Good afternoon. I think we're ready to kick off our next presentation. It's my pleasure to host Patrick Barbeau, CEO of Intact Financial Corporation. Patrick, thanks for joining us today.
Thanks for the invitation. Thanks for being here.
Patrick, you were appointed to CEO in June 2021, which gives you global accountability for claims, technology, and Intact's innovation labs. Certainly not a newcomer to Intact, you've been with the company and its predecessor, even ING Canada, since the year 2000. That's right.
You've held many different leadership roles, actually, across Intact: claims in Canada, SVB personal lines. You're also involved in the AXA Canada and GEBCO integrations. Worked in belairdirect for a number of years, marketing and communications. You've done pretty much all of them except for maybe Charles's job. Thanks for spending the time with us today. My pleasure.
I guess where I want to start off is on growth and the ROE outlook. When I look at the ROE today, it is a bit above the long-term average. I think one of the key questions investors are asking is, to what extent is that structural versus cyclical? I.e., can that ROE be maintained at an above-average rate? Right.
The first thing I would point out is we're very pleased with what we observe in all of our business lines across geographies. The performance is very good. We're quite confident that we can sustain the kind of level of ROE we've printed in the recent quarters for when we look forward. There are good reasons for that. One of them is if you look at the track record, we've printed 16% ROE on average over the past five years. From a relative perspective, we've outperformed the industry by 650 basis points over that same period, which is significantly higher than our 500 basis points objective. If you look more closely at that track record, you would see also that the margin of outperformance is generally higher in years where the industry has lower profitability.
Not only are we outperforming on an absolute basis on average, but we're also more stable. We have more stable ROEs than the industry over time through the different parts of the cycle. The other piece that I think is important to mention is that the mix of our business has changed a lot in the past 10 years. Commercial lines and specialty lines, which tend to have higher profit margins, were only 30% of IFC in 2015, and it's more than 50% today. That change of mix also helped the ROE sustainability. Overall, we're quite happy with the performance. I'd say the outperformance is coming from three main areas at IFC. Pricing and risk selection is about a third of the outperformance. Claims management and supply chain is another third. Capital management and investment is the last one.
We see we constantly have a list of initiatives to push on these competitive advantages. We have a very healthy pipeline right now. If I take just the example of pricing sophistication, we're deploying aggressively our machine learning model of pricing into commercial lines and specialty lines across the platform. We're bringing some of our competitive advantages in claims in the U.S. and in the UKCL. It's going quite well, but we have seen only a portion of the benefits that we think we can realize from these initiatives.
OK. When I think about the claims management piece of that, clearly, there's been a lot of initiatives and a lot of sustainable improvement on claims management. When I think about the long-term margin and competitive dynamics, like how much of that gets, does any of it get competed away? Your competitors are obviously always going to try to catch you.
Right.
You're going to reinvest part of that back in price to gain market share, kind of thinking about that dynamic, the margin versus revenue growth equilibrium.
Maybe a bit of a view on the claims and supply chain strategy first would be helpful. You know, we almost need to start from the purpose of Intact. The purpose of Intact is to help people, businesses, and communities to prosper in good times and be resilient in bad times. The claims strategy is a cornerstone of that purpose, obviously. It's, as we might have mentioned just earlier, contributing to about a third of the ROE outperformance. How we do it in practice is two big ideas. The first one is we want to control as much as possible the claims experience or the claims process as we can with our own employees, internalizing much more than anyone else the claims expertise and going deep in the supply chain.
The second big idea is to leverage our data advantage and expertise in AI within the claims process to make better, faster decisions throughout the cycle of the claims. More specifically, in the internalization, today in Canada, it's 100% or 99.7%, I think, the number of all claims that is handled by our own employees. That's true in normal time, as well as in very busy times, so peak period, like large cats. We've built over the years a force of legal defense that today represents more than 600 lawyers and legal professionals that handle more than 80% of the legal defense in liability claims. We went deep into the supply chain. We have today, we operate 37 service centers for car repairs. We don't own it, but it's our people. It's branded. It's dedicated to our clients.
