Ladies and gentlemen, thank you for standing by, and welcome to the Intact Financial Corporation Q1 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ken Anderson, Senior Vice President, Investor Relations and Corporate Development. Thank you. Please go ahead.
Thank you, Cheryl. Good morning, everyone. I hope you're all safe and well. 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. Our executives are joining virtually today from across the country. Firstly, 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. From Calgary, we're joined by Darren Godfrey, SVP of Commercial Lines.
We'll begin with prepared remarks, followed by the Q&A. With that, I'll turn the call to our CEO, Charles Brindamour.
Thanks, Ken. Good morning, everyone, and thank you for joining us today. Since the last weeks of March, the world has changed dramatically. The coronavirus pandemic has inflicted immense pain and suffering on communities across the globe, and economic activity has slowed to levels not seen in our lifetime. We're grateful for the dedication and commitment of healthcare workers and essential services. They've rallied to society's aids while people and communities have endured a lockdown never before seen. Across North America, society's discipline is paying off as we're thankfully witnessing a slowing of the spread of COVID-19. At Intact, our business is resilient, and our number one priority is ensuring we support society and our customers through this. Over the past six weeks, we've been helping impacted customers by providing payment flexibility and premium adjustments to recognize financial hardship and changing risk profiles.
Our measures are aimed at providing the highest amount of benefit to those who need it the most. Far into Q2, we've provided over CAD 130 million of relief to approximately 390,000 customers, and we expect the total amount of relief will exceed CAD 200 million by the end of the lockdown. Our business was built to support people, businesses, and society in both good times and bad times, and that's exactly what we're doing. Our ability to support our customers and brokers is the direct result of our people, of which over 99% of them are working effectively from home. Supporting them is our robust IT infrastructure, which is performing really well. We're set up to operate our business remotely for an extended period of time, if necessary, and at Intact, the trains are running on time.
I do believe it's now important, though, for businesses and government to work together to develop a plan for a gradual, risk-based return to work in the coming weeks. Now, let me provide a bit of color on our quarterly results. Yesterday evening, we announced solid first quarter net operating income of CAD 1.61 per share. Top-line growth was 14% in the quarter, including the GCNA acquisition. In Canada, premiums grew 15%, and in the U.S., growth was 9%. The combined ratio was 94.3%. Canada posted a solid 93.3%, with mild winter weather more than offsetting the COVID-19 related losses. The U.S. commercial lines combined ratio was 100.1%, including 8.5 points of COVID-19 claims provisions.
In aggregate, we recorded a provision of CAD 83 million directly related to COVID-19 claims in commercial lines, both in Canada and in the U.S. We did a bottom-up analysis of where our exposure could be to determine the direct impact of COVID-19 in commercial lines, and of course, we'll refine it in the second quarter as the situation develops. We're confident with the position we've taken so far. We're also, of course, remaining vigilant on the potential indirect effect of the slowing economy over the coming year. The prevailing hard market conditions in Canada we experienced in 2019 and into early 2020 will be temporarily impacted by the crisis as we provide relief to small and mid-sized businesses that are going through a hard time. Once the impact of the crisis has passed, we do expect our active measures-...
to resume fully as the industry continues to report ROEs well below historical averages. In 2019, the industry ROE was 5.6%, which put our outperformance at 580 basis points for the full year, again, above our 500 basis point objective. In the U.S., while industry premium growth will be impacted by the economic slowdown, we expect the prevailing hardening market conditions, including rate increases, to continue. Let's now look at our first quarter results by line of business, starting with Canada. In personal auto, premiums grew 11%, driven by favorable market conditions and including the GCNA acquisition. The combined ratio of 94.6% improved by 7.3 points, driven by lower frequency of claims, in large part driven by our action plan over the last few years, as well as benign weather in the first quarter this year.
The crisis did not have a material impact on Q1 results in automobile insurance. Overall, our emphasis remains on portfolio quality as we focus on maintaining overall profitability levels in 2020. In personal property, premiums grew 12%, driven by favorable market condition, the GCNA acquisition, and unit growth. The combined ratio at 81.8% was the strongest in over a decade, driven by our actions over time and a mild winter. The crisis did not have an impact during the quarter and is not expected to have a meaningful impact in 2020. Personal property remains well positioned to operate sub 95, even with severe weather. In commercial lines, premium growth of 22% reflects the GCNA acquisition, as well as strong market conditions.
The combined ratio of 100.7% included 6.6 points, or CAD 50 million of direct COVID-19 related losses. Overall, the underlying fundamentals in commercial are strong, and we're maintaining our focus on underwriting quality. This business is positioned for low nineties performance over time. Moving to our U.S. commercial segments, premiums grew 9%, including the GCNA acquisition. The combined ratio at 100.1% included 8.5 points of direct COVID-19 related loss provision. While the crisis may add some near-term volatility, the fundamentals of this segment are trending well towards our goal of sustainable low nineties performance. Looking at our IFC underwriting operation for the rest of 2020, one could expect to see a mid-single digit to low double-digit impact to top line growth from COVID-19, depending on the severity and duration of the crisis.
With the prudent provision we recorded in Q1, we expect the overall direct impact of the crisis on underwriting income for the rest of the year to be largely neutral. Given this unprecedented crisis is ongoing, it's of course, difficult to be definitive on the indirect impact of the economic slowdown in future periods. As there is a fair amount of uncertainty as to how the crisis will evolve, performance by quarter and line of business may be uneven. Despite the market volatility in March, we ended the quarter with a strong capital position, with MCT above 200%, and a capital margin at CAD 1.5 billion. Our balance sheet is both capable of absorbing further meaningful headwinds and is also flexible to act on opportunities.
