Good morning ladies and gentlemen and welcome to the Intact Financial Corporation Q2 2025 results conference call. At this time, note that all participants are in the listen only mode. Following the presentation, we will conduct a Q and A session. 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 Wednesday, July 30, 2025. I would now like to turn the conference over to Jeff Kwon, Chief Investor Relations Officer. Please go ahead.
Thank you Sylvie. Hello everyone and thank you for joining the call to discuss our second quarter financial results. 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 2 for a disclaimer regarding the use of forward looking statements which form part of this morning's remarks, and slide 3 for a note on the use of non-GAAP financial measures and other terms used in this presentation. To discuss our results today I have with me our CEO Charles Brindamour, our CFO Ken Anderson, Patrick Barbeau, our Chief Operating Officer, and Guillaume Lamy, Senior Vice President, Personal Lines. We will begin with prepared remarks followed by Q and A, and with that I'll turn the call over to Charles.
Thanks Jeff. Good morning everyone and thank you for joining us today. Yesterday evening we announced net operating income per share of CAD 5.23 driven by strong underwriting performance across all geographies and lines of business. Our book value per share increased 12% year over year driven by an operating ROE running above 16%. Top line growth was 4%, an improvement of 1 percentage point quarter over quarter. This was attributable to continued growth in personal lines through both rate actions and an increase in units. Commercial lines remain challenged as we continue to see elevated competition in large accounts. As profitability remains very strong, we're actively positioning ourselves to benefit from growth opportunities. We're entering new verticals in the U.S and Europe. We're expanding broker relationships in the U.K., leveraging technology to deliver a more streamlined experience for customers and brokers in Canada.
Overall, our combined ratio is very strong at 86.1%, a 1 percentage point improvement year over year despite higher CAT losses this quarter. A clear proof point that our advances in pricing, risk selection, and portfolio management are really paying off. Let me provide some color on the results and outlook by line of business, starting with Canada. Personal auto premiums grew 11% in the quarter, a result reflecting both rate action and a 2% increase in units. As profitability for the industry remains challenged, we expect hard market conditions to persist over the next 12 months. Based on this, we see industry growth in the high single-digit range. Our combined ratio improved 1 point 90.3%. Even in what tends to be a seasonally favorable quarter, this was a very strong result. We remain confident with our guidance of sub-95 combined ratio for this business.
Moving to personal property, premium growth was 10% in the quarter driven by both rate actions and a 2% increase in units. Given the elevated level of weather and climate-related claims over the past few years, we expect current hard market conditions to persist. We see industry growth in the low double digits over the next 12 months, and the combined ratio here was also very strong at 84.5%. In commercial lines in Canada, premium growth was 1% in the quarter, reflecting low to mid single-digit rates and sustained competition in large accounts. Despite the competitive environment, we're growing our customer account. We continue to see a drag from mix shift as we gain in SME in the mid-market space. While we remain keen to grow large accounts, we are very deliberate and disciplined where we grow.
Overall market conditions are favorable and constructive and we see industry growth in the mid single-digit range over the next 12 months. The combined ratio in this line was robust at 74% reflecting strength in both commercial and specialty lines. Moving now to our U.K. and I business, premiums in the quarter were 5% lower year over year than due to continued remediation in the Direct Line portfolio and some delegated arrangements. Excluding this, premiums were up 3% year over year with elevated competition continuing in large account market. We see industry growth in the U.K. and in Europe in the low to mid single-digit range over the next 12 months. The combined ratio of 92.9% was marginally higher year over year due to a modest increase in the expense ratio and large losses.
We remain focused on pricing and risk selection and see our U.K. and I combined ratio evolving towards 90% by the end of 2016. In the U.S. premiums were flat year over year marking an improvement from prior quarter. While growth was positive across most of our lines, we experienced a five point drag from accounts and large properties. We see industry growth for U.S. specialty in the mid single-digit over the next 12 months. The combined ratio in the U.S. was also very strong at 87.8% in the quarter, an improvement of nearly 1 point over a year ago. Driven by the underlying loss ratio. The business is positioned to maintain a low 90s or better combined ratio moving forward. Our team continued to execute on our strategic priorities during the second quarter across the world let me highlight a few important achievements.