We see a reduction of cycle time in these locations of 30% and an increase of net promoter score of 10 points. We also acquired OnSite, which has more than tripled in volume since the acquisition four years ago, with a lot of opportunities to continue to push forward. I would say these are hard to replicate competitive advantages because you need the scale and you need to build the internal expertise to be able to get there, which took us, you know, we're 20 years into it.
Yeah, OK. Structural and sustainable competitive advantages.
Yeah. Now, when the outperformance is like 650 basis points and our ROE is, you know, getting into the 17 and so forth, I think there's reinvestment opportunities to capture growth, to build more value. That's done more at a global level. We continue to push forward our competitive advantage to stay ahead.
OK. We'll come back to that piece in a bit. Maybe it's a good time also to talk about AI, right? Obviously, very topical. You've talked about your scale advantages, your advantages in pricing, risk selection, claims management. Can Intact replicate sort of that same success with AI? How does it incorporate AI to build upon that success?
Yeah. The pricing and segmentation advantage is a lot linked to our strategy with AI. We've started to invest heavily in AI and data analytics and machine learning models about a decade ago. Today, the innovation lab, which includes the data and AI expertise, has more than 500 data and AI specialists or scientists within the team on the staff. They've deployed north of 500 different models of AI at scale in the systems in our operations. Together, or in aggregate, that is producing around $150 million of recurring benefits that are measured. We think we can bring this to $500 million of recurring benefits by 2030 with the additional investments we're making in that field. That benefit is two-thirds in the risk in pricing and one-third more in efficiency gains and improvement of the customer experience journeys. For sure, generative AI is an accelerated third to this.
Most companies will use generative AI to gain efficiency. That's where it's the most efficient. When you look at our business model, for $1 of revenue, the controllable expenses are only about $0.15. The loss ratio is $0.50. For us, the big opportunity is to continue to push out performance and use AI in the pricing and to generate growth through better customer experience, rather than focusing only on the $0.15 that is the efficiency gains or potential.
Got it. Let's go back to the other point you brought up before, earning the excess ROE or higher than normal ROE and opportunities to reinvest that back in the business for growth. I think you mentioned more global. Let's talk about what are those opportunities? You mean for top line growth? For top line growth, right?
Yeah. I mean, we have very good momentum right now on top line. We've printed 4% overall at the group level in Q2. That includes a drag in because of corrective measures we're still applying in our UK book, mainly from the business we've acquired from Direct Line, and as well on a few specific segments in specialty lines in the US. That's largely behind us at this point. It will taper in the second half of 2025. It's important also to realize that with the recent acquisition, now we play in a much bigger pool or potential for growth, you know, 10 times what it was before the RSA acquisition because of the UK market. In global specialty lines, we now operate in markets that in total represent $500 billion of potential. We have a small market share. It's growing fast.
The other piece that is important to understand is now we have outperformance in all of these markets. Commercial lines in the UK are outperforming, and specialty lines as well are outperforming in the US, in the UK, and in Europe through our global platform. We're keen to grow in all of these environments. We see a lot of opportunity. The other thing maybe also that is particular to Intact is even within commercial lines and specialty lines, our focus is more on the SME and mid-market, more than in the very large stuff. In terms of stability over time and through the insurance cycle, that part of the commercial lines is more stable than the upper-end stuff. We're quite confident on where the growth will be.
To be honest, you know, with the momentum we see, we really feel like we'll see an increase in the top line growth in the coming quarters and for a couple of years, for sure.
OK. I do want to ask you a follow-up question on that point you raised regarding the stability, the SME versus the large account, because we are seeing increased price competition or increased competition, particularly in the large account.
Yes.
I want to get a better understanding of why is that odd impact in your focus areas, SME, specialty. In no way does it inhibit your growth ambitions or opportunity.
