Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the Intact Financial Corporation Second Quarter 2020 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. I would now like to turn the call over to Ken Anderson, Senior Vice President, Investor Relations and Corporate Development, for opening remarks. Please go ahead, sir.
Thank you, Carol. Good morning, everyone. Thank you for joining the call today. A link to our live webcast and published information for this call is posted on our website at intactfc.com under the Investors tab. As usual, before we start, please refer to slide two for cautionary language regarding the use of forward-looking statements, which form part of this morning's remarks, and slide three for a note on the use of non-IFRS financial measures and important notes on adjustments, terms, and definitions used in this presentation. Once again, our executives join us virtually today from across the country. In Toronto, we have our CEO, Charles Brindamour. With me here in Montreal are Louis Marcotte, CFO, Isabelle Girard, SVP of Personal Lines, and Patrick Barbeau, SVP of Claims. And from Calgary, we're joined by Darren Godfrey, SVP of Commercial Lines. We'll begin with prepared remarks, followed by Q&A.
With that, I'll turn the call to our CEO, Charles Brindamour.
Good morning, everyone. Thank you for joining us today. Ken, thanks for the introduction. The COVID-19 pandemic continues to have a significant impact on society. Healthcare professionals and essential workers have done a tremendous job on the front lines, while governments have moved fast on many fronts. Despite these efforts, there is still uncertainty as to how long the crisis will persist. So businesses have an important role to play here in supporting their communities as they cope with economic and societal impacts. We have stepped up to support millions of Canadians through relief, community support, and being there in good and bad times, and it's more important than ever that we work together to get through this. We entered the crisis in a position of strength, which has enabled us to support our customers.
To date, we've provided more than CAD 350 million of relief to over 1 million policyholders across North America. Our relief continues to be risk-based and needs-based and will evolve as the situation develops. Speaking of strength, yesterday evening, we announced second quarter net operating income of CAD 2.35 per share, an increase of 63% over Q2, 2019. The team delivered solid results despite navigating a difficult environment and accelerating investments in our people and technology, all that while providing relief across all our customer base in North America. Top line growth was 7% in the quarter, with 6% in Canada and a robust 10% in the U.S. IFC growth in the quarter was impacted by four points of written premium relief.
The overall combined ratio was 89.5%, with strength on both sides of the border. Our view of the ultimate direct cost of COVID-19 has not changed since Q1, as we've seen no evidence to warrant the change to our prudent Q1 bottom-up, policy-by-policy reserving to ultimate losses. In Canada, the combined ratio of 89% was strong, driven by underlying performance, while U.S. commercial lines delivered a solid 93.2%. Let's now look at our results by line of business, starting with Canada. Personal auto growth was solid at 3%. Given we provided seven points of relief in the quarter itself, in the next quarter, that is in Q3, we expect the impact from premium relief to be in the low double-digit range.
The combined ratio in the quarter was strong at 84.7%, given the work we've done in the past three years, which meaningfully impacted our mix of business, in addition to reduced driving during the quarter. The benefit from reduced driving was partially offset by a portion of premium relief that was earned during the quarter. Looking to the coming quarters, the remaining relief will roll through net earned premium, while we expect driving activity to gradually return to normal. From an underwriting standpoint, since the start of COVID, we largely expect relief and driving activity to offset each other over time. Overall, the fundamentals in personal auto are strong. In personal property, premiums grew a strong 11%, driven by favorable market conditions, the GCNA acquisition, and unit growth.
The combined ratio at 88.6% was the best Q2 in over a decade, driven by our profitability actions over time and mild weather conditions.... Personal Property continues to be a solid contributor to our strong underwriting performance overall, and I'm confident this will continue. In Commercial Lines, premium growth of 7% reflects the GCNA acquisition and was tempered by the economic slowdown and our multiple Relief Measures. The combined ratio of 95.1% reflected strong underlying performance, offset by lower Prior Year Development. The underlying loss ratio improved 5.5 points year-over-year. We're already seeing pricing momentum return, and I expect us to operate this business close to 90% going forward. Moving to our U.S. Commercial segment, premiums grew a strong 10%, with robust organic growth across most lines.
The underlying loss ratio improved 4.8 points, driven by our ongoing profitability improvement game plan. The combined ratio of 93.2% was strong, as this segment continues to trend towards our sustainable low 90s objective. Let's turn to the industry outlook. The prevailing hard market conditions we experienced in Canada in 2019 and into early 2020 have been impacted by the crisis. Rate increases in both personal and commercial lines were tempered to help our customers navigate what is a very difficult economic environment. In the coming months, as activity moves back towards normal, we expect the industry to return to the corrective measures required to restore its ROE to historical levels.
In the near term, the trends that have emerged in the past few months will likely exacerbate the industry's need for rates, given lower reinvestment yields, economic impact, and potential loss exposure likely to arise from the crisis. In the U.S., we see similar trends supporting the hardening market conditions. Looking at the rest of 2020 for IFC, the crisis is expected to impact top-line growth in the mid-single to low-double-digit range. Given the strength of our operations entering the crisis, I expect our underwriting performance for the rest of 2020 to be on track. While managing the crisis and providing relief has been all-consuming in the past few months, we haven't lost a beat on the strategic front. The teams across North America have delivered and accelerated initiatives to ensure that we expand our leadership position.
As you know, our roadmap for the next decade is rooted on expanding our leadership here in Canada, building the best specialty insurer in North America, transforming our competitive advantages, and ensuring that our people win in this changing world. While progress in the near term is important, the key question for us now is how will the future be permanently altered as a result of COVID-19? For consumers, our view is that value for money, ease of access, and strong digital engagement will become even more important. Our breadth of products, brands, and distribution channels provide optionality for us to emphasize these changing expectations. We've made great leaps on the digital and AI front in the past few years, and these have accelerated in the past few months. Our intent is to double down on our digital edge.
