business is mid-market. It's mid-market and SME. It's not so much large commercial. That's a very differentiated platform from any other global platforms in the world. The reason why we like it is, A, a lot of large numbers work in mid-market. B, it is less price sensitive than large accounts. As a result, I expect navigating the cycles will be better. And C, we can bring our sophistication in pricing and risk selection to all these places because we know that those tools work. We feel pretty good about doubling that business in the next few years.
OK. Great. Only a few seconds left. Maybe one more. How about we touch on a geography we haven't touched on yet, which is the U.S.?
Yeah.
Intact has ownership in MGAs, managing general agents. They also operate through brokers. Maybe talk us through your strategy in terms of do you prefer the captive MGA, the owned MGA channel versus the broker channel, and where you see that mix moving to over the next few years?
So in the U.S., we have a very good business in the U.S., which we've transformed since the acquisition in 2017. It's north of $2 billion. It is outperforming, operating in the upper 80s in the U.S. We're very small there. And I would say the first lever of growth in the U.S. is brokers. It's to have our 12 verticals distribution relationships talk to each other. And it's to expand the number of brokers in which we do business. And I think that is a massive growth engine, which has been underexploited to date. We've invested in MGAs because we like distribution income. And we like to enter in certain parts of the market without taking manufacturing risk.
The beauty of MGAs, and we've done a few of these acquisitions, is we can put our balance sheet to work as an insurer on these platforms as we become comfortable. So we want to do more of that. As to the balance between brokers and MGAs that we don't own, I think that we don't mind the balance. What we want is to make sure that we have a profitable relationship. But I would say the focus is on brokers.
OK. We've gone over time. Charles, thanks again for joining us and kicking us off today.
Thank you very much, Drey.
Great. Thank you.
All right.