Right. It is not a big area. We do have some of the larger accounts in the portfolio, and these are the ones that can make some of the growth a bit floppy. That is not where we see the big opportunity of growth going forward. I think the important part is the fact that we have been acting on creating the outperformance in the U.S., acting on a few segments. In the UK, especially on the RSA book since the acquisition and more recently on the book we have acquired from Direct Line, we feel that we are at a point where the absolute performance, but also relative to our competition, is at a place where we have fewer of these actions to take going forward and huge opportunity to even outperform in markets where we have relatively smaller market share than what we are enjoying here in Canada.
Wow. It sounds like you've reached a point with RSA in the UK specifically where you're ready to dial up that organic growth. What about as you think about market share gains there, right? We talked about the importance of scale. We all know what Intact has done with its scale advantages here in Canada. Remind us maybe where you are in the UK, commercial and.
Number three.
Number three, with a target of getting larger.
Yeah.
Is that an area where you would consider M&A or acquisitions in the future, and how close or not would you be?
Yeah. Good question. A few things come to mind. The outperformance is key to consider M&A, and we're in that zone now. From an organic growth perspective, we're launching right now the Intact brand in the UK that will put together the existing offers of RSA and the new ones coming from the Direct Line book of business into one system, one offer for brokers. We've seen customer satisfaction from what we've done in claims go up in the last 18 months. We're seeing service to brokers also improve. From broker surveys, good relationships that we're deepening with the combination of the two. For organic growth, we feel we're at the right stage. There's still work to be done to fully be completed, I would say, with the Direct Line acquisition.
In terms of M&A, I think we could act on the right opportunity in the UKCL, but that's not necessarily the top priority. Canada would remain the first area, and then GSL in the global specialty lines in the markets we're already operating in.
OK. Just to drill back down a little bit on one of your areas of focus or leadership, the claims management, right? Obviously, clear in terms of the success Intact has had here in Canada. It seems like those methods and strategies are deployable to foreign markets as well, like the UK. Maybe talk us through a little bit about what your team is being able to accomplish in the UK to help with that margin improvement and why that could help if you were to engage in further acquisitions.
Very good question as well. That's why I was pointing to two big ideas on how we create outperformance from claims. At the highest level, it's controlling the experience and controlling the process. We do that through internalization and deep vertical integration into the supply chain in Canada. The first part of that concept works well in the UK as well to internalize. That's what we're focused on for now. We've internalized the adjusting. We're starting to create our own law firm internally in the UK, just like Canada, to internalize the liability part. We're just starting to look at how to apply the same high-level idea in the supply chain to the UK. Obviously, there, we don't have the same concentration or penetration, especially since we're focused on commercial lines and no longer have personal lines.
The same concept applies because the way our journey in Canada has been similar to this in the early days, what we were concentrating on is to measure precisely the performance of our vendors, our partners, and directing more of our business to the ones that are outperforming, both from a capacity of managed costs and capacity to deliver a better customer experience. That's what the teams are focused. From the data perspective, we were able to leverage some of the models that we've embedded in the operations here for key decisions. Examples are identify early the files that might have subrogation opportunities in claims. How do you determine quickly the type of services you need to deploy on site when there's water damage and the like? We have models that are progressively being deployed in the UK.
I'd say so far, we have seen only a portion probably of the benefit that will come out of that, but enough to be quite confident that this will become also a competitive advantage for commercial lines in the UK.
OK. The question is going to be focused on the UK. Could we make the same kind of arguments and conclusions on the US as well?
To a large extent, at least the first part, the internalization can be done. The legal aspect, we are doing it. We've been doing it for five, six years in the U.S. It's a bit more complex because you deal with 50 different states. To have enough volume to internalize to the same level, it will come with growth. We're establishing the basis, and we're getting some good benefits. I was talking about scale. Scale is important to build these competitive advantages. The geography of the United States and the penetration we have at the moment limits some of these. The internalization is a big portion, and that part we can act upon.