While it's always difficult to determine the timing, it's clear to me that market dislocation tends to surface opportunities, and we remain watchful. Turning to strategy, while supporting customers through this crisis is our number one priority, we continue to execute on our long-term strategy. First, our people are engaged in responding to customer needs. When the crisis hit, we mobilized at lightning speed. Over 1,000 employees were redeployed across the organization to focus on specific initiatives, including the processing of customer relief transactions and supporting our digital tools and other activities. Across the organization, productivity and collaboration remain high, and we continue to deliver top-notch service to our customers and brokers. Second, to our digital platform, we're ensuring our customers and brokers have ease of access in a world where physical contact is disrupted.
Since the crisis began, we've seen, for instance, electronic payments for claims increase from low teens to north of 35%, the proportion of clients who are submitting claims electronically has more than doubled as well. The usage of our digital tools is a win-win. It drives a better customer experience and improved efficiency for both IFC and our brokers. Lastly, the integration of GC&N and Frank Cowan is on track as we build a leading North American specialty platform. Policy conversions are underway. We launched our high net worth brand, Intact Prestige, in March. GC&A employees are already integrating with their Intact colleagues and living our values, and we're on track to meet our financial objective of mid-single NOIPS accretion, including the On-Side acquisition by 2021.
In conclusion, our discipline and our work over the past three years meant that we entered 2020 in a very strong position, and our first quarter performance is a good proof point. Our teams have mobilized fast to deal with the COVID-19 crisis, and we've provided significant relief to our customers. Our focus is on continuing to provide real help to customers while advancing our strategies and achieving our financial objectives. Our business is tremendously resilient, and we're well positioned to demonstrate that again in the months and years ahead. With that, I'll turn the call over to our CFO, Louis Marcotte.
Thanks, Charles. Good morning, everyone. Net operating income per share was $1.61, up from $0.73 last year, driven by strong underwriting performance and distribution results. As good as these results are, let me first summarize the impact of the COVID-19 crisis on our Q1 results. The impact on top line was very limited, as the crisis really began at the end of the quarter. The relief measures have also started after quarter end. We took a provision of CAD 83 million related to COVID-19 losses, which we have reported as cats. This represents a 3-point impact on our IFC combined ratio. Of the CAD 83 million, CAD 50 million resides in Canada and CAD 33 million in the U.S., both in our commercial lines.
These provisions relate to direct losses from event cancellations, tuition reimbursements, liability, and specifically endorsed business interruption in some of our specialized programs. They represent our best estimate of ultimate losses based on a bottom-up assessment of where COVID-19 could trigger a liability, as few claims have been reported to date. Although the crisis is still unfolding, we recognize these direct losses early and prudently. For the rest of the year, and based on our knowledge today, we believe our underwriting performance will be largely on track. As we progress through the year, we will continue to monitor the economic impacts of the crisis and the potential for indirect losses.
In Canada, excluding 2.1 points of COVID-19 losses, the combined ratio of 91.2% was solid, improving 11.7 points year-over-year, thanks to benign weather, favorable market conditions, and our ongoing profitability actions. In the U.S., excluding 8.5 points of COVID-19 losses, we achieved a 91.6% combined ratio, which reflects solid or improving performances across all lines of business. Net investment income of CAD 150 million was up 7% compared to last year, mainly driven by the impact of higher invested assets following the acquisition of GC&A. We now expect investment income in 2020 to grow between 1% and 3% compared to 2019, as we reflect the impact of lower interest rates and dividend yields.
Distribution, EBITDA, and other income grew 22% to CAD 44 million in the quarter, driven by the acquisitions of Frank Cowan and On Side. Our growth expectations for distribution earnings for the year are tempered by the uncertainty resulting from the crisis. Depending on the length and severity of the crisis, we believe the growth of these earnings for the full year will be in the upper single-digit to low double-digit range. I am pleased to see how our business performed in the first quarter, delivering strong operating results despite absorbing the impacts of COVID-19. In particular, I should underline the operating ROE of 14% on the last 12 months basis. Let me provide some additional color on the underwriting results, beginning with Canada.
In personal auto, we saw premium growth of 11%, with minimal impact from COVID-19, as relief measures have been rolled out after quarter end. As I mentioned earlier, we expect that the premium reductions offered to customers will largely impact top line in Q2 and Q3. Personal auto profitability was strong in the first quarter at 94.6%, with a six-point improvement in the underlying current year loss ratio, driven mainly by our profitability actions as well as better weather conditions. The impact of COVID-19 was minimal in the quarter as the frequency decline observed throughout the quarter accelerated at the very end, making it difficult to distinguish between the impact of action plans, weather, and COVID-19. Prior year development was slightly favorable in the quarter, a sharp reversal from last year, but in line with our expectations.
In commercial lines, excluding 6.6 points of COVID-19 losses, the combined ratio of 94.1% improved 12.6 points on a combination of better weather and profitability actions. The Canadian expense ratio of 29.3% for the quarter increased 1.2 points from last year, mainly driven by a business mix and the impact of GCNA. To U.S. commercial, the GCNA acquisition added 9 points to our top line in Q1. On a pure organic basis, excluding the impact of exiting healthcare last year and the acquisition of GCNA, growth was 10%, thanks to favorable market conditions and new business. The underlying loss ratio of 51.6% in the quarter improved 3.9 points, which was largely driven by the impact of our profitability actions.