While we did not experience significant CAT losses this quarter, the deep trend of increased natural disasters over the last few years has not changed. That is why in Canada we launched Keep It Intact, a national long-term program aimed at empowering Canadians to make informed decisions and take actions to protect their homes from climate threats. We also recently announced additional funding for our Municipal Climate Resiliency Grant Program, increasing it. Through these grants we're supporting 19 municipalities across Canada which will implement proven solutions that help protect communities from flooding and wildfire. In the U.K. we started renewing Direct Line's policy onto our platform in June 2024. This has allowed us to deploy our sophisticated pricing models across the portfolio. This is already contributing to an improved combined ratio.
Our new Initiative 1 commercial, launching later this year, will deliver a single compelling proposition to brokers on service, product and price in the U.K. As we highlighted at our Investor Day, the competitive advantage in data and AI that we built in personal lines and commercial lines is also now being leveraged within global specialty lines. Advanced pricing models now cover close to 40% of our GSL premium base. Our values, strong sense of purpose and long term perspective keep us anchored as we navigate this period of economic and geopolitical uncertainty. On top of that, our healthy balance sheet positions us to capitalize on future opportunities. As we look ahead, we're really well positioned to continue to achieve net operating income per share growth of 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 Ken Anderson.
Thanks Charles and good morning everyone. Our second quarter results again demonstrated the strength and earnings power of our business. Net operating income per share increased 8% from last year, reaching CAD 5.23. This reflected solid underwriting performance across all segments in a light catastrophe quarter and a healthy contribution from investment and distribution income. Operating return on equity was above 16% for the third straight quarter and our balance sheet is strong with a total capital margin of CAD 3.1 billion. Let me provide some color on our underwriting results. We reported a solid underlying loss ratio of 56.8% in the quarter. In both Canada and the U.S. our underwriting fundamentals are strong. In the U.K. and I, the underlying ratio increased by 3 percentage points for higher large loss activity more than offset improvements in the DLG portfolio. Moving to catastrophes.
Second quarter losses totaled CAD 137 million from storms in Canada and a few large commercial fires across our regions. While cat losses were CAD 41 million higher than last year, it was less than half of what we would expect in the second quarter. As Charles mentioned, the deep trend of increased natural disasters over time has not changed and as we have seen, catastrophe losses can fluctuate significantly from one quarter.
The next.
Favorable prior year development continued to be strong at 7.4% in the quarter, particularly in commercial lines. With favorable development on prior year catastrophe losses in Canada and in the Direct Line book in the U.K. and I, we continue to apply prudent reserving practices across our business. Therefore, combining current accident year and prior year development is the best way to assess the evolution of our underlying performance on that measure. The year over year improvement overall was 1.8 percentage points, reflecting our ongoing focus on underwriting fundamentals. The consolidated expense ratio was 34.3% for the quarter, comparable with last year and on a year to date basis it remains in line with full year expectations. Operating net investment income increased 3% from last year with slightly higher book yields and favorable foreign currency movements.
Our reinvestment yields are broadly in line with book yields and with a little over CAD 800 million of investment income year to date, we remain on track to reach approximately CAD 1.6 billion for the full year. Distribution income of CAD 165 million reflected a strong contribution from BrokerLink, including continued M&A activities. This was offset by slower growth in other parts of our business such as our MGAs. In addition, mild weather over recent quarters lowered the contribution from On Side. In line with the countercyclical attributes of this business, we remain well positioned to grow distribution income by at least 10% annually going forward. Our operating effective income tax rate was 22.1% for the quarter, in line with expectations. Turning to the balance sheet, we continue to maintain a very strong financial position.
Total capital margin held steady at a robust CAD 3.1 billion and our adjusted debt to total capital ratio decreased by close to a point in the quarter to 18.4%. Additionally, book value per share grew 3% sequentially to CAD 98.67. Our balance sheet strength means we can handle impacts from economic uncertainty while also being ready to capitalize on growth opportunities as they arise. In closing, despite the macro environment of the past six months, our business has demonstrated its strength and resilience. We had a solid first half of 2025 with net operating income per share up 9% to CAD 9.25. With the strength of our people, our platform and our strategy, we're well positioned to continue to execute on our financial objectives to outperform the industry ROE by 500 basis points each year and grow net operating income by 10% annually over time.
