All right. Well, it's my pleasure to introduce our next speaker, Mr. Charles Brindamour, CEO of Intact Financial. Charles, welcome. It's great to have you.
Thanks, Phil. Glad to be here. I think it's my 20th time.
Is it 20?
Do you guys give gifts or something?
It's always a highlight, yep.
Maybe Roy does.
You get an iTrade account.
No need for gifts.
So Intact's generated a very strong operating ROE over the past 12 months. Could that be a peak, or what factors do you see might suggest that's sustainable?
Coming in, I mean, closing Q2, 17-ish% ROE, with a fair bit of drag from CATs, and so very strong performance. I think we'll close the year north of 15%, despite, you know, what's been an early, tough Q3 from a natural disasters point of view. Is this a peak? I don't think it's a peak, though, when you think about the economic value creation equation, when you're at about 2X your cost of capital, you know, you need to balance a dollar of growth for a dollar of ROE past 15%. So not a peak, but, you know, the value creation equation changes past 15%. Is it sustainable? You know, I think it is. Now, it's important to realize that there's volatility in our industry, and that's why ROE outperformance is what we're focused on.
It's 670 basis points, roughly over a decade. But there are, I think, ingredients, important ingredients, that have changed in terms of our business and our profile. I mean, one of them, one big change is that our mix between personal lines and commercial lines and specialty lines has changed meaningfully over the past six-seven years. We're close to 60% commercial lines, a big chunk of it being specialty lines, where the ROE opportunity is higher, as its increase in weight. And for me, that changes the earnings generation profile of the organization. Second, the moat and the ROE outperformance and our leadership scale advantage in Canada has also expanded over the past few years. I think that is an ingredient that certainly solidifies outperformance.
And the third element, which has changed also over the past five years, what my team calls the Monday Morning ROE, which is the power of the investment income generation and the distribution income generation of the business, which is now close to CAD 500 million. And so when you put the investment side of the house and the distribution income point of view, you're in the upper single-digit ROE, and you haven't started the insurance business yet. And so you put these three things together, and I think you have a very strong ROE machine. But for us, it's about outperformance, and we're certainly working really hard to grind and expand the ROE outperformance, and we feel pretty good about the place we're in at the moment.
Okay. Again, you're coming off a solid, clearly twenty twenty-four, at the risk of being too short term, and what do you see as the best opportunities over the next 12-18 months for Intact?
I mean, the opportunity set at Intact has increased by a factor of 10, almost, in the last six, seven years, and there's now outperformance everywhere we operate. So the big opportunities are pretty much everywhere you look in the firm. First, expand the leadership position in Canada. The market backdrop is very good for us. You've seen it in our growth profile, and so it's really about using the lever of the brand, the digital platform, and the distribution to expand our leadership position in the Canadian context. I think the second big opportunity is global specialty lines. It's a business that is now close to CAD 6 billion of revenue or, you know, a quarter of the firm. And there's a lot of room to grow in specialty lines, sub 90% combined ratio.
The third big opportunity is the fact that in the U.K., we've taken a business that was a little bit spread in a bunch of things and a bunch of places, created outperformance. You've seen in the first half, this business has been running in the low 90s. The ROE of the U.K. business is migrating towards mid-teens, and there's plenty of growth in that basically commercial lines business, and the last big opportunity we're focused on is to expand the ROE advantage in pricing and risk selection, in particular, by accelerating the deployment of new generations of models, as we've done in the past seven, eight years.
Excellent. Well, listen, following a quiet start, I guess, to the year, Q3 , obviously, seen several severe weather events. Any updates to your outlook for CAT losses through that back half of the year?
Look, we've in the first three weeks of the quarter, it's been very intense from a natural disaster point of view. We've issued a press release to that extent. One billion. We think it's a one-in-30-year type event. It's been quiet since, so nothing to report. What I would observe is, on one hand, incredible resilience from an operational point of view. Customer experience is quite good. We're very focused on that. It's 50,000 claims from natural disasters in about a month, and making really good progress. But the financial performance of the firm, when I look out prospectively, and the underlying performance of the firm, points towards an ROE this year, north of 15%, and so I think in good position.
And the last point I would observe is the market in property and in personal property was quite hard coming into this, and I think it'll really harden the market and extend it, as far as we're concerned. We will lean in for growth in that environment. But nothing new to report.
Okay. Has the rise in extreme weather events spawned thoughts or developments of new coverage that could represent growth opportunities?
Yes, and I think that this is not a new phenomenon. It's a phenomenon that's been on a trend for probably 30 years, and we've transformed our business in the past decade. If you look at the performance of the home insurance business, which is the most sensitive to natural disasters, and if I include results to this day, this is a business that's returned 90% combined ratio over five years, 90% combined ratio over a decade, and we've expanded coverage over that period, and we think that the demand for the product is rising and therefore, we see growth opportunities.