Favorable prior year reserve development of 2.2% was better than expected, with strength across all ongoing businesses. We continue to expect little impact from PYD in the near term. The U.S. expense ratio of 39% was 1.5 points higher than Q1 last year, mainly due to the addition of GCNA's Surety business. The combined ratio in the U.S. of 91.6%, ex-COVID-19 related losses, was driven by a strong performance in most lines of business. Although the crisis adds a bit of volatility to our results, we continue to make steady progress on our profitability improvement plans and target a sustainable combined ratio in the low nineties. Moving to our non-operating results, we recorded an impairment charge of $96 million on our common share portfolio, despite the short time period over which we could observe the price movements.
The impairment does not impact book value per share, as the investments are marked to market, but it does affect the ROE. The effective income tax rate of 27.9% was above expectations and reflects a one-time retroactive change in U.S. tax legislation. Moving forward, we continue to expect our tax rate to be between 21% and 22%. A few words on our balance sheet. Our unrealized gains position, which stood at $360 million at the end of 2019, moved to an unrealized loss position of $554 million at the end of Q1, mainly from common and preferred shares preferred equities. This was partially offset by an improvement in the funding ratio of our pension plans, driven by wider spreads, as well as the strengthening of the U.S. dollar.
Overall, this led to our book value per share declining by 4% sequentially to CAD 51.71, a good outcome in the circumstances. In the face of highly volatile markets, we acted quickly and prudently to strengthen our capital position, including the issuance of a CAD 300 million medium-term note, and unwinding some capital-intensive strategies, such as our market neutral strategies. We ended the quarter in a strong financial position with CAD 1.5 billion of total capital margin. In Canada, our MCT was 202%, and in the U.S., the RBC regulatory capital stood at an estimated 393%, both well above minimum required levels. We have CAD 343 million of cash at the holding company, and over CAD 600 million of our credit facility is undrawn.
Our debt to total capital ratio was 24.1% at March 31st. We are confident we will return to our target of 20% over the next 18-24 months. With our resilient operations and strong capital position, we are in a good position to support our customers throughout this crisis. We are also in a strong position to pay our dividends, absorb future shocks from capital markets, and capture opportunities as they arise. Before concluding, let me update you on the unrealized loss position in Q2. I'm happy to report that the unrealized loss in AOCI has decreased by approximately $400 million on the back of strong equity markets. Keep in mind that spreads have tightened, and this will impact our pension plan funding and could offset some of these gains.
In closing, with a talented team, robust operating platforms, and solid fundamentals, we're well positioned to deliver shareholder value during these unprecedented times. With that, I'll give 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. Of course, if there's time at the end, you can certainly re-queue for follow-ups. Cheryl, we're now ready to take questions.
Certainly. To ask a question, please press star one on your telephone keypad. The first question is from Geoffrey Kwan of RBC Capital Markets. Please go ahead, your line is open.
Hi, good morning. When I think about, I guess, how you run each of your business lines and you try to target certain profit levels, but arguably, these aren't normal times, and you've got personal auto that could benefit from lower frequency and commercial, or maybe there's potentially higher claims exposure. When you talk about the premium relief efforts that you guys are doing, are you still talking about kind of a silo approach to profitability? Or given the circumstances we are in, is it maybe taking a little bit more from a consolidated approach, albeit on a temporary basis, when making those decisions on how to allocate the premium relief for your customers?
Jeff, that's a really good question, and I would say that, you know, we entered 2020 in a position of strength, and that's why we were able to put those measures in place very quickly. You know, just to recap, financing relief here that is provided across the board. You have premium relief that is provided based on change in risk profile, a change in behavior, and where, and where real needs exist. We've tempered some of the increases again, in the areas where businesses are most impacted by shutdown. You know, Jeff, this program is very much risk-based, it's flexible, and it's based on individual people's circumstances.
Our approach to running the business is to look at each line as they stand and do the right thing for our customers within those lines of business, taking into account, the performance of that line. I would say in aggregate, subsidization between line of business is not something that is part of how we're thinking here, about this relief effort. It is really based on need, based on risk profile, and based on what we can do as an organization. Sitting here today, you know, I'm quite pleased that we've helped 390,000 Canadian, and we're probably past 400,000 as we speak, because there's a fair bit of volume.
We feel that this is the right thing to do in this environment, but there's no subsidies between lines of business that are explicit or even implicit.
Okay, thanks. Just my other question was, out of the U.S., we've seen on the auto side some data points from Progressive and Geico on whether or not it's claims ratio or frequency since COVID-19 started. Can you quantify what the impact so far has been in Q2 to whether or not it's a claims ratio or even if it's just frequency severity for the personal and commercial auto book?
Jeff, at high level, the impact of the lockdown was most acute towards the end of March. I'd say last week of March and the first few weeks in April. We have seen from telematics data as well as from frequency data for a few weeks there, we've seen ballpark, you know, a drop in frequency close to 50%. It's been. In the past couple of weeks, though, we've seen driving started to pick up in the 10%-20% range, from the bottom of the lockdown, and with good weather, we expect that to gradually increase. I think the other thing that one needs to take into account, though, when you think about that, is a couple of things.
I think that one should not assume that severity doesn't change when frequency drop. There are some severity impact related to, you know, the crisis itself, and we remain prudent, in particular in lines of business, like accident benefits in Ontario, about the severity impact of not only the lockdown, but the economic environment. All in all, I'd say at the depth of the lockdown, we saw a drop in driving of about 50%. We've seen the driving increase in the past two weeks, in a, I would say, meaningful way. It's really not back to normal, no doubt about that. Then we're keeping an eye on severity in that process. That's kind of, you know, my take on it.
I don't know if Isabelle want to add anything to that, or Patrick, who is sitting in the claims operation, also on the front line of this. Maybe, Isabelle, a bit of color, and then Patrick.