For businesses, we believe that there'll be an increasing differentiation between small and mid-sized businesses. So we intend to build our leadership with more than one in four small businesses in Canada to simplify and make it easier for them to access our products. For mid-sized businesses, we intend to better differentiate our offer and broaden the range of services to those. Our rapid expansion in specialty lines and the acquisition of GCNA and Frank Cowan give us the perfect platform to win for these businesses across North America. Finally, this crisis will exacerbate the income and skill disparity that exists in society. We're stepping up our efforts in the communities where we operate to be an agent of change and a force for good. We're also ensuring that our people across North America will adapt and gain from this changing world.
We're committed to investing in adapting our people skills to our needs of tomorrow, and we're also committed to continue to ensure that our environment is one of the most inclusive. So we intend to integrate these trends and initiatives with our 10-year strategic roadmap in the coming months. Our aim is to position ourselves to excel in a post-COVID environment and come out of this crisis stronger and even more resilient. So in conclusion, this quarter was a testament to our business's strength. We ended the quarter with a robust capital margin, ready to absorb severe shocks and invest in strategic opportunities. Our operating ROE has moved into the right zone, and our book value is up 8% year-over-year in a turbulent environment. Our business is very resilient, and we're well positioned to continue to beat our financial objectives in the quarters and years ahead.
With that, I'll turn the call over to our CFO, Louis Marcotte.
... Thanks, Charles, and good morning, everyone. Net operating income per share was CAD 2.35, up 63% versus last year, driven by strong underwriting performances across North America. Before turning to our Q2 operating results, let me share a few points related to the COVID-19 pandemic, which continues to impact communities in our markets and around the globe. We have provided significant relief, totaling more than CAD 350 million to our customers. Included in this amount is CAD 263 million of premium reductions, of which CAD 134 million was written in the quarter, impacting our top line by four points. Although these measures are meant to compensate customers for the lower driving activity observed in Q2, the top-line impact will continue to be felt in future quarters as the relief is earned.
In terms of COVID-related losses, we have not changed our best estimate of CAD 83 million booked in Q1. However, we took a prudent approach on bad debt due to the economic uncertainty and recorded a CAD 34 million provision in Q2 2020, most of it in Canada. This represents approximately a 1.4-point impact to the expense ratio across our three lines of businesses in Canada. Overall, we expect the crisis to impact the top line in the mid-single to low-double-digit range for the rest of 2020. From an underwriting perspective, the impact of the crisis is expected to be neutral for the rest of the year, although it may vary by quarter and by line of business. Now, turning to our operating results. Net investment income of CAD 141 million was down 5% compared to last year.
This was mainly due to lower reinvestment yields and lower dividend income, partially offset by higher invested assets from the GCNA acquisition. Assuming the U.S. dollar and interest rates stay where they are, we continue to expect investment income in 2020 to grow between 1%-3% compared to 2019. Distribution, EBITDA, and other income grew 8% to CAD 78 million in the quarter, driven by both acquisitions and organic growth. Although there remains uncertainty surrounding the length and severity of the crisis, we expect the growth of these earnings for the full year to be in the high single to low-double-digit range. Now, let me provide some additional detail on the underwriting results, beginning with Canada. In personal auto, profitability was solid in the second quarter at 84.7%.
The underlying current year loss ratio improved 13 points, driven by a combination of lower driving activity, better weather conditions, and our ongoing profitability actions, all of which were partially offset by higher severity and relief. Prior year development was muted in the quarter, and although Q2 is typically a seasonally favorable quarter, cat losses were three points above historical averages due to two severe weather events in Alberta. In personal property, the combined ratio improved 11 points, driven by our profitability actions, better weather, and fewer fire losses. On the other hand, the expense ratio increased 2.4 points, driven by a bad debt provision and higher variable commissions due to our strong underwriting performance. Overall, personal property continues to deliver a strong performance. In our Canadian commercial lines, we saw premium growth of 11% in Q2 if we exclude the impact of premium relief.
The combined ratio of 95.1% reflected a solid improvement of 5.5 points in the underlying performance, which was offset by elevated cat losses, lower favorable prior year development, and higher expenses. Overall, the Canadian expense ratio of 32.2% for the quarter increased 3.7 points from last year, mainly driven by an increase in the provision for bad debts, as mentioned earlier, and higher commissions. Turning to U.S. commercial, growth was 10% in constant currency, with strong organic growth in most lines of business as rate momentum and unit growth continues. The underlying loss ratio of 53% in the quarter improved 4.8 points, which was largely driven by the impact of our profitability actions.
The cat loss ratio in the U.S. of 1.7% in the quarter was entirely weather-related, with no COVID losses recorded in the quarter. The increase in the U.S. expense ratio to 39.4% is consistent with our expectations and is mainly due to the addition of GCNA's surety business. All in, I'm pleased with the performance in the U.S. On a consolidated basis level, there is no doubt our business has delivered solid operating results and led to an operating ROE of 15.6%, 300 basis points above that reported in the 2019 calendar year. Now, looking at our balance sheet, we ended the quarter in strong financial position with a total capital margin of CAD 1.7 billion and a debt to total capital ratio at 22.1%.
We remain on track to reach our 20% target over the next 12-18 months. We also have CAD 300 million of cash at the holding company, and our CAD 750 million credit facility is entirely undrawn. Our book value per share increased 4% since March 31 to CAD 53.95, thanks to solid earnings and favorable capital markets, but offset by losses related to our pension plans. Overall, we've maintained a strong balance sheet throughout the crisis, and I am confident it can absorb severe shocks or help us capture growth opportunities that may arise in these turbulent times. In closing, I would like to thank our teams across North America for stepping up for customers, suppliers, and shareholders as we navigate through uncharted territory.
They have shown extreme agility and flexibility to maintain our operations in top shape and deliver solid results.
...Finally, with our resilient operations, talented teams, and strong capital position, we continue to be able to support our customers throughout this crisis. With strong fundamentals across our business on both sides of the border, we are confident that our underwriting performance will be on track for the remainder of 2020. With that, I'll turn the call back to Ken.