The big opportunity also, as a result of the increase in extreme weather, is in the supply chain, and so we're building this business called On Side, which is really good for customer outcomes, but it's certainly becoming an important economic engine for us. It's close to CAD 500 million of revenue, and we think this is a business that'll grow meaningfully in the coming years. The third opportunity that I see here is prevention, and prevention that is protecting homes before damages happen is probably an element that's not been used much, nor has it been monetized. I think that this is an area over the coming months and couple of years, where we'll put more emphasis with our customers and see if we can find an economic opportunity in it.
But, you know, extreme weather is increasing, risk is booming in a way, but this is our business, and as we've done in the past decade, we'll turn that into an opportunity.
Okay. And how do you see industry products like evolving to help balance the customer affordability with the product sustainability?
I think if you look at what we've done in the last decade, the thing we've done is we've unbundled the product so that, the product is far more perils-based, as opposed to being just a fire-based, product. And we see and we expect that the industry's product will evolve, along these lines over time. I think the issue, though, for the industry and for society, broadly speaking, is that you probably have 10%-15% of Canadians where coverage will become increasingly difficult because they're built in floodplains, essentially, and floodplains have expanded. And I think that is really an issue, and that's one that we're working with, governments to make sure that there are solutions there. Part of the solution is don't build in floodplains, and I've been saying that for 15 years.
The second solution is invest in infrastructure to a much greater extent than we have historically. There's probably a 50-year gap investment in infrastructure. Again, I've been very public about that for over a decade, and I think that people are starting to get it now.
Okay. I want to circle back a little bit. You mentioned On Side.
Yeah.
So let's kind of drill down a little bit, maybe talk about some of the advantages that On Side's provided in the aftermath of some of these extreme weather events we've seen.
I mean, if we just take where we are now, as I mentioned, this is a business that we've doubled, in a sense, in the past four or five years, and I see Patrick is there. He's overseeing that business, and so we're really using it now in terms of natural disasters. If you look at the past month, north of 60% of all claims where On Side operates are handled by On Side, so it is a source of growth and demand for them. It gives us way more capacity than our peers. The reason why we built On Side was first to create capacity for ourselves, diminish inflation, make sure that the customer experience is better.
And what it translates into is, not only do you get somebody to visit you, but what we call the cycle time or the time to get people back on track is 50 days shorter if you deal with our home restoration company. And when you ask customers, "What do you think?" after the experience, it's for those who understand customer satisfaction or Net Promoter Score. It's a full 10 points above what it is in the rest of the network. So very clear customer advantages, capacity advantages for us, and then economically, this is a business that's making money for us, that's inversely correlated with the underwriting business, which contributes to the Monday Morning ROE.
So it's good for customers, strategically very powerful, I think, and economically, this is a muscle we're building at a good clip, and I see that this business will likely double in the next five years.
And is that a platform you look to expand through, as well, through M&A?
Yes. I think, you know, where relevant and where conditions are right, we've made, I think in the past four or five years, four acquisitions. They're smaller tickets. But a bit like what we've done with BrokerLink, we see that this is a very good way to increase the footprint. It added a very strong base in the West, and we've expanded it right up to the East Coast, and organic and M&A is how we're expanding that business.
Excellent. We'll shift gears a little bit, and we'll talk about the pricing environment. And again, I think there's a consensus firm to hard markets will continue across personal property and auto line over the near- to mid-term. Do you ascribe to that view?
Yes.
There you go. Done.
Yeah. Absolutely, and I think the pressure we're seeing this summer will contribute to that, and if you look at our Q2 results, you've seen that top-line growth is in personal lines roughly 10%, if you combine both lines, and I don't see that diminishing.
Okay. And again, how is that impacting Intact's appetite and outlook for growth?
I think that the outperformance and the profitability of both the automobile and the personal property product is solid, so we're leaning in and growing in that environment. We're using our brand, the digital channel, and our distribution platforms, as opposed to our rates-
Yes
... to grow in that environment, and we're quite keen to expand our position in personal lines.
Okay. And what wild card should investors be watching to maybe kind of signal a surprise inflection point in personal pricing environment?
Wild card? I don't know. But I think the thing to look at in personal lines is the industry's performance.
Right.
If you look at the industry's performance in personal lines, you know, you're likely to get a sense of where rates are headed, and so if you do that, and you look at Q1 of twenty twenty-three, Q2 is not available for the industry, you'll see that the industry in personal lines is running north of 100%, and I think it'll be worse than that when you look at Q2 and Q3, and for me, that points to ongoing firm, hard, pricing environment, and I think this plays to our strength.