Yeah, sure. Thanks, Charles. I would say that, in addition of what Charles mentioned during the COVID crisis, I think it's also important to notice that pre-COVID frequency was already decreasing in our portfolio, given our strong action plan that was in place for a few, a lot of months already, as well as favorable weather in the first quarter of 2020. Frequency was already in decrease by about 15% versus prior year average. I think that's also something that is important to note. As Charles mentioned, during the peak of the lockdown, frequency decline was higher, but we've seen in the last two weeks that driving have picked up.
we expect this to continue as governments are starting to remove restrictions and starting to share high-level, high-level plans to reopen economies.
Thank you very much, Isabelle. How about you, Patrick?
Not much to add. From a claims perspective, there's no real lag between the amount of driving that we measure from UBI and the intake that we see in the claims operations. I would say that the increase in driving from the past two weeks or, you know, the 50% of or so that we've seen for a few weeks at the peak, mirrors very much the intake we've seen in claims. There's no real lag between the two.
Okay.
Yeah, thanks, Patrick. I think, Jeff, you know, we have been working hard to push our telematics program in the past three years. It is close to 40% of new business. This gives us tremendous insight in driving, but it also means that embedded in the product and embedded in a portion of the portfolio, the amount of driving that people do is actually in part reflected with how we price, in particular, with telematics. I would add that on top of the relief measures that have taken place. Thanks, Jeff.
Okay, great. Thank you.
Your next question is from Michael Phillips of Morgan Stanley. Please go ahead. Your line is open.
Yeah. Hey, thanks. Good morning, everybody. I think Louis mentioned part of the CAD 83 for COVID, I think you said, Louis, specific endorsements for BI. If I heard you correctly, I hope that's what you said. I guess, does that mean that excluding those specific endorsements, that you probably wouldn't have had any exposure to business interruption? I guess, if so, does that mean then that I guess I'm trying to get you to maybe quantify any kind of exclusions you might have in your policies. There's clearly a lot of talk about that down here in the U.S., about specific endorsements and versus exclusions for viruses.
I just don't know the % of maybe your policies that have these exclusions and how that might differ for your Canadian business versus the OneBeacon business.
Yeah. Thanks, Mike. key question indeed. I would say 99.5% of our policies would not provide coverage for pandemic. I'll let Darren maybe give a bit of perspective on the CAD 83 million per se, which is not really driven by business interruption. It is one of the elements that make up the CAD 83 million. Maybe Darren, you want to provide a perspective on business interruption, in particular, in the U.S. portfolio, to Mike's question.
Sure. Absolutely. Thanks, Charles. Mike, as we mentioned, I mean, consistent with our past practices of reserving major events quickly, and clearly, this is a rather major event. I mean, we took a very prudent approach to recognizing at the end of Q1, the ultimate view of our direct COVID losses. As you mentioned, obviously, our best estimate at this point is CAD 83 million. Should point out, though, that this has really not been driven by claims activity to date. We've only seen less than CAD 10 million of incurred activity. We undertook a very extensive bottom-up, file-by-file exercise to get a really good understanding of where exposure is understood to exist.
When we look at the CAD 83 million, CAD 50 million relates to Canada, $33 million relates to the U.S. And I'll get into the BI component here in a moment. If we look at some of the key categories of our COVID-19 exposure, and there's really, I would say, four major components. First of all, liability exposure. We understand, we know that certain businesses in the commercial space have been impacted by COVID-19. Remember that for liability for CGL, negligence has to be proven, so therefore, duty to defend is clearly an exposure that exists for us. Both in the U.S. and in Canada, entertainment line of business has some exposure, mostly related to production shutdowns, but also event cancellations.
In the US, tuition reimbursement, we could see some exposure there as well. Lastly, as you referenced, we do have some specialized programs where pandemic-related business interruption coverage is extended, but as Charles indicated, that's less than half a point in our portfolio. If I look at our U.S. portfolio, and obviously, business interruption comes with the property form, property coverage. When we look at our various different lines of business in the U.S., roughly 15% of our U.S. portfolio actually has property forms, of which a good two-thirds of that is actually excess property. When we back out the excess property, we're really looking at less than 5% of our portfolio has property, which ultimately then has an extension of business interruption.
If I compare that to Canada, which is obviously more Main Street, roughly 40% of the portfolio has property coverage with a corresponding business interruption coverage as well. When we look at our coverage forms, the coverage that we have in the U.S. is very consistent with industry practice and industry language, which is surrounding the requirement of physical damage by an insured peril to trigger business interruption together with a virus exclusion, which was introduced well over a decade ago, and as I say, consistent with U.S. practices. On the Canadian side, we're very comfortable with our language. It's very clear, and the courts really have determined that loss of use, absent physical damage, does not trigger business interruption coverage.
I mean, beyond this first line of defense, we have exclusions in our policy language that make it very clear that the inability to use or access a property, even in times such like this, in a lockdown, does not qualify for coverage. That is very unique, similar, I should say, to our U.S. position as well. We're very, very comfortable with where we sit from our coverage position today. It's well understood by governments, by brokers, by customers, that in the vast majority of cases, which as we indicated, 99.5% of our policies, business interruption coverage would not be triggered by the pandemic. One last point that I would make, though, Mike, is that, again, business interruption is a covered peril under our property cat reinsurance treaty.
Assuming we do end up, more than our retention on multiple claims, and we're not of that view, at this time today, we believe that there's a reasonable scenario that we would present this as a reinsured event. A lot of information there, but that's sort of a breakdown in terms of where we sit from a coverage position, both in Canada and in the U.S.
We think the position is quite solid, and I think Darren's point is that there are many layers of protection here. Where specific coverage was provided, we've largely reserved it for in Q1 already, which would be on less than 0.5% of our portfolio.