Thank you, Louis. In order to give everyone a chance to participate in the Q&A, we would ask that you kindly limit yourselves to two questions per person. If there's time at the end, you can certainly re-queue for a follow-up. Carol, we're now ready to take questions.
Thank you. As a reminder, you may press star one on your telephone to ask a question. To withdraw your question, please press the pound or hash key. Our first question this morning comes from Geoff Kwan from RBC Capital Markets. Please go ahead.
Hi, good morning. I know you talked about not changing your claims provisions relating to COVID-19, but can you talk about, you know, how many business interruption claims you've received so far, and what the aggregate dollar amount that's being claimed?
Yeah. Good morning. Morning, Geoff. I'll ask Patrick to take this one, and if there's anything to add, Darren can chip in as well. But, Patrick, why don't you run with that?
Yeah. So, maybe first of all, on business interruption claims, firstly, our view has not changed on this during Q2. Following our discussions, we had at the end of Q1, I'd like to remind that the language in our policies is very clear. The business interruption coverage requires direct physical damage from an insured peril to be triggered. This is the case for 99.5% of our policies in commercial lines. There's only in very exceptional circumstances that we have provided limited business interruption coverage that can be triggered by a pandemic. For the most part, by the way, all claims related to these limited exceptions have been received and settled, so paid and closed, as we speak. So not, not a lot of remaining uncertainty around that, I should say.
But as expected, some groups of insureds and law firms have initiated litigation in Canada and other, and in other jurisdictions as well, to, in an attempt to challenge this interpretation. But we are, we continue to be very confident with our defense arguments and, various levels of defense we, we have. One of the main developments during Q2 is that, a few decisions actually have started to be rendered on BI litigations. This is the case, as an example, of, two federal court decisions in the States, one in Michigan and one in New York, that are relating to, wordings almost identical to ours.
Both of those decisions have confirmed that, one, physical damage to the property is necessary to trigger a BI coverage, and two, that the pandemic itself or a government-mandated closure of businesses cannot be considered as physical damage to the premises. So here in Canada, none of these class action motions have been certified yet, but we are actively preparing our defense, and I'm very confident with our position. Now, we have received a number of individual businesses that have filed for business interruptions, and we have explained individually to each of them our position of coverage and why coverage would not apply. I don't have the exact number, but yes, we have seen a bit of that. So overall, on BI, very confident in our numbers, and that's why we haven't changed the CAD 83 million overall.
Yeah, and I, I think, Patrick, the other thing that's important here is that the CAD 83 million of reserve was not just, BI. In fact, you've got liability, and entertainment type claims. And I would say, Geoff, you know, we've done such a rigorous analysis in Q1, doing a bottom-up, policy-by-policy assessment of what might be, you know, a COVID direct related claims that, things are... What we've seen in terms of activity has led us to not change our view of the ultimate, at this stage. You know, maybe, Patrick, to provide color ballpark, you know, out of the provision we put, what, how much actual case incurred have we seen? And by case incurred, guys, we mean, you know, file by file that have actually been received. So just ballpark for the group, Patrick.
Yes, roughly, if I combine both Canada and U.S., we're talking about just under CAD 30 million so far. And on all the reported claims directly linked to COVID, at the moment, 80% of them are already paid and closed within that CAD 30 million.
So, you know, we've got a decent visibility. I think three, four months in, the Case Incurred gives us a sense that our ultimate assessment was, was very good, and, and we're ready for more, clearly, with a provision at CAD 83 million. So that's where we stand. Darren, I don't know if there's anything else you can add, here.
I think the only thing, as you said, Charles, is that the activity we've seen to date is very much consistent with that bottom-up exercise. There's no real surprises of misses from coverage or anything else like that, so, very consistent. So, that's, for me, gives us more comfort around our CAD 83 million ultimate view.
... Yeah. And maybe just to add a bit of color to Patrick's point on U.S. decisions, we've talked in the previous quarter that our language was also very well supported by common law here in Canada, and previous court decisions here in Canada, and the decisions we've seen in the U.S. would be consistent with the common law we've seen here as well. So Geoff, did I hear you or-
Yeah,
You have a second question?
I was wondering if I could, I could just clarify, because when, when you, when Patrick talked about the U.S., decisions and the way it was kind of described, because in the U.S., I think you guys have talked about, it's, it's quite explicit around, you know, pandemics are not covered. But I just want to, it, it sounds like what, what he was saying or what he was saying was the U.S. court decisions, were relating to policies that had similar wording to what you have in Canada. And so-
Yeah, but-
Hopefully, there's something. Is that correct?
Yeah. The debate here, like, the virus exclusion is a second, third line of defense. The real debate in BI is direct physical damage, and our language on that front compares very comparable to the language in the U.S., and that's where the debate is in courts. It's not as to whether you have an exclusion or not. And in that regard, we're saying the court decisions are very clear. They're in line with what we expect. They're in line with the common law in this in Canada. It's not a... It's not gray, you know, it's kind of pretty straightforward, and I think the courts err in that direction.
Exactly, Charles. I would even add, you know, in the Michigan decision, the judge actually limited his decision to the first line of defense, commenting on the physical damage and stated that he didn't have to even consider the other line because it was clear in his view that physical damage was required.
Yeah. Geoff, as you know, in Canada, we have other lines of defense in the product as well. We've got two additional lines of defense. So, you know, all in, sitting here today, we feel even more confident than we did at the end of Q1, and we were very confident at the end of Q1 about the clarity of our product, and you know, that's it.
Okay.
Thanks for your question, Geoff.
Okay. Sorry, just my second question was just on the bad debt expense. Are you able to provide some clarity? I know you mentioned it was mostly in Canada, but just whereabouts, which lines of businesses or any sort of color around that, and how that might play out in upcoming quarters. In other words, is it more of a one-off or might this linger a little bit, albeit a smaller amount?