Okay. And can you talk about how the pricing environment is shaping up across commercial lines, across your footprint?
You know, given we have 14 minutes, I would put this in two buckets. North American commercial lines, we're seeing mid to high single digit, sort of, rate environment. On the other side of the Atlantic, that is U.K. and Europe, you're in the mid single digit range, and we're seeing that pretty much across our platforms. It's important for investors to understand that we are largely focused on SME and mid-market. We're one of the only firms in the world that has an SME and mid-market focus across our global commercial or specialty lines operation. The areas that stick out in terms of soft market conditions would be at the larger end of commercial lines. Where we have large customers, you see way more fluctuation in rates, lots of price sensitivity.
So I'd give you as an example, the London market for international accounts. It's a tougher environment in which to operate. And where we have large Canadian corporate customers, this is also bumpier. And then, what is known as financial lines, think E&O, D&O. In Europe, they would call that Profin. This is an environment that's been really hard over the past three, four years. It is in a rate decline environment at the moment, therefore, we're not growing in those segments. But in aggregate, mid to upper single digit in North America, mid single digit in Europe and in the U.K.
Excellent. We'll shift gears a bit, and we'll talk about global specialty lines. And I think you, you mentioned in the introduction, obviously, the sandbox that Intact plays in has expanded dramatically over the last decade, and clearly, global specialty lines identified as a significant growth opportunity. Can you just remind us what portion of premiums are currently derived from specialty lines and how that compares to, say, five, 10 years back?
Right now, it's about CAD 6 billion of revenue, and that's therefore, say, 25% of the organization. If you go back 10 years, it was one-tenth of that. It was in Canada. Now, the CAD 6 billion is interesting. We think we can, you know, take that to CAD 10 billion in the next few years, but more importantly, this is a business that runs sub 90% combined ratio. It's one of the most, the best performing business. In every market where you look, specialty lines tends to perform better, and so the real opportunity for us is twofold. First, deepen our relationship and distribution with our current footprint, and that'll be a meaningful source of organic growth. Second, bring some of our core competencies in risk selection.
That is the application of AI to data in the process of risk selection, especially in the U.S. and in the U.K., and to me, this is what creates sustainability in the sub-90% combined ratio performance, and a big opportunity, I think, for our organization, and one where we currently outperform even outside Canada.
Okay. And you've been in the U.S., I think, for just over seven years. I think it attributes roughly probably half of specialty line premiums. What do you see again as the primary organic growth levers and opportunities of the next five years for that platform?
So in the U.S., we have 12 verticals. We chose to enter the U.S. in very specific segments of the U.S. economy, or very specific products where we felt we could, A, have a leadership position in relatively short order, and B, outperform. And I think, and that's why we've exited very quickly as we entered the U.S., a few lines of business. That's why when you look at our performance in the U.S. today, we've doubled the size of this platform, even though we've exited a number of segments that we felt were hard to price. Think long tail liability as an example, we were out of these lines. And so this business is running, the combined ratio starts with an 8, and so, a very good platform to build with, build from, but we're small.
The reality is that leveraging the distribution relationships we have in the U.S. is a big source of growth, and it means going deeper in the relationships that we have with brokers and expanding the number of relationships, putting people in seats. And for me, that is a low risk path to growing in the U.S. because you start from a base of outperformance. Second, we have global capabilities now. We need to use them better in the U.S., and I'm thinking of certain lines like marine, renewable energy, et cetera, which we can put on the shelves in the U.S. And thirdly, the other way to expand our footprint in the U.S. is to use our distribution expertise and invest in MGAs in the U.S. MGAs that would have a footprint that's consistent with our underwriting appetite.
We've done that. We've invested in a number of MGAs. They manage about CAD 1 billion of premium at this stage, and smaller checks, again, but, economically, very good from a distribution point of view, and very good from a manufacturing point of view. I think if we punch on those three levers, you'll see our U.S. platform get much bigger, but with that sort of, sub 90% combined ratio performance and, and probably an ROE that starts with a two.
Okay. So again, solid appetite for U.S. MGAs. What about the appetite and approach for carrier M&A in the U.S.?
Carrier M&A in the U.S. As we entered the U.S., what I told many people in this group, what I told investors is the first order of business was to prove to ourselves we could outperform in the U.S., and I think we're there. As a result, we're prepared to deploy capital to make acquisitions of carriers. But it needs to be, for us, M&A is just an accelerator, it's not a strategy, to be clear. The capital deployment for carriers in the U.S. needs to accelerate the footprint we're on at the moment. It needs to generate an IRR north of 15, you know, our track record from that point of view.