With that, I'll turn it back to Jeff.
Thank you, Ken. In order to give everyone a chance to participate in the Q and A, we would ask that you limit yourself to two questions per person. You can certainly requeue for follow-ups and we'll do our best to accommodate if there's time at the end. Sylvie, we're ready to take some questions now.
Thank you, sir. Ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, we ask that you please lift the handset first before pressing any keys. Please go ahead and press star one now. If you do have any questions, your first question will be from James at National Bank Financial. Please go ahead, James.
Yeah, thanks. Good morning. First question, wanted to touch on the, let's say, softening in commercial lines, growth across all geographies. Can you dig into what you're seeing on the ground specifically and perhaps what are some of the strategies you put in place to offset some of that softening in the broader industry?
Thanks and good morning. Let me give a perspective on what we're seeing across the markets in which we operate. Some of the operational metrics that we would have looked at in the past few days, basically. So a fresh view on what's happening. The first point I would make is that this is still very much a constructive marketplace in aggregate. You look at rates and exposures, which is really what's important, you know, in light of where there's inflation. We're in the mid single digit range. Okay. That's what I'm seeing in the field.
All in, conditions in the SME and mid market space are pretty healthy actually. Keep in mind, this is the bulk of our portfolio. The pressure continues to be observed for larger risks as we've talked about in the last year. Some specialty segments such as ML or Management Liability Cyber, I'd say the same James that we've seen in the last three months, three, four months is that large commercial property risks is where we've seen a bit of weakness this quarter, really at the larger end of commercial prop, not across the board in commercial prop. When I sort of put that together and I look 12 months out, my perspective is the industry premium growth in North America should be in the mid single digit range and in the U.K. and Europe in the low to mid single digit range.
When you look at that, the question you then ask yourself is when you look at trade and exposure, we're growing that more than inflation. Despite the fact that the performance is really strong. We're not in a zone as a firm where we're anywhere near margin erosion, to be clear, let alone the fact that we're actively investing in pricing, risk selection, deploying with, I'd say, intensity, new pricing models in particular in the U.S. as well as in the U.K. You know, given that these are areas where we're less mature from that point of view, the performance in both absolute and relative term is really strong. We're super keen to grow our position in that environment. If I, you know, maybe go by markets, as I said, if you look at Canada, for instance, in Q2, rates and exposure were close to 4 points.
If you look at the U.S., rates and exposure were in the 3-ish sort of zone. And that's including the pressure we saw in large property. Then U.K. and Europe rate and exposure near 5% in the last quarter. Again, pressure at the top end, pressure in some segment, but in aggregate, I'd say constructive and an environment that plays to our strength, I think. One thing I would observe, James, in particular in the context of Canada, the biggest headwind is mix. And that's just a top line headwind. What does that mean in practice? Yes, there's pressure in large commercial, but then we're winning at the lower end, we're winning at the lower end of mid market, we're winning at the lower end of the SME space. And frankly, if you look at the profitability curve, we're pretty comfortable with that mix shift.
This is where I think top line tells a story, bottom line tells another story to a certain extent. I think we're building serious economic value as we navigate this cycle.
That's a very, very good answer. As I'm thinking about some of the pressures and where those pressures are coming from, you know, from other companies that are reporting, it sounds like it's coming from the reinsurance side specifically. Are you catching any of that or starting to see any of that competition or demand from the reinsurance side pushing into the personal property area? Or is this still entirely focused on commercial at this point?
We don't see that pressure. Just to be clear, we're not big users of reinsurance. We use reinsurance for tail risk purposes. Otherwise, you know, we're really not using reinsurance much, quite frankly, and therefore don't feel any of that pressure.