Yeah, I'll ask Louis to give you his perspective. Our thought process is to front load our assessment of ultimate as much as possible, the same way we've done for the Q1 reserve. So but Louis, go ahead.
Sure. So essentially, it's been spread over premiums, and this is where I shared about 1.4 points of impact per each line of business in the Canadian market space, which is where most of the provision was made for. So we can spread it accordingly. And then from how it's going to pan out here, our view was to take a strong stance in Q2, knowing that there's a lot of uncertainty in the marketplace right now. We've given a lot of relief to our customers to facilitate their ability to pay for the coverage. But as the government relief unwinds, people have to pay, you know, the delays are expiring, we're expecting some headwind there.
So we tried to provide as much as we could for that in Q2. Our hope here is that we're not going to use as much as we've provided for in future quarters, but at this point, that's our best view of where the cost could be overall, based on what we're seeing in terms of our data and our intelligence on the in the relationship with the customers.
I think, Geoff, one data point that I was impressed with is the fact that when people ask for help, it's because they need it. And 80% of people that have asked for a payment deferral paid the second payment. And so only 20% of people that have asked for help have delayed more than one payment. And obviously, the bad debt provision, even though we've given a lot of financing relief, the bad debt provision is aimed, you know, at those that have deferred payment three, four, five times. But the vast majority of people take this very seriously and and have stepped up to stay on track in terms of paying their insurance.
So to be very clear, we took a bit the same approach as we did in Q1 for the loss revisions. We've been prudent here, and the expectation is this is what could be needed, and we don't expect to need to add more unless really something really bad would happen. But we think we're good here.
Okay, thank you.
Our next question comes from Brian Meredith, from UBS. Please go ahead.
Yeah, thanks. A couple of questions here. First one related to personal auto insurance. One, Charles, could you talk a little bit, what are we seeing right now trend and what's going on with miles driven in Canada and frequency, and are there any offsets on severity? And then I'll have a follow-up.
Yeah... Yeah, Brian, I think that's the key question. We've seen, starting in the second half of April, a gradual increase in driving. And from a severity point of view, you've got a couple of things happening. One is, and this always happens, when your mix of claims shifts because your frequency drops, the nature of claims changes, and this has an impact on severity. And then there was severity to start with. I'll ask Isabelle to give her perspective on what she is observing and where we think we stand now.
Sure. In terms of a change in miles driven, we've been using our telematics tools or our UBI data to follow on a regular basis how much of the kilometer driven were done by our customers, as well as the number of trips. That was a tool we used during the crisis to monitor how things were evolving. What we saw is that, for sure, a big drop in driving at the peak of the crisis or early April, but since then, we see that both the kilometer driven and the number of trips are increasing gradually since that moment over time. I would say at this time, we still see that it's below the same level at the same period of time last year.
So we're not fully back to what we would say, normal driving, but clearly, this has been increasing since mid-April.
So it's like, you know, every week it's ticking up again. Year-over-year, you know, you're in the teens, in terms of difference, Brian. And then, of course, the severity will adapt accordingly. Do you have any comments on severity you want to make, Isabelle, or we're good?
Yeah. Maybe on severity piece, as Charles mentioned, we see a change in severity due to the change of mix in claims we received during the crisis, while frequency was lower. And this is mainly due because we see less of the small accidents since there's no urban traffic or less traffic in the city. So in that period of time, we're seeing less of those small accidents. So that's why-
Got you.
We've seen an increase in severity.
And so, Brian, in practice, so when you run with that, then you ask yourself, "Okay, so severity looks different." The way we've looked at results is also try to anticipate and be cautious with the body injury type impact, and so made sure that we took a cautious stance in the quarter.
Got you. Makes sense. And then as a follow-up to that, I guess, given what's going on right now, Charles, what makes you confident that we're going to see a return to kind of affirming our hard market and personal auto when we get through this crisis? And do you anticipate any regulatory pushback or making it harder to kind of get that type of a rate?
Well, I think that, you know, this is a fluid environment. It is changing every week, and we will adapt our, not only our relief measures, but our pricing actions based on what we're seeing in the environment to make sure that our performance remains, remains on track. I think that we've been working with governments to address the root cause of the product, Brian, where, you know, there was inflation coming into this, there's inflation coming out of this, and root cause of issues in automobile insurance, Ontario being a good example, Alberta, as well, still need to be addressed. And we'll work, with elected officials and regulators to make sure that we start turning our attention to reforms.
I think that, look, if there is permanently less driving and less accidents in the system, rates will reflect that over time, from my point of view. But, to the extent that the root cause of the product is not solved, and the fact that the industry's combined ratio is north of 100%, in auto coming in the crisis, I don't see why rate corrections should not continue. Now, if there's less driving, the rate correction need will not be as big. What matters to us is we keep operating the business, you know, within the box we've given ourselves from a profitability point of view in automobile insurance and give as much relief as we can, when driving and frequency is out of the norm.
Makes sense. Thank you.
Our next question comes from Paul Holden from CIBC. Please go ahead.
Thank you. Good morning. So continuing with-
Good morning, Paul.
Continuing with the theme of personal auto, I want to ask a question on written insured risks. Now, if I go back pre-COVID, I would have expected Intact to start gaining some market share this year in terms of volumes, and I think you kind of guided to that expectation as well. Now, if I look at written insured risk trends, it's roughly flat year-over-year. So I'm just trying to think, like, how should we view that? Is that just because COVID has resulted in less vehicles being insured at the industry level? Or is it, you know, you've kind of pulled back on your marketing efforts in order to gain market share because of the COVID disruption. Just wondering how you're thinking about that?
Yeah, I think, Paul, you know, just go out of memory here, and you look at the policies in force in personal automobile. In Q1 2019, you know, when we were deep into the correction, our policies in force dropped 4.6%. Let's take this six months later, as the market started to change, policies in force then shrank by 2%, but half the rate at which they were shrinking coming into 2019. Starting 2020, policies in force were up 2.2%, and in Q2, up 2.6% this year.