And, and so we're open, but, you know, we're in no, no rush, and, that'll be the case in the U.S. It'll be a big growth engine for us.
Okay. Let's drill down a little bit, Charles. You mentioned on profitability, and I guess one of the more interesting recent initiatives, Charles, is exporting your expertise in AI into U.S. specialty. Can you talk about that initiative, and where you expect to see the biggest opportunities from the U.S. platform resulting from that?
I think I assume, like many companies, we're using in different ways, but I'll concentrate on where an advantage exists.
Okay.
That is in risk selection. We've built a muscle in AI over the last decade of north of 500 people that have generated, to this day, 370 models. The majority of those models are in risk selection. We're on a mad race to deploy some of these techniques, not only in the U.S., but in the U.K., as well, and for me, that's a big opportunity, because that contributes to solidifying the outperformance and the moat, and it's an engine of growth as well. That is number one. Number two, past the pricing machine, so to speak, is to leverage the continuum of quant AI with GenAI in the underwriting or in the underwriting process, itself, and that's an area we're investing heavily here in Canada, and I think in time we'll export that.
That is more of a midterm opportunity in the U.S., but we're concentrating on the outperformance in terms of leveraging AI. And then we're using it in ways similar to what I'm sure you've heard about a few times in the past few days.
Okay. And again, specialty lines contribute, I think, just over a third of U.K. and Intact commercial.
Right.
How big can that platform become over the next five years, and what needs to happen to get there?
Yeah, so on the other side of the Atlantic, there's about CAD 5 billion of business, and indeed, 30%-35% of that is specialty lines. The rest is largely SME and mid-market commercial lines. I think this can become meaningfully bigger, but we're much earlier in the process of creating outperformance. The reason why I think it can become bigger is that London, and the London market, to a certain extent, is kind of ground zero in the insurance world. And it is an opportunity that is untapped, as far as I'm concerned. We're in no rush to grow through too quickly there. We're still solidifying what is a good performance to start with, but we want to have a clear visibility on what is actually a sustainable advantage.
And we've got some work to do in the U.K. and in the London market, as well as in Europe.
Okay. And again, we've got kind of three minutes left here, and I think interest rates or interest rate changes have been fairly topical throughout the conference. And I guess with the shifting interest rate environment, are you comfortable with the sustainability of the investment income over the next 18-24 months?
Yes. It was topical. I cannot say we think a lot about interest rate at Intact. We think about ROE. We start from there, and we price our products-
Yeah
... and everything else follows. But to your question, per se, the first thing one has to know is that the book yield right now is 3.5%-3.7%. The duration of the asset side is 3.4 years. And as a result, that creates in itself a certain degree of sustainability. The second thing that I think is relevant to understand is the fact that in the past few years, because of transactions we've done, volatility, et cetera, we've been at the low end of our risk appetite, 10% cash. With capital generation and where we, where we sit today, we will migrate towards the target, policy. That'll be a source of lift.
And the third thing, if you think about the investment income, is that we're generating CAD 1.5 billion of investment income, and that's being reinvested in the asset side of the house. You put those three things together, and to answer your question, yeah, I feel pretty good about the sustainability of the investment muscle at this stage.
Okay.
But, we price with ROE in mind. Reserves are discounted, so interest rate is interesting, but I don't view it as a big economic lever for our business.
Okay. Just in terms of closing comments here, what do you see as the top two to three opportunities for Intact, and its shareholders over the next three years?
I think it is... If you think about the backdrop of the market in which we operate at the moment, and you integrate in your thought process the fact that we have outperformance everywhere we operate, and the opportunity set is 10x what it was seven, eight years ago, that's where the opportunity comes from. And it is expand your leadership position in Canada, primarily with non-rate levers. Deepen your distribution footprint in the U.S. Finish the integration of Direct Line and NIG in the U.K., and then grind your ROE advantage on pricing, supply chain, and capital management. And then it's about finding opportunities to reinvest the capital that the business is generating at the moment, but, these are the things we're focused on, and we're looking forward to the next year.
Excellent. Well, Charles, great discussion. Again, I'd like to take a minute and thank you personally again for your time, on behalf of Scotiabank Global Banking and Markets, the Intact organization, for your continued support-
Thank you
... for 20 years, and hopefully, we can make it 20, 25 years of participation in that conference.
Well, that'll be a debate for another time.
Thank you.
Excellent.
All right.
Thanks, Phil.
Thank you. We're gonna take a short break, and we're gonna reconvene at 2:40 P.M. with our next speaker, Mr. Rowan Saunders, President and CEO of Definity Financial.