We're very clear about the ROE targets we can achieve that's deployed in the field and that's really what drives our underwriters' behavior account by account because people know where the margin exists and what posture they have to take in this environment. Frankly, that includes large accounts as well. I think we're in terms of pricing and risk selection. One of the calls we've made about three years ago was to go pedal to the metal in terms of deploying the best science we could, not only in Canada where we were in great shape, but in the U.S. and in the U.K. Now those tools are in the field and people can navigate even the choppy environment knowing that their stance on rate is the right one.
Thank you.
Welcome.
Next question will be from Bart Dziarski at RBC Capital Markets. Please go ahead Bart.
Morning Charles.
Thanks for taking the question. Just wanted to dive into distribution income a little bit. You talked about some of the weakness driven by On Side growth down 2% year over year. Curious on your thoughts around how do you get back to that 10% growth outlook over long term?
Yeah, I'm quite bullish about the distribution growth profile. I'll let Ken Anderson unpack that. Yeah.
You know, in the quarter CAD 165 million of distribution earnings, CAD 282 million in the first six months of the year. Yes, a 2% decline in the quarter. We're up 5% year to date. I would say consolidation of distribution continued at pace in the first six months. You know, BrokerLink closed 13 transactions with north of CAD 300 million of premium and BrokerLink are on track to hit CAD 5 billion of premium before the end of this year. You know, earnings growth was a bit more tempered in a few segments. I point to MGAs in the U.S., you know, which are operating in a competitive environment. Then as you pointed out, On Side, you know, we really like the countercyclical attributes of that business. Margins are improving there, but obviously with benign cap levels, that's meant a little less revenue for On Side.
I would go back to the deep trend that we've talked about and On Side being very well positioned in that context. All in, I would say very pleased with the development of the distribution platform. We've generated over CAD 500 million of income in the last year and we've compounded at 20% over the last five years. We still see a lot of opportunities in distribution and, you know, particularly the continued consolidation at BrokerLink but also in the MGA space in North America. We would expect to quickly return to that objective of 10% growth. In fact, you know, if we look at where we stand right now in relation to the third quarter, we would expect to be back in line with that objective.
Yeah, that's good, Ken. I think it provides good, good perspective, you know, mid to long term. Bart, you know, there are a number of things that give me confidence about the trajectory that Ken is talking about. The first one is that I see margin improvement opportunities in our distribution footprint, including On Side. The second one is the fact that consolidation in distribution is a big source of growth. I'd say this year compared to where we were a year ago, the competitive environment is better than it was a year ago in terms of who we're competing with to consolidate distribution. BrokerLink has been probably the most active consolidator in the first part of the year and the pipeline is really solid. The third element is the fact that we're building an organic growth muscle with the digital channel in a number of those units.
BrokerLink first and then on side has a lot of room to grow and so, you know, it can be choppy from quarter to quarter, but the trajectory is north of 10% there and we've got good visibility on that.
Super, very helpful and clear. Thanks guys. Just one follow up on James' lines of questioning. With a softening pricing environment in the U.S., like are you thinking about taking advantage of that opportunity in terms of you've got excess capital, it's a highly fragmented market, you talked about on your investor day trying to capture more of that market. Is your thinking evolving on that front in the U.S. as a result of what's going on in the broader environment?
The U.S. and our U.S. business and our U.S. team are doing a great job.
The combined ratio outperformance part in the U.S., I start there because that's the key input in terms of how much appetite you should have to grow. At least that's how we think. You're north of 7 points of combined ratio outperformance in the U.S. Most of the lines of business are outperforming with the exception of a few which are being remediated. That's where the drag is coming from. What's in the pipeline to grow our U.S. platform? One, we're expanding the product set within the 12 verticals within which we operate. Second, we're investing in distribution management. In other words, we want to go deeper for each of those verticals and the relationships that we have with brokers. There's a fair bit of upside to leverage the relationship that each vertical has to cross sell between the verticals. Thirdly, we're investing in MGA in the U.S.