So for me, I see the trajectory that I'm looking for in terms of our portfolio, the written risk are indeed, you know, still flat, but quite different from where they were 12 months ago, where we were shrinking the business by 5%. I think that the industry was meaningfully behind us from a rate point of view, and as such, there's a time lag here, but the trajectory is there. You know, we remain, we remain cautious in automobile insurance. We've been through what I would describe as three years of serious pain, and we don't want to be back in that zone. We wanna firmly operate the business in the mid-90s, at worst, and we're taking all actions we can, but I like the trajectory that we're seeing.
Great, I hear you on that. Second question is related to investment mix. Your net exposure to equities has come down since the start of the year, and, you know, obviously, there's some market mark-to-market factors behind that. Wondering, in any way, has your long-term thinking towards asset mix changed at all?
Let me ask Louis to take a shot at your question, and then I'll conclude at the end. Go ahead, Louis.
Thanks, Charles. Paul, we have, as you saw, as you noted, diminished the asset mix in terms of the equities, for sure, largely driven by the impact of the markets. We have chosen not to go back to our previous asset mix on purpose. I think we are a bit cautious here on the risk-taking on the equity front, and, you know, we took some actions in Q1 that panned out well with a strong balance sheet, same position in Q2. And I think we're being cautious here before rebalancing our mix to what it was in the past. Now, my sense is the long-term view has not changed.
At some point, we will migrate back towards that mix, but in the short term, there's a bit of a preference to precaution.
Yeah, Paul, I would say that first point I'd make is the team under Werner Muehlemann and Dave Cobley in Montreal have done an outstanding job navigating the environment. We don't time the market. You know, we have a long-term total after-tax return strategy, which is optimized against our portfolio. But the guideline I gave these guys late February is we wanna play offense and defense in this environment. So not only do we need to absorb severe shocks, but in relative terms, we want, as an organization, to be in a position to use our balance sheet to grow the business.
I think, you know, when you throw this sort of strategic direction in the mix, that's why we are in a position now, probably one of the most conservative position compared to the policy for a long period of time, and it's with an objective of being able to play defense and offense.
Great. Thank you for your time.
Our pleasure.
Our next question comes from Jaeme Gloyn from National Bank Financial. Please go ahead.
Hey, Jaeme. Morning, Jaeme.
Good morning. I was actually hoping you could talk about the U.S. business and some of the developments that are going on there in terms of pricing around certain products and performance of certain products. Are you looking to tweak up or down any of the lines that you're in, or potentially looking at some new lines given what's going on in the market in the US?
Yeah. I mean, in fact, your, your question is very timely, Jaime. I met every one of our 12 business units individually in the past two weeks just to gauge the state of the market, our teams are doing in this environment, and the competitors we need to watch. And I'll say, you know, I'm thrilled with, with how things are going. The lines of business, as you know, I would put them in two buckets. I would say you've got the lines of business that are doing very well, and you've got the lines of business who are in segments that have been tough, and we call that our profitability improvement lines. I mean, the, the bulk of the business that is not in profitability improvement, at the moment, is running in the 80s. And these lines of business-...
16% in the quarter. The lines of business where we're doing correction, you know, that are heavily on the liability front, we've seen tremendous improvement compared to last year in those segments. They're not yet at the level of profitability we're looking for to grow those, and that's why, you know, when I look at these lines, we're from a growth point of view, shrinking those by 20%. So, Jaime, I'll say high level, the strategy we put on the table in 2017, to grow the best performing lines and work on the lines that we believe in, but that are not yet at the right stage, is very much still what's happening now. Conditions are firm or hard in the U.S., and I'd say we're open for business.
We're seeing good progress across all the lines that are profitable. As I said, I mean, these lines are growing at 16%, at the moment. We have a very good footprint. We're keen to build on that footprint. We're also, I think, making progress on expanding within those lines, our distribution footprint, and I'm, you know, I'm quite pleased with what I'm seeing south of the border at this stage.
Thank you.
You're welcome.
Our next question comes from Michael Phillips from Morgan Stanley. Please go ahead.
Thanks. Good morning, everybody. Charles, in your comments, you talked about the digital and AI emphasis, and I guess a couple of questions around that. One is, where does—what parts of your business are you talking about there, that you'll be more digitally focused? And then secondly, you said double down on the digital edge. Does that mean any kind of near-term investments and maybe a little bit of headwind on the expenses that we should expect?
Yeah. So, you've captured my words very well. So in AI, 75% of our efforts, which have not slowed down one bit, are directed to predictive analytics through machine learning in pricing and segmentation. Digital, more broadly, is in all our channels. So our thought process there is to make sure that the digital value proposition compares with the best insurers in the world, and that's, you know, very much the tools we have. And then that we use digital and claims meaningfully. And so I'll ask Patrick in claims, for instance, so it's very much customer experience driven. I'll ask Patrick to give you a sense of the progress we've made in claims in the last three months on the digital front. Patrick?
Yes. So we had started to develop quite a few tools in claims, even, you know, in the last year or so, I would say. Some of the tools were there. This situation of COVID allowed us is, we've seen a very sharp increase in the take-up rates. So what this does is, it help us learn much faster and improve those solutions much faster than in a slower, you know, progression of penetration. In terms of more specifically, the tools we've been using, you know, there are possibilities for our clients to file their claim online, track the progress. There's a lot of automated notifications that allow clients to keep track of what are the next steps in their claim, et cetera.
But, given the, you know, the pandemic, we've also leveraged videos and, pictures, that are taken from clients to be able to do a lot, a big portion of the assessment of the losses, from distance. And, we've seen that that has started to accelerate, in many cases, the cycle time and, the quality of service. So to give you a perspective, today or over Q2, it's more than 60% of all the auto claims that we were able to estimate completely the damage from remote, based on pictures taken from clients, and that number was in the teens, entering the crisis. So a big progression that allows us to then, accelerate also the next steps, to offer to clients a more straight-through processing and accelerate the, process.