OK. Given the desire to have more scale in the U.S., how is Intact thinking about that as a priority destination or a destination for capital and acquisitions?
Yeah, I think we're quite interested in specialty lines in the U.S., both from an organic growth perspective, where we have a lot of opportunity. We have built significant outperformance. We've been very selective in what verticals of specialty lines we operate into. We stay away from the lines that are more long tail and more exposed to trends like social inflation. We've built significant outperformance. I'd say organic growth is the area of focus. In terms of capital deployment, despite some of the wider geopolitical environment, I think with the proper opportunity, it would be at least to deploy capital in the U.S., probably because of the risk I just referred to, probably aiming for a slightly higher return on the investment than we would normally do, say, in Canada. Quite happy to consider opportunities in the U.S.
OK.
In specialty lines, that would be.
Understand.
Yeah. Both manufacturing and distribution.
Going to that point on distribution, actually, I want to ask you on the distribution acquisition strategy here within Canada, the BrokerLink.
Yeah.
That's somewhere where Intact is consistently doing acquisitions, deploying capital year by year and quarter by quarter effectively. Now, you're actually 20% of the market, I think, BrokerLink.
Yeah.
It's pretty big. When I think about that, I'm like, the acquisitions become harder to find because you're already such a big part of the market.
Yeah. Is momentum slow?
It's not actually the case for the moment. You know, BrokerLink has reached now $5 billion of written premium. You're probably right. It's probably around 20% of the broker distribution market. Our ambition is to grow that to $10 billion by 2030. We've done about 100 integrations, acquisitions within BrokerLink since 2020. That's many every year. We've built a very good integration playbook, and through that process, we've built significant scale, not only because of the sheer size, pure size, but with the operating model. We have one technology stack. We operate in all of the offices of BrokerLink with one operating model. There's big efficiency we can leverage because of that, our capacity across Canada to service customers. We've leveraged because of that a lot of automation for administrative and backend processes. Most of our brokers are really focused on customers.
We've built competitive advantage within BrokerLink from a customer experience perspective and from an efficiency perspective. All of these become very important when you consider acquisition to see the return you can have. It makes us quite competitive. I think we've built a reputation in the market also to be good partners for owners of brokers' offices who are looking for the next opportunity. We see the pipeline really just as LT. We don't see any slowdown in it. Quite confident with where we can bring BrokerLink. That has been a very exciting journey.
OK. I think Intact has very much been on the forefront of technology, pricing sophistication, et cetera. I'm curious on some of the things you can share with us. What are you working on in terms of the data lab, Intact lab? What's coming down the pipe that you can share?
I would share two big ideas. One that might be not as exciting, but for us has a ton of potential, is we're in the fourth generation of machine learning models deployed in personal lines in Canada for pricing and risk selection. In each of these generations, we not only leverage new science in the modeling itself, but expand the sources of data that we use in the models. Now, we are in the process of expanding that into commercial lines into the U.S. and into the U.K. We've done enough so far to see that it actually works and produces very significant upside. We're just starting. There's a huge opportunity in the remaining of this year and into 2026 to do that at a much larger scale into our operations. When we do that, we bring the third or fourth generation straight away into the new business.
We don't have to go through all the learning we've done in the other version. That's the big one that is where we put a lot of our emphasis. The other one is with the fast acceleration of generative AI and the science in large language models. Like I hinted to earlier, we're not necessarily focusing only to leverage that into operations and generating efficiency gains, but more in how we combine the quant model that I just referred to, so a very precise view of the risk, one policy and one client at a time, with the potential of generative AI to automate the underwriting process or making it much easier, especially in commercial lines, to interact with brokers. We're deploying technology in Canada into the broker offices, our own technology.
We're building AI modules that will be on top to really create a distance with what our competitors can offer.
OK. I think in the interest of time, why don't we wrap it up there?
Sure.
Patrick, thank you very much for talking to us.
Thank you very much. Thanks for having me.