We have expertise in managing distribution. We like to build distribution profit. If you invest in an MGA in the U.S., you expand your distribution relationship in the exercise. Therefore, this is an area that we're really focused on. Lastly, it's tapping into the international capabilities of Intact. Now we have a great global network. We have very strong presence on the other side of the Atlantic. We've demonstrated in North America that we can export some verticals. I'll take the example of technology, for instance, or entertainment. In Canada, verticals can be exported. For me, that is a big source of growth as well. When I look at all that, you've got a pretty robust organic growth game plan. Obviously, if you outperform the market by 7-ish points of combined ratio. Combined ratio.
You know, ROE outperformance in the U.S. probably in that zone, you should be ready to deploy capital through acquisitions as well. We're clearly in that mindset. You know, it needs to be on strategy. It's not deploying capital just to deploy capital. It needs to be on strategy. Second, our track record of deploying capital in M and A is an IRR north of 20. Our objective is to hit for north of 15. The numbers need to work as well. If there was an opportunity now, we'd be on it.
Very helpful. Thanks so much, guys.
Thank you.
Next question will be from Paul Holden at CIBC. Please go ahead, Paul.
Thank you.
Good morning. First question, I want to ask about the increasing claims pressure you highlighted in Alberta Auto. I guess the question really is, I think if I remember correctly, the 2027 reforms or reforms effective 2027 will tackle some of these issues, but want to get a better understanding of how you're going to manage that between now and 2027.
Guil, do you want to take a crack at that?
Yes. Nothing really changed in Alberta. Just to be clear, there's still pressure in the market. The industry is unprofitable, but we have strong defensive measures in place to control the quality. We're comfortable with the new business that we're writing. The main issue remains the rate cap. That's not linked to the overall claims inflation and that affects the profitability of the renewal portfolio. That's a continuation of the trend we've talked about in the past. The solution is clear there. The cap really has to be removed. The inflation itself is product driven and the problem is specific to the Alberta market. We don't see or expect similar pressure in other jurisdictions, Ontario for example, where the product is much tighter. When we look at Alberta, it's less than 20% of personal auto and the remaining 80% isn't very good out.
When we take a step back, I think Alberta Auto has been and still is a strong source of outperformance for IFC. While the absolute performance is not where it should be, we believe the reform that is, as you pointed out, 18 months away, is tackling the right fundamental issues to restore profitability. We really want to hang on to that book. I think we have good hope that come the reform, the profitability will be restored and that will happen January 1, 2027. In the interim, sorry, we don't see the current pressure having any impact on our overall sub 95% guidance. That's an outperforming book. We want to keep it and we have a view to profitability in 2027.
Okay, good. Maybe a little bit more of a broader question on personal auto. We have been through a period of robust rate renewals and modifying claims inflation. Maybe an update on where we stand there. In particular, I am just wondering if the rate renewals are starting to slow. Maybe a perspective on where we are on a year over year basis. Thank you.
Guil, do you want to provide a perspective on that? Yeah.
I'll start maybe at the industry level. The industry took a lot of rates in the past few years, double digit last year. We've seen the industry growth likely come down in the last couple of quarters, which kind of drives the change in outlook that you might have seen. The industry is still unprofitable. We're expecting hard market condition to persist with industry growth still strong in the high single digit. There is still work to do for the industry. When we compare that to our own growth, which is double digit, we're gaining market share in a favorable market condition. We're now in that part of the cycle where, as anticipated, we're outperforming on both top line and bottom line when we look at our rates.
Growth has been double digit seven quarters in a row despite the written rates coming down quarter over quarter, with unit growth continuing to contribute favorably at 2%. Inflation is stabilizing in the mid single digit range. Our rates are normalizing also in the mid to high single digit rate, down about a point and a half from Q1. That doesn't really show in the growth as we have strong unit momentum and also favorable mix from higher growth in our direct channel and in Ontario in particular. Really happy to be in that environment and continue investing in our growth there.
Great, thank you. Ballpark would be the 8% zone.
At this stage, which is good.
Zone to be in. I think the point that Guillaume is making here is that the outperformance from a combined ratio or loss ratio point of view in automobile is very strong. It's been strong for a while now. We're getting in the zone where we're outperforming on growth as well and we're really keen to pursue that while making sure we protect quality in the Alberta marketplace. Please.
I'll leave it there as my two questions. Thank you.
Welcome.
Next question will be from Tom MacKinnon at BMO. Please go ahead.