From a residential perspective, another example, with On Side, we confirm coverage based on videos that are taken by clients and On Side staff from remote. And instead of taking us two to three days on average to be able to confirm to the clients the coverage, we do that within three to four business hours. So just a few examples of developments we're doing.
So massive jumps in Q3. Now, the last part of your question, Mike, was, you know, accelerating investment and expense drag. And I'll ask Louis, who's done a really good job with his team, to basically look at the pandemic, assess the additional costs that came from the pandemic, and figure out two things: How we could absorb those costs to make sure our performance remained on track? and how we can take advantage of an excess supply in the system to accelerate some of our investments in technology without creating a drag, to keep expenses on track. So Louis, why don't you talk about the exercise we've done in March on that, so that Mike understands there will not be a drag here?
Sure. Thanks, Charles. So, in March, as soon as this crisis started, we undertook a process to identify what kind of headwinds we would face in terms of costs and potentially the savings we would harvest from the crisis as well. It became fairly clear that, in fact, the savings would basically offset the costs, so we could, you know, manage through the crisis without a drag at that point. We also took on a project to actually take people that were perhaps underused in some sectors. We saw clearly that phone calls were not coming in the same volumes as usual. It's about 1,000 people that we actually redeployed in multiple areas in the business where we saw more needs.
And you won't be surprised, a portion of those people will have been re-affected to the AR function, for example, for collections. But we took a number of people as well to support the digital e-engagement processes, and we took a further number of people to accelerate our digital initiatives and our developments. And so the view here was take advantage of the resources that are suddenly a bit less occupied, redeploy them in the right areas and accelerate some of the developments we were already working on. We went further than that, tried to harvest further savings from the pandemic throughout the year. And those savings essentially are being reinvested in acceleration of our technology investments.
So we've shifted some of that money from the savings into the investment pool, if you want, and with a view that overall, it would not have a significant impact on the expense ratio. It might not be totally true on a quarterly basis, but our overall view for the year, in fact, is that we come out neutral on expenses even after taking into account the bad debt. So that's how we undertook this, and the view is here, the very limited drag on expense ratio with accelerated development of technology.
Hmm. Awesome. Thank you, guys, very much. Appreciate all the details.
No problem.
Our next question comes from Mario Mendonca from TD Securities. Please go ahead.
Good morning. Charles and Louis, both of you in Q1 cautioned us that results could be lumpy on a quarterly basis throughout 2020. Would you say this quarter was lumpy to the positive? And if so, what were some of the reasons why that played out?
Louis, do you wanna, do you wanna take a crack at this?
Sure. So the lumpiness, I think here, comes from the mismatch between when the relief measures are given and when they actually get earned. And then, you know, going against that would be the frequency, for example, impact and elements like bad debts. So as much as, you know, most of the impact from the activity reduction was seen to be happening in Q2, we knew that the relief measures we were putting in and, you know, because they're risk-based or adapted to customers, they weren't all going to roll out in the same quarter as the benefit would come out. And so we knew we'd see different results per quarter, and we're trying to give as much clarity as we can in terms of how they will impact future quarters.
But dealing with a lot of uncertainty where it would land, you know, we feel comfortable saying it's gonna be on track overall, but quarterly, it might evolve a bit differently. And that's why we took that stance. I think it would be fair to say that we're it was positive in Q2, and then for the rest of the year, we're suggesting on track. It could evolve Q2, Q3, between Q3 and Q4, not being necessarily even, but come back to be on track for the rest of the year.
Yeah. I would say, Mario, I don't expect negative lumpiness to the bottom line for the rest of the year. I think Q2 was a clean, strong quarter with very strong fundamentals across the business. I think personal auto might have, you know, a mild positive there, but then commercial lines at 95% in Canada, in my mind, you know, was a negative. And so in aggregate, I think this was a very good, very strong, very clean quarter, and we'll try to keep the bottom line on track for the rest of the year. I think from a top-line point of view, this is where you'll see more lumpiness, Mario.
You know, when we said mid-single to low teens, with variations by quarter and line of business, we're putting the spotlight this quarter on the fact that personal auto top line next quarter will be impacted by, you know, roughly 10 points of written relief measure. We're confident, though, that the bottom line throughout the year will remain on track, sort of in line with what one would otherwise expect our performance to be, for the rest of the year.
Charles, I don't wanna put too fine a point on it, but if you're saying that that's true for full year 2020... and the first half was, I think, better than what you might have expected because of the phenomena that played out. Doesn't that necessarily mean that the second half has to be, actually have to show some negative lumpiness, if you will?
Yeah. I don't really see that, Mario. I think that, you know, we're using words like on track, and the range we're providing from a top line point of view, admittedly, is wide. But you'll, like me, admit that we are in a bifurcated environment. When we model a good, a bad, and an ugly scenario, we think that we've got the lever to make sure that the underwriting performance remains within a fairly narrow range. You and I have talked about that in our Fireside Chat in early April. My view is still the same. The first part of the year benefited a bit from weather, admittedly, and Q1 was one of these, these elements. And weather is one time, and making the average between the first half and the second half here is not how I would look at this.
And so when we say on track for the remaining of the year, that's pretty much what we mean.
Okay, I follow you. One, my second and final question relates to, Charles, you referred to CAD 30 million in response to Geoff's question. It was one of the first questions on the call, and I thought you were referring then to COVID-19 related claims. But in the MD&A, I thought you said there were no COVID-19 related claims. Maybe I just misunderstood.