Okay. No, great. Thank you, guys. That's great detail. I appreciate it. That's the only question I had for now. Thank you.
Thank you.
Your next question is from Meny Grauman of Cormark Securities. Please go ahead. Your line is open.
Hi, good morning. Just wondering if there's any political pressure to increase premium support or make it broader to all policyholders on the personal auto side of the business? Then just more broadly, if you could just talk about the regulatory landscape because of COVID, coming out of COVID, and how you see that? Is there any changes you see on the horizon because of this pandemic?
I'm talking with regulators and elected official on a weekly or biweekly basis across the board to share with them, you know, what we're seeing in the field. I think that there's a lot of relief that is provided by the industry across North America, and certainly in personal lines, which I'm more familiar with across Canada. I think that regulators in general recognize that this is going in the right direction. I think that it is early in the process, and people want to make sure that Canadians have access to this relief in personal automobile in particular, and in personal property. Political pressure, I think, is a strong word here, but I think we all share the view that relief needs to be provided.
There's a lot of traction, and I think the regulators want to make sure, in my mind, that indeed, Canadians take advantage of these measures. That's the first point, but very cooperative relationships at this stage. The second point on the regulatory landscape, no major changes at this stage. I would say that where reforms were in the pipeline, because the key issues in automobile insurance today, in my mind, if you take Ontario, if you take Alberta, if you take the Maritimes to a certain extent, is rooted in the fact that the product that is designed by the governments have been a big source of inflation in the last few years, as you know. I mean, we've talked about that a fair bit.
There are, you know, proposals on the table across most jurisdictions. You know, it is likely that we will see some change in the coming year or two, and in my mind, important to put in place to further provide, you know, access to the product at a reasonable price. There's no change at this stage. Some jurisdictions are saying, "No, we're going ahead with the reforms." Other jurisdictions are focused on other things at the moment, and it's completely understandable, but no major change from a regulatory point of view as far as I can tell. I don't know, Isabelle, if you have a different perspective here or other members of the team?
I would say, Charles, I agree with your comment. I would add that all the regulators were open for discussion on relief measures as soon as the crisis started. That is true for all the jurisdictions in Canada. We're really in regular contact with them to ensure that they understand our relief effort. We keep them advised of our actions in that regards.
Yeah. No, exactly. There's been, you know, in the U.S., a number of states have issued a moratorium on primarily underwriting measures and so on. Quite frankly, many of those measures make sense. I don't know, Darren, if you have a different perspective or any color you want to add there, but that is COVID driven. Nothing in there is not things that we're doing already.
No, I would agree, Charles. I think we've seen a number of moratoriums in different states in the U.S., very much consistent with processes and practices that we had in place in the U.S. I think the only other thing I would add from a U.S. standpoint is this notion of prospective pandemic coverage. There's several discussions around that at the federal level to look to create federally funded programs to provide prospective pandemic coverage, similar to other programs that have been established in the past. Obviously, industry bodies are very much in communication with the federal government working through that. That's probably just another nuance that I would add from a U.S. standpoint.
Thank you, Darren.
Just in terms of a follow-up on that, I guess the question is, to what extent do you see the risk of, you know, you're clear that the market should continue to harden after maybe a brief pause, but could you be in some situation where, because of a deep recession, because of political will, it's just not the political side of it will not allow for that on the personal auto side in particular?
Well, I think that you're saying on the personal auto side in particular, I think the answer in my mind is the reforms I've just talked about. I think that the industry has suggested over the past few years, across the land, very specific concrete measures that would bring relief in the system. I think the answer now, and the answer coming out of this, is to put those reform measures in place as the best possible way to reflect, you know, the environment in which we operate. I think the better answer here, in my mind, is reforms. Keep in mind, automobile insurance is regulated today. You know, the pricing process in automobile insurance is a back and forth, and I think that will keep happening in the coming period.
I think if people push in ways that become uneconomical to write automobile insurance, you'll see a severe capacity shortage in the marketplace, and I think nobody wins in that environment. Keep in mind, automobile insurance coming in this crisis, you know, maybe not as much for Intact, but for the industry in aggregate, the industry was operating automobile insurance with a combined ratio above 100%. In 2019, the industry's combined ratio, you know, was probably in the 103%, 104% range in automobile insurance. I think, you know, applying pressure in ways that would create a deeper issue there for the industry, in my mind, is a recipe for a big capacity shortage, and I don't think you want that in this environment.
That's why we encourage cooperation on relief, and we encourage people to think about the reforms, coming out of this.
Thank you.
Your next question is from John Aiken of Barclays. Please go ahead. Your line is open.
Good morning, Charles. In terms of the current environment, I know that there's a little bit of unwillingness to try to look out in terms of what the environment means. You know, does this change your outlook for M&A in terms of whether or not there's gonna be greater dislocation from the rest of the participants in the industry?
Yeah, I think that, John, you know, you know us well. We've had this thesis of consolidation for many years. We have said, you know, that we felt that in the midterm, we'd see a good 15-20 points of consolidation. I think this environment is a meaningful source of dislocation in my mind, not only here, but abroad and globally. I think that this only exacerbates or solidify our thesis when it comes to consolidation. I think that, Louis, Ken, and team have done a fantastic job with the investment guys and our capital management guys to make sure that, A, we can absorb a real bad crisis, but also, you know, be able to be on the offensive at the same time, and that's really how I feel we're positioned now.
I think the thesis we've laid out a number of years ago is certainly stronger today than it was, three months ago.
Understood. Charles, as we wait for that dislocation, are there any particular areas where you're deploying capital, where you think you can gain market share organically in the meantime?