Tom,
Good morning.
Thanks very much. Morning. With respect to the U.K. and I, you mentioned some large losses, and if you can maybe elaborate on where those might be, what your outlook would be with respect to the U.K. and I, and generally as you've changed, slightly more muted industry premium growth for those for U.K. and for the U.S. Is there anything you can comment on in terms of terms and conditions or some other things other than just rate? I mean, you're still being able to. And does this change in muted premium growth have any impact on your ability to continue to do. I guess it's low 90s or better in the U.S. or trend to low 90s by 2026 for the U.K. So bit of a mouthful little question, but hopefully you can tackle it. Thanks.
We'll try to tackle your six questions. Patrick, why don't you start with the large losses and then we'll get to combined ratio trajectory maybe in the U.K. and the U.S.
The U.K. and I business overall is really performing largely as we expected at this point. You know, the Q2 combined ratio of 92.9% included, as we mentioned, higher than usual large losses mainly coming from some portions of the specialty lines. In the U.K. and I, on the other hand, the favorable PYD was also stronger probably than normal. So overall I'd say with the 92.9% largely reflects the range of the run rate of that business in the U.K. and I and in line with the expectations we had for this portfolio at this point in time. Just like Charles mentioned for the US, we are outperforming as well on a combined ratio perspective now in the U.K. and I.
With the traction we're seeing from our actions in adjusting the footprint, adding pricing sophistication tools, and the overall improvement in the portfolio, you know, our confidence level is the same to be able to run that business at around 90% by the end of next year.
Yeah, I think, Tom, you know, if I step back here and I look, you know, there's a lot of focus on the comments we make on, you know, large pressure and large commercial lines. You know, if you step back and you look at the U.K. and I, the rate and exposure in Q2, near 5% yet. You know, the two things that I would highlight, this business is running at 92.9. You're already in the mid teens ROE in the UK or U.K. and I. There are two big things that are happening in the UK that will eat up the pressure we might see on the top line in terms of what it means for the bottom line. The first one is the fact that in the 92.9, you have the NIG performance.
If you look over the last year and in the run rate, which is sort of in that zone, which is not at the level we want it to be, there's a drag on the top line. That will translate into meaningful improvement in the NIG performance, which will then translate into improving the run rate of the U.K. and I business, which is about in the 92-93 zone, I think. I think the improvement in the NIG performance is in the six to seven points year on year. Year on year.
Yeah.
Just to put things in perspective, and we only have.
Sorry, NIG. What's N.I.? NIG.
Oh, sorry. It's the Direct Line acquisition that we've done last year and that segment of Direct Line is called NIG. And so which is the pressure point on top line. I mean, it's costing close to five percentage points of top line at this stage. Why? Because we're wanting to make sure that that acquisition, which basically doubles our commercial lines position in U.K. class, is performing like the rest of the book. We haven't seen that yet and that is a big portion of how we go from 92.9% to 90%. The other thing that's happening in the U.K. and I is the deployment of risk selection tools and some of the science that's been exported there that is paying us for sure.
But there's a fair bit of upside in my mind in the usage of those tools in the next couple of years and that's why frankly, at 92.9% today, given what's in the pipeline, what's happening in the market is interesting. More interesting to me is the upside of the actions we're taking, which we have yet to see. So, you know, we feel very confident about the guidance we're giving in the U.K. which is to get to 90%-ish. The U.S., in the U.S. 87.8% this quarter. You go back in time. I mean this is a business that we said should run 90% or better. It's running below 90% for a while now.
And there's a fair bit of remediation still in that portfolio to a point or two of pressure from the market for me does not take us off course or off track one bit in terms of the trajectory of performance. Ken, anything you want to add?
No, I think you've covered all of Tom's questions.
Maybe with respect to overall what you're saying in some terms and conditions or mix.
Oh, sorry.
I mean, you talk about overall premium growth, but you know, that may not necessarily be the key thing in. Any color on that?