Yeah, I think one of us misunderstood, but the CAD 83 million Q1 provision that we have put up would be direct COVID-19 related provision. Okay, so you, you look at all your portfolio and you say, what claims can arise because of COVID-19? And so we came up with CAD 83 million. In the quarter, our ultimate view of the direct COVID-19 losses is still CAD 83 million. The point I made, and I gave a ballpark CAD 30 million bucks, is the case incurred, that is the actual claims we've received. The CAD 83 million was a bottom-up assessment of what could happen, and the CAD 30-ish million is actually what has happened so far. And obviously, it's early in the process. So maybe somebody can add here?
Charles, I agree with you. I, I think, maybe to further illustrate, Mario, you know, when we started at the end of Q1, this analysis, all of it was in reserves. Now, as the claims come in and we settle them, obviously, we reduce the reserve because we pay those claims. So that CAD 30 million is the actual incurred, but the sum of the ultimate costs stay that CAD 83 million, so there's no impact in Q2.
I see. So you haven't actually paid the 30. That's just what's been incurred so far?
Well, a good portion of it is paid, so that's paid and case reserves, so file-by-file reserves, and then the total reserves, including what's expected that could be reported later, is still the same 83. So, during the quarter, there was no impact. It was just to give a feel of the actual activity we see in the claims.
Sorry, my confusion is if you paid some of those reserves, why wouldn't-- So if you paid some of those COVID claims, why wouldn't you have released the reserve?
Well-
We did.
I think, Mario, if you think about it, you break it into three buckets here. You have paid losses that are closed or partial payments that you make. Then you have the actual claims that came in for which we've set up a case reserve. Let's say the ballpark sum of those two things is $30 million bucks. The rest is IBNR. It's what we might receive in time for claims that have been incurred but not reported to us, just yet. The ultimate is $83 million. Now, when you get a claim, you know, you have set up a case reserve, which offsets your payment, but overall, the ultimate is very much still in the ballpark that that we have put out there.
Okay, thank you.
Our next question comes from Tom MacKinnon, from BMO Capital. Please go ahead.
Yeah, thanks very much. You continue to say that the impact of COVID-19 in terms of DPW growth is gonna be in the mid-single digit to low digit, to low double-digit range for 2020. And I mean, that's consistent with the guidance that you provided in the first quarter as well, and pretty well consistent with what you said, almost going back to early April. My question, though, is on page five in the MD&A, particularly with respect to personal lines, where we look at the impact of premium reductions in terms of what was written in the second quarter, or year to date in the second quarter, and then there's another column to say, to date provided, and that's with policies issued.
And, one number is 96 in terms of the written, and then to date provided for personal lines is 198. Now, I thought the premium relief measures that you were putting in place, just per what you announced in early April, where people could call in and say, "You know, I'm not driving as much, and so I get a 15% discount for three months," or, "My car's, you know, parked for a long time, and I get a 75% discount." And I thought a lot of those things were all going to end around June 30th.
So I would have assumed there wouldn't have been as much difference between what's been written and what's been, and between what's been written year to date in terms of the 96, and then the other column to-date provided in terms of policies issued of 198. So I'm trying to figure out what is the difference there? Are you giving some other, you know, are you tempering rate increases at renewal for various personal auto policies? Is that why there's that difference? Maybe you can help us understand that.
Yeah, there's a couple of things. So first, the mechanics of the program, which by the way, we've increased to July thirtieth. So if you haven't called us, Tom, you still have one day to do it. So we came out early with this, like, before any other relief measures were announced in the industry, we were out with the risk-based, needs-based program that basically said, "Look, call us until June or now July, and we'll give you a break for three months." And that break turned out to be an average discount of 22-ish%. Now, we've given those, you know, right up to tomorrow, and of course, when you give that, you've got three months forward of this impact, right? So that's why the written on these measures will impact other quarters as well.
And then on top of that, we've mitigated rate increases in the system as well to make sure that there were no extreme dislocations or not too large dislocations in a period like this one. Isabelle, this is your domain, so I'll let you add to what I have said and then maybe correct what I've said, if you feel that there's something that was off the mark there.
Yes, thanks, Charles. No, I think it's totally right, and you're right, Tom, in your assessment that with the tempering of rate increases since we're issuing our policies in advance. So some of those policies have been issued to date, but will impact the top line only in Q3. So that's why there's a difference between the total amount issued in relief, in premium relief, versus the ones that are impacting Q2.
Okay. And then in terms, I'll take a stab at trying to get you to help quantify what you mean by underwriting performance being on track. Would you say that it's on track in terms of what you expected for a dollar amount of underwriting profit? Or is it on track in terms of what you would have expected the combined ratio?
Yeah, I think that we're talking about the underwriting performance as measured by underwriting profit, basically, which is not too far, Tom, from combined ratio, quite frankly, but that's the way to think about it. So you know what? I think when you look at it by line of business, before the crisis, you had a good sense of what we wanted to achieve, high level by line of business. Really, that's what we mean when we say on track. You know, we're saying automobile should operate in the mid-90s%. We're saying commercial lines should be in the low 90s%. We're saying personal prop should be sub 95%, even in bad times.
As you know, in personal prop, weather is a big component of the number, so it's hard to have, you know, a number. We're saying here, sub 95, even in good times, and the U.S., low 90s. So that is what on track looks like from a combined ratio point of view as far as we're concerned, but our perspective is the operating and the underwriting performance really should be on track in underwriting profit terms.
Okay, thanks for that.
All right.
Our next question comes from Steve Theriault, from Eight Capital. Please go ahead.
Thanks very much. Just to follow up a little bit on Tom's question, and I get how deferrals lag into earned premium, but when we consider the recovery in miles driven, and Isabelle gave some color on that, do you expect that to translate into premium reductions dropping significantly in Q3? I know there's the two pieces. There's the reductions and the payment flexibility, but maybe a little bit of color there would be helpful.
Isabelle, do you want to provide a bit of color on Q3?