Yeah. I think that. By the way, John, I just want to point out that as we wait for consolidation, we closed our last transaction, you know, five months ago. We're, as we wait, we're deeply in integration process at this stage, and I want to point out this integration is going quite well. Actually, we're quite pleased with where we are, even though the environment has changed. You know, capital priorities, John, I mean, clearly. We've laid out the roadmap in the fall about the next decade of Intact, and one of the things we said is, priority number one is capital deployment to strengthen our position here in Canada. That's true in manufacturing, and it's true in distribution.
Priority number two, it's becoming increasingly relevant, is to solidify our position as one of the leading and best specialty lines writer in North America. We're now hitting 3 billion dollar of revenue. The underlying performance of that business is low nineties, I feel really good that after all the heavy lifting that Mike Miller and team have done in the past three years, that we are very much in that zone and in an outperformance zone. I think that we're quite open and interested to deploy capital in the U.S., provided, you know, good options present themselves to us. Our view has not really changed from that point of view.
Great. Thanks, Charles. I appreciate the color.
All right.
Your next question is from Jaeme Gloyn of National Bank Financial. Please go ahead. Your line is open.
Yes, thanks. Good morning. First question is related to the bottom-up assessment of direct losses, where COVID could create some claims. Appreciate the color around that. One thought is, how far did you look out in terms of developing that bottom-up assessment? Was this related to events and production shutdown for the next three months, or is it something further out beyond 2020, for example?
Well, the lens we've taken is one of saying, if we look at this crisis, the shutdown, the implications of the shutdown, which parts of our portfolio will be subjected to a direct loss as a result of COVID-19 per se? Not so much as a result of an economic slowdown, which is what we call indirect losses. This is the lens that we have used to comb through our portfolio in Canada and in the U.S. to come up with this bottom-up exposure, as opposed to extrapolating claims reported to date, which is a big difference. I'll ask Darren to give a bit of color on that.
Jaeme, when we look at the indirect effects, I mean, clearly we can see that these are possible throughout the recovery, clearly from where we sit today, much harder to predict. Now, while we've seen economic contraction before, our business has proven to be quite resilient in past economic downturns. When we look at potential contraction of the recovery, and we look at it by line of business, I would say in personal lines, first of all, we may see some limited severity pressure, and that's mostly around social distancing requirements, virus prevention measures in the claims fulfillment process. We don't see this as being material, but it's one that we continue to watch. The area that we'll obviously be very vigilant is in commercial lines, both in the U.S. and in Canada.
Let me give you a few examples here. If we can think about property, potentially we'll see an increase in vacant properties, and with that comes the potential for moral hazard. When you look at CGL and liability, we potentially see an increase in the litigious environment in areas such as employment practices, liability, and financial services surrounding market volatility, just as a couple of examples. I would, I would bring another example around contract Surety, which is clearly linked to the health of the construction industry. While we do expect to see heavy government stimulus and infrastructure spending in construction, contract Surety can be impacted by an economic slowdown. I think at this point, we're simply highlighting the risk of potential indirect losses at this time.
To be clear, we have not seen anything to date, clearly, we remain very, very vigilant, in particular in commercial lines. Obviously, as the recovery progresses, we'll continue to keep you up to date on what we see. As I said, at this point in time, we don't see anything, but the risk is there.
Louis, any color you want to provide?
Well, just a bit on the entertainment and the event cancellation, trying to figure out how far ahead we're estimating here. In fact, the notion of a bottom-up is actually having reviewed every single insured policy that we have in our book, and some of them have canceled their events. They're fully provided for, if they have not rescheduled, because if they do reschedule, the liability goes away. It was a file-by-file work that was done for every single insurer that we have in entertainment. Where events have not yet been canceled because they're further out in the future, we took an estimate of how much payouts we could have, apply the probability of cancellation there.
... based on time, it was more based on what are the insured or the policies that we have in place, and then the likelihood of cancellation because they're extended in the future. It was really policy by policy from the event cancellation coverage.
I think what you want to take out of this, in my mind, is we looked at the portfolio and we said, the direct impact that we expect here, let's try to account for that now as much as we can. We're flagging that in a slow, low economic environment, even though our business is very resilient, we need to keep an eye on indirect losses. It would be really hard to, you know, I mean, you can't reserve for that. You just need to keep an eye on it as the situation evolves, and we wanted to be very transparent with you guys that these are the sort of things we'll keep an eye on as this crisis evolves. On the direct losses per se, we put our best foot forward, tried to be as rigorous as possible.
You should expect fine-tuning, you know, on that point, in Q2 and probably in Q3. At this stage, we put our best foot forward and tried to be as rigorous as we could in doing that. We all, and you all recognize that, you know, this is a new environment in which most people are operating, and that will come with bumps here and there, but we try to go as fast as we can to develop a perspective on it and reserve accordingly. Okay?
Thank you very much.
All right.
Your next question is from Brian Meredith of UBS. Please go ahead. Your line is open.
Yeah, thank you. Charles, I just want to clarify. In Canada, I guess your policies for business interruption does not have a virus exclusion. I guess that's what I think I heard, and if so, I guess my question is the protection purely based upon having a physical kind of damage to the building? Because I know there's a lot of discussion down here in the U.S. that that's a potential risk area here, that courts could potentially, you know, decide that the virus is, in fact, a physical damage to a building or a conference.
Yeah. Thanks, Brian. The, the primary defense is indeed a direct physical loss, and as we've mentioned, the common law is very strong in Canada on that front. The product has a second layer of exclusions, not specifically focused on the virus per se, but focused on the fact that if you can't use your property, if you don't have access to your property, pretty much whatever the reason, there's no, there's no coverage for BI interruption as a second layer of defense. You have other elements of exclusion as well, which I won't get into in the product. While we don't think the odds, we think that it's extremely remote, that we need to invoke the second and third layer of defense.