Yeah, I think first point, high level, the mix shifting means that, you know, you're moving towards somewhat smaller customer in average and likely simpler terms and condition in the exercise. There is movement on terms and conditions, but I would say in aggregate for the U.K. or the U.S. nothing substantial to be concerned about. That is true at the top end of commercial lines where when there's pressure on rates, people find ways to offset that with deductible and limits and other elements of terms and conditions, but not true across the portfolio.
Okay, thanks.
Thank you. Next question will be from Lemar Persaud at Cormark. Please. Go ahead Lemar.
Thanks.
Hey, how are you guys? I'm going to just ask a very basic high level question on, you know, this elevated competition in large accounts and commercial. Like, why are peers willing to push so hard on these large accounts across geographies? Should we think about this as just one of those times where peers are willing to accept a lower ROE than Intact and you're just going to wait for the market to come back to you, or is there some other underlying reason? Very high level?
No, I think that's it. I think you're coming up many years of hard markets. So there's very good profitability at the top end of commercial lines. And with rates sort of decelerating, the desire to protect one's portfolio or to grow goes up in a way and in large commercial lines. That's why I like the fact that we have very good large commercial lines capabilities. But the mix of our book is far more mid market, where a lot of large numbers and systems play a much bigger role in pricing in large commercial lines. The reason why it's more cyclical and the amplitude of the cycles are wider is because there's a fair bit of delegation in the field.
The pressure that comes with writing large accounts, which tend to be more complex, and the fact that there's more delegation at this end of the market means that you see some irrational behavior faster there than in other parts of the market. I think that's the zone we're in at the moment. Do we think there's no inflation in property? That climate change won't have an impact in property? No, obviously, but it's been profitable, quite profitable. There's a fair bit of demand there. It's supply that's driving what we're seeing in large property schedules. As I said, we're not seeing that sort of behavior across property. We're seeing it at the top end of commercial lines in property. What do you do in this environment? Our teams in property know exactly where the margin is and how much room they have to compete and operate with that book.
We monitor that behavior. We've got a pretty tight tool and governance at the top end. Accounts are reviewed with the actuaries individually. As a result, I'm very confident that our teams are navigating these conditions very well. Obviously the success rate from a growth point of view is not what it was a year ago. We're fine with that. There's lots of opportunities here to grow. We want to make sure we grow where it makes sense.
That's very helpful. If I can just, you know, kind of follow up on that, is there, are these large accounts, large multinationals, because it's impacting other geographies outside of Canada? Is that the way to think about it?
Yeah.
Okay. Okay.
Not only large multinational, but I think it's a good way to generalize. At what part of the market are you seeing the most pressure?
Okay. Okay, thanks. Then my second question, just kind of on distribution income here, can you guys quantify? I do not think you have in the past, but I will try it anyways. You know, trying to understand that CAD 165 million, how much came from On Side this quarter versus Q2 last year just to help understand, you know, that dynamic between, you know, how much On Side would contribute in a heavier cat quarter versus a quarter like we saw in Q2. Is there any context or numbers you guys can provide just to help us understand that dynamic?
Lemar, I think this is a good question. It's a complex one. We'll take it and make sure that we have an answer that is insightful. I'm not sure we're well equipped to give you a sense of sensitivity on distribution income as a result of natural disasters. This is an exercise. We could see how easy it is to disclose, but we'll take your question under consideration.
Okay, thanks. Thanks.
Thank you. Once again, ladies and gentlemen, a reminder to please press star one should you have any questions. Next question will be for Mario Mendonca at TD Securities. Please go ahead.
Mario, good morning. I went back over the last three years, so 12 quarters, and looked for how many quarters we, Intact, reported where the PYD relative to net earned premium was sub 4%, and I found one. It is not common to be sub 4%, but yet your guidance remains the 2-4%. Perhaps, Charles, you can speak to what are the conditions that would cause PYD to fall back into that 2-4% range? Or are there some structural reasons why it could remain well above 4% in the near term?
Yeah, I think, Mario, I'll just start by saying we're not selling widgets and as a result the range of outcome is something we're very conscious about. If you go back 10 years, you see that there's a degree of volatility around this and therefore that calls for caution. That's the first point I would make, I have to say. You know, the mix of business over time has changed and we're in businesses that might be a bit less volatile than where we were in the past and mainly, you know, focus on commercial as well as specialty lines. Look, our guidance really is indeed 2-4%. I think what we're saying is that we expect that in the near term PYD will oscillate around the top end of our guidance.