Yeah, sure. So, as we just discussed in the previous question, part of the top line impact of the relief will happen in Q3. So also on the earn perspective of those relief, they will follow progressively the return over time. So the difference between what have been provided will be earned over the coming quarter, while we're still seeing driving activity that would be returning to normal. So we need to keep in mind that those two effects will offset but will not be perfectly symmetric over time. But our program was built having that in mind. So from an underwriting standpoint, since the crisis started we largely expect that our relief and driving activity will offset each other, but we know that there may be some timing difference between calendar quarters.
Yeah, and I think that the relief measures clearly were based on our expectation of what we would see in the next, you know, three to six months. And also based on our expectations that a return to normal would be gradual over time, and that part was more reflected in the rate tempering that we've put in place, and so on.
Okay. And then just secondly, I wanted to follow up on one of the comments on, on digital, and that was an interesting example in terms of 60% of auto claims being appraised digitally. So, how permanent a shift you would either expect to see or really want to see there, and how comfortable, and how should we think about any risk of, of misuse?
I think that, the changes we're seeing on the digital front and the stepped up that we've seen in Q1, in our mind, will be a new plateau to grow from. We're not going backward from there, and our value prop from a digital point of view, will improve over time, because as I've mentioned, we've doubled down on our investment, there. In terms of misuse, per se, I'll let, Patrick maybe share his perspective, given how much activity has taken place, in claims. And I think misuse, you know, if I get you properly, you know, more likely to be an issue in claims than, than in sales or, underwriting, which was to start with data-driven, very much so.
Yeah.
So, Patrick, why don't you comment-
Yeah.
-on-
Yeah.
on that, and some of the work being done with data from a fraud management as well.
That's, that's right. So, you know, by misuse in claims, of course, you, when you start doing estimates from pictures, especially if they're taken and fully in control of the clients, you want to make sure that you don't miss any information, compared to when you actually send someone looking at the car, as an example. So I think this was from the start, one of the key questions for us moving into that digital way of estimating damage. So we had prepared quite a few controls around that. We have to understand that at the end of the day as well, there's a reliable network that actually make the repairs and that can adjust that estimate with us.
We also have a pretty robust audit process based on data, in fact, on AI and/or people looking at a sample of those things. So far, I would say that the signs are very positive. In fact, we've seen an additional precision up to now on the exact assessments that are done in this way. Partly because the process is consistent. You know, our clients, when they send us the information about their claim, they're guided through our mobile app on what type of pictures they have to take. There's metadata behind those pictures that allow us to confirm timestamps and locations and all sorts of things that is very useful in the investigation of the claims.
I think we have quite a few angles that control how we, you know, any abuse that could arise from a digital process.
Okay. Thanks for that color.
Our next question comes from Doug Young, from Desjardins Capital Markets. Please go ahead.
Good afternoon. Just, maybe I'll start, and hopefully, these are fairly quick, but can you quantify, you know, how much of the year-over-year improvement in the personal auto loss ratio related to the past actions, which you've clearly done a lot to, to fix the business, versus what you can kind of bucket within, you know, the, the COVID impact? I was just wondering if you can quantify that.
No. That's, you know, I think, go back to Q1 and look at what happened to the fundamental to get a sense of proportion, Doug, you know, because there was really no COVID in any meaningful way in the first quarter. Otherwise, it's very hard to break down the impact of mix versus the impact of reduced driving, net of relief and net of severity. It's something that we don't wanna come out and speculate about because, you know, there's a lot of judgment to separate a claim that you don't get from a source as opposed to another claim you don't get from another source so.
Okay. So, but if we looked at Q1 and assume maybe a little bit incremental, more benefit, that would give us at least a rough guess ballpark. Is that what you're suggesting?
Yeah. Well, I guess what I'm suggesting is Q1 showed a lot of momentum in terms of, you know, frequency and severity, and I think that it's fair to assume that this carries on in Q2, you know? It's highly imperfect, but it's certainly a good sense of what that momentum was.
... Sure.
If I may, Charles, from a claims perspective, especially comparing Q1 versus Q2, it's important to factor in seasonality, especially on the auto line. Q2 is historically the best quarter in the year.
Okay. I think that's a critical point, Patrick. You're right. And in personal automobile, this is where the delta is the most meaningful from a seasonality point of view.
That's fair. And then just second, you know, the prior year reserve developments were a little bit lower this quarter. I think it was 0.1% of opening reserves. You've guided to 1%-2%, but I think you've also indicated that it's gonna run lower, specifically around personal auto. Is there anything unusual in the quarter? I mean, this was just generally just an unusual quarter. I think it's gonna be for most companies, but just wondering if there's anything else in there that we should be thinking about from a PYD perspective. Thanks.
Yeah. I think there's nothing, prospective slash permanent, in this. We have a range of 1-3. We said that in auto, we would try to run this as close to the line as possible, given the uncertainty, in that line of business. And, maybe, Louis, do you wanna comment on the PYD here?
Well, you know, I think we said one to three, and by line of business, we were guiding to, as you say, close to the mark, in the U.S. as well. And then on the other lines of business, a bit of activity, but I would concur with you, Charles. There's nothing, you know, structural or permanent here. I think it's one quarter, and we're still confident in our long term, long-term guidance.
Yeah.
Good. All right. Thank you.
Yeah, you know, I wouldn't qualify this, Doug, as necessarily an abnormal quarter. I think we've tried to front-load the impact of COVID-19 as much as possible in Q1, and I think, you know, the quarter showed a fair bit of momentum. A bit of plus here, a bit of minus there, but overall, a very good clean quarter.
Thank you.
All right.
This concludes the Q&A portion of our call, and I will now turn it back to Ken for concluding remarks.
Yes, so thanks, 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. The transcript will also be available on our website in the Financial Reports and Filings archive. Finally, our third quarter 2020 results are scheduled to be released after market close on Tuesday, November third. Thank you again, and this concludes our call for today.
Thank you, ladies and gentlemen. This does, indeed conclude today's conference call. Thank you once more for participating. You may now disconnect.