If we had to, in an extreme scenario, there are other solid arguments to defend that position, as well.
Great. That's very, very helpful. Then I'm just curious, I know you, Darren, you talked a little bit about the Surety potential indirect exposure here of an economic downturn. Do you have any kind of numbers or anything you can give us with respect to the guarantee book and how that performed during the financial crisis, the Surety business?
Yeah. Darren, do you want to take this one?
Sure. Hi, Brian. When we look at our Surety business in North America, roughly half a billion dollars is the portfolio in Canada, U.S. Obviously, the contract Surety piece is the portion of the portfolio that is the most sensitive, as you well know, and that's just under $300 million, that particular portfolio. That portfolio today is in a very strong position, and it was very well positioned going into the crisis. We could see some pressure both in the near term and over the period of economic contraction, both in terms of costs, but also in terms of the economic slowdown. The flip side, obviously, we do expect to see strong government stimulus and infrastructure to support the construction industry.
Your reference back to 2008, 2009 is a really good one. If we look back over that period of time, where we would say that there was less government support at the time provided to the construction industry, and if we look at industry results during that time, combined ratios sort of pushed into the mid-90s. Again, strong underlying performance. Yes, felt some pressure in 2008, 2009, I would say still within manageable levels. Obviously, in addition to that, we do have reinsurance protection in place on the Surety book to provide protection on larger losses. That's another layer of protection that we have. I think when I look in the longer term horizon, Surety portfolio is shown to be very resilient in economic cycles.
If things get worse, we have reinsurance protection in place. From where we sit today, we don't see this as a key issue for IFC during this crisis.
Certainly something, Brian, something we're watching, of course, with great intensity, and we'll give you guys an update at upcoming quarters as the economy changes. You know, the thing to keep in mind with construction is that before the crisis, this sector was red hot. It was a lot of demand, and we think government response will compensate to a certain extent, the pressure that might come from the economic slowdown, but clearly an area to keep an eye on.
Great. Thank you.
Your next question is from Tom MacKinnon of BMO Capital Markets. Please go ahead. Your line is open.
Yeah, thanks. First, a question on tax, probably for Louis, and then a question on premium volumes, maybe for Charles. With respect to tax, the operating tax rate was 22.6%, and I think it included an expense of $9 million or about three points related to some U.S. tax legislative changes. Is that considered to be a one-timer? If we take that out, we would have had an operating tax rate of 19.6%. Is that correct? Is that what should we be thinking about operating taxes going forward, given this? Then we'll get into the premium volume question.
On the tax front, you're right, it's a one-time event, so it's a retroactive change to some legislation where the U.S. government has made their views more precise, and we had to adjust for that. It's roughly $9 million overall. It was affecting operating and non-operating the tax rates. Roughly three points, as you said, in the operating tax. I would say here, our expectation, generally speaking, is to be somewhere between 20 and 22 on the tax rate. It fluctuates on a quarterly basis, as you know, depending on the nature of the results, how they're combined. Our view here, that doesn't change. This is a one-time item, and we would adjust for it and continue estimating between 20 and 22.
Okay, that's great. Second, with respect to premium volumes, there's CAD 130 million, I think, of premium relief measures kind of in place, and they're going to expire at the end of June. Maybe the first question on that, what's your thinking behind the CAD 200 million or more? How much longer... You know, how did you come to that, and how, and how much longer do you have that extending to? In addition, as a follow-up on that, in addition to the premium relief measures, what other headwinds do you see that would impact premium volumes going forward?
Yeah, Tom, this is a, this is a, a question that is multifaceted. We have provided over CAD 130 million so far, you know, to close to 400,000 people and businesses. When we say June 30th, what we're saying is that, you know, given where we are, given our assessment of the situation, we will grant relief until June 30th, then we'll reassess, depending on where the world is. That relief will impact not the performance until June thirtieth, it will impact probably Q2 and Q3, quite frankly, because if you come to us and you need help in late May or early June, we'll give you help and provide probably give you three months' worth of help as we do that.
The CAD 200 million that's been put out there, you know, is an assessment today of how much premium relief will be provided. On top of that, there's a bit of financing relief as well. We think that the bulk of that will impact the direct written premium in Q2 and then in Q3 to a certain extent, and will be earned shortly thereafter. Our program is risk-based. It's flexible, you know, it depends on how many customers come to us, and so far it's been very, very successful.
I think we've put our best foot forward, and I think as the weeks advance, Tom, we'll look at the environment, we'll look at people's behavior, and we'll decide if we take a different stance in the marketplace, but we're not, we're not there at this stage. We're clearly leading on this relief process, and we'll reassess in the coming weeks. You know, I would say, you ought to think about that in terms of impacting Q2 and Q3 direct written premium, and I would say three-quarters of which you should think about in personal lines and a quarter of which in commercial lines. That's the first point I would make. Headwinds from a top-line point of view, I would say, you know, you ought to think about a couple of things beyond relief.
One is the impact that the slowing economy will have on the units. I would say that the impact that it will have on the units or the number of customers, is expected to be felt to a greater extent in commercial lines. On one hand, you've got more relief in relative terms in personal lines. On the other hand, I think you have more pressure from a unit growth point of view in commercial lines. The third thing that you ought to anticipate in primarily in commercial lines, I would say, is the pressure that comes from how much you insure yourself, meaning the amount of insurance, which is driven by your business activity, which is driven by the size of your fleet and things of that nature.