Maybe, Patrick, I don't know if you want to provide a bit more color on PYD,
maybe just on the.
Higher level of this quarter. I think it's, while solid across all lines of business, it was in particular higher than expected. I would say in two main areas, commercial lines, Canada and the DLG book in the U.K. and I. And in Canada. Mario, I would point to two main things. There was additional PYD on prior year cats, given the elevated amounts we had, and also on other short tail property claims in particular, and I think that that's important to illustrate why we focus so on the importance of looking at PYD and current accident year together. Because in that specific example, these two, by the way, represented about 1.5 percentage points overall of PYD at the IFC level. And there's very short period of time between the current accident year and the PYD when it's in such short tail lines.
That is one important point to note. In U.K. and I, I mean, this is a recent acquisition. The data that we had at the time was not very credible, so we were particularly prudent in it. And we've seen some of that coming back this quarter as favorable PYD. This is an additional half a percentage point overall for IFC. These are some of the elements specific to these quarters that illustrate some of the points.
In the case of the U.K. and I, we're still building caution in the current accident year. That is why I would not dismiss that and look at those things together. Mario, the way I think about the PYD range here, and keep in mind the appointed actually decides where they book the reserves and that is their business. Our view is that PYD should oscillate around the top end of that range in the near term. Your question is what could take this back in the middle or at the lower end of the range? Inflation in automobile insurance is something I would keep an eye on. We're not overly concerned about that. Automobile insurance is a four year duration product and if you go back in time, that is where there has been pressure. Now we have much less automobile insurance in relative terms than we did a decade ago.
That is one thing I would watch for. The other thing I would watch for is inflation in commercial lines. Liability. It has been good so far, but we're prudent about that. My analogy with the widget is that when you're in the liability business you have to be cautious. So far I think what we're building in the current accident year and what we're seeing in the PYD shows that we've been conservative in relationship with the inflation that is materializing. We want to make sure that we do not get surprises the other way. That is why we think you should look at current accident year and prior year together and you should expect in the near term to see PYD at the top end of that range oscillating around the top end of that range.
I think prudence in our space is really important because we're in the risk taking business.
Helpful. Second question. I was reading an article and this was about the US market and it related to a survey where the respondents, one in four respondents, said they were downgrading or dropping their auto insurance. The dropping makes no sense to me. Downgrading or dropping, it seems to be in response to just how much more expensive it has become to insure your automobile in certain parts of the US. Is there any trend that you're observing in personal auto where folks are downgrading their coverage, perhaps not dropping, but changing their coverage to save money?
Yeah, Guil.
No Mario, we're not seeing any of that. Like we're seeing a good penetration of our dual line, dual line concentration. So people buy auto property together a lot more than they did a few years ago. But within auto we're not seeing anything. The mix is actually positive to our top line. So that's not a trend we've observed.
I think, Mario, the highly competitive marketplace in Canada, highly segmented from a pricing point of view and Canadians who shop can really manage the size of their automobile insurance premium. In fact, in an inflationary period like the one we have been in over the past couple of years, we have seen shopping go up dramatically. That is why if you look at the growth in our direct channel, it is even higher than the growth in the broker channel. Very healthy marketplace. I would say that when it comes to what you call downgrading or underinsurance in automobile insurance, Alberta is the province where we need to keep a very close eye on that because access is challenged at the moment and I think the government knows that.
Thank you.
Welcome.
Thank you ladies and gentlemen. This is all the time we have today. I would now like to turn the call back over to Jeff Kwan.
Thank you everyone for joining us today. Following the call, a telephone replay will be available for one week and the webcast will be archived on our website for one year. A transcript will also be available on our website in the financial report section. Of note, our 2025 third quarter results are scheduled to be released after market close on Tuesday, November 4 with an earnings call starting at 11:00 A.M. Eastern the following day. Thank you again and this does conclude our call.
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 ask that you please disconnect your lines.