I think that this will play out in the coming year. We're not sure exactly what that will be, but we know it is a pressure point. When I came out in April, and I said, we expect that the impact on the top line will be between low single-digit to low double-digit, this really anticipated those three components. We're sitting here today, and in a moderate scenario, you know, which we think is the scenario we're in, we think that the hit to the top line will likely be mid-single-digit, maybe a bit above mid-single-digit, but at that point in the range. If I can help you think through that, our perspective is that it's likely to be mid-single-digit across personal lines and commercial lines.
In personal lines, it'll be more driven by relief, the hit that is. In commercial lines, it's likely to be more driven by units. This is an informed judgment. We've done a fair bit of modeling under a number of scenarios, but that would be the best way for me to help you think through what that means in practice from a top line point of view.
Great, that's very helpful. Thank you.
Okay.
Your next question is from Paul Holden of CIBC. Please go ahead. Your line is open.
Hi. Thank you. Good afternoon. The question I was actually gonna ask was sort of on the continuity of your Canadian P&C business, Charles, I think you pretty much just answered it. Maybe you can give us a little bit more specifics in terms of, as we think about that premium relief, how much is being provided between personal and commercial, and then sort of any details you can provide on premium collection from commercial customers.
Yeah. It's about three quarters personal lines, one quarter commercial line. In terms of collections, I guess, is the point that you're making, we have provided in commercial lines, in terms of financing relief, in commercial lines. You know what? I don't have that number in front of me right now, and maybe it's something we can come back to. I don't have a specific perspective on commercial financing relief in commercial lines.
Those are the kind of data you put together to come up with your mid-single digit impact on commercial units, that conclusion?
Yes.
Yeah, maybe Paul, it's Darren here. I can just add a little bit around some of the forms of relief that we are providing in Commercial Lines. There's really three different elements there. When we look at mid-term, so middle of term, we're enabling customers to come back to us and say, "Hey, my revenues are down, my payrolls are down. Can I adjust my coverage accordingly? Can I adjust my premium base accordingly?" We're making those changes mid-term. Similarly, on the auto side, with fleets, parking vehicles that aren't in use, traditional things that we would tend to do more at the end of the term, but we're making adjustments at the middle of the term. We are tempering rate increases in Commercial Lines.
In fact, we've identified about a third of our portfolio that are small to medium businesses that are most impacted by the current crisis. On renewals for those customers, we're going six months as is. In other words, no change in terms, conditions, pricing. So that's another form of relief that we're providing on the commercial line standpoint, and that will all feed into some of that top line pressure that Charles was referring to.
Okay. Any sense of how long that Commercial Lines' top line pressure might last for? That seems like it could be something with a little bit more legs to it than obviously just a few quarters, but maybe something that lasts into 2021 as well.
Yeah, I think, you know, it's very much dependent on your perspective of how long we'll be in a meaningful economic contraction and when the recovery will take hold. It, it depends on the scenario, quite frankly. In the moderate scenario, I think, you know, the pressure less than 2021, there will still be pressure in a moderate scenario, though we wouldn't qualify it as significant from a top line point of view in commercial lines at this stage.
Got it. Those are the questions I had. Thank you.
Thanks, Paul. Ken, I think, you know, we have an AGM to go and do a speech to, so we'll let you manage the queue here, but I want to make sure I'm not late to the AGM.
... Your next question comes from Mario Mendonca of TD Securities. Please go ahead. Your line is open.
I'll be quick, Charles. The thinking longer- term here, do you see any meaningful impact on auto miles driven and now that people have become really accustomed to not working in the more formal settings, do you see any long-term implications, and how is the company positioned for that?
g one, right? Because it talks about behaviors of people. We've done a bit of, we've done a bit of work on what the permanent impact of COVID-19 could be, and we're in the process of thinking through, you know, midterm, talking three years here, how our strategic positioning should or could change. I think that on one hand, the opportunity to work from home is something that obviously will have greater importance in the future. The flip side of this, Mario, is the fact that you could argue that the usage of public transportation might come down at the same time
You know, there's a say a return to normalcy effect, which might last within a year, and I think wouldn't want to opine on that at this stage, though, was surprised to see the driving pick up so quickly towards the end of the period. If I think about it mid to longer- term, you know, I think that it is a matter of looking at how people will move in relationship with coming to work for those who come to work versus how many more people will work from home. I think in aggregate, it's probably fair to assume that there'll be a fair bit less driving in the long run.
However, again, I think if people don't feel the pressure to live close to the city, and if people don't use the public transportation as much, I think that's an upset here. I think that with UBI, with some of the work that we've done on the data front, with our broad distribution platform, with the fact that we're leading in commercial automobile as well, and on the fleet side of things, we feel, Mario, that from a transportation point of view, we have a fair bit of optionality. We have a fair bit of optionality because a few years back, we started to have this discussion about where the world was going and in relationship with transportation, and clearly, this is a new vector, but we have optionality.
Should miles driven compress on a permanent fashion, clearly, the growth profile of transportation changes, but this is where, the move we've made a few years back to really bolster our presence in commercial and in specialty lines, and the growth that might come from there, in my mind, is a clear long-term macro offset to anything that can happen on the transportation side of things.
Thank you.
Thanks, Mario.
We have completed the allotted time for questions. I will now turn the call over to Kenny Anderson for closing remarks.
Thank you, and 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. A transcript will also be available on our website in the Financial Reports and Filings Archive. We will be hosting our first virtual annual and special meeting of shareholders shortly after this call at 12:30 P.M. today, and you can join that meeting via live webcast from our website. Our second quarter 2020 results are scheduled to be released after the market close on Tuesday, July 28th. Thank you again, and this concludes the call for today.
This concludes today's conference call. Thank you for your participation. You may now disconnect.