Good afternoon, everyone, thank you for joining us. Charles, I really appreciate you being here. There's very few CEOs on the street that I think really don't need an introduction. You've been around a good amount of time and had a very good run at the institution, I'm sure everybody knows who you are. Before we get started, Charles, can I go to you for some opening comments, maybe on the quarter in particular?
Sure. I think, Mario, lots of headwinds in the environment in which we operate, and for me, Q4 clearly showed, again, the resilience of the platform. I think we're starting to see growth turn because the environment in which we operate is quite conducive to our value proposition and the stance we took. The underwriting performance at 91.5%, when you have 1.5 points of cats beyond expectation, is, in my view, quite strong. There was a lot of focus on personal automobile. We think we're in the zone. You know, some things need to happen there, but I think we're in the zone. UKPL is the area that also people want to understand more. We're quite focused on it, and we said, you know, within 24 months we'd be there.
You look at the top line, you look at the bottom line, capital position is quite strong, investment and distribution, quite strong. I think we're entering, Mario, in a phase of the competitive cycle, where you're likely to see outperformance expand while we're expanding our growth as well. I'm really keen to, you know, to take advantage of that environment in 2023. Otherwise, strategy's on track, RSA integration is on track, and working hard on employee engagement and bringing people back to a greater extent in the office.
You say that with me sitting in my office at home.
Exactly.
That's perfectly fine.
All right, call me.
For everybody listening in, please use the portal to ask questions. I'll look over my left shoulder occasionally for questions. You know, Charles, I wanna go directly to something you said in your opening. You said that we could be entering a phase where the company's outperformance could expand, and I take that as the ROE outperformance expanding while the company grows. Now, those two, I'm not saying they're incongruent, but they're hard to marry up together. How could those both statements both be true? What's changing in your mind that gives you confidence in saying that?
What I love about our industry, Mario, is when the margins start to expand, if you read the margins right, many people are starting to put the brakes on. You've got capacity issues in commercial lines, while I think the margins are really solid. You're certainly seeing that in our results. We're, you know, under-impacted by the tightness in reinsurance. We'll try to take advantage of that in this environment. Therefore, I feel good about the growth we will see in commercial lines. In personal lines, what's interesting there is that we played quite cautiously in the past few years. There's been very little shopping on the part of Canadians. The market is tightening up. Canadians are starting to shop as a result.
I feel good about where we are from a pricing point of view, but I'm seeing demand for our product, in personal lines in particular, really changing. And therefore, I think 2023 should see better relative performance from both a top and bottom line point of view. It's this behavior, Mario, that when things get a little tough, you can actually charge adequate prices 'cause people are fearful, and you very much see that in the P&C business.
Capacity constraints in commercial, that surprised me a little bit, 'cause the market looks pretty good. Why would there be capacity constraints in commercial with such a good, like a firm market right now?
I think, first of all, in commercial lines, there's a great degree of dependency on reinsurance. One of the phenomenon, Mario, in the past five years, is the explosion in growth in MGAs. MGAs are specialized distributors who rely heavily on third-party capital and reinsurance. The reinsurers, on the other hand, you know, have run businesses at mid-single-digit ROE for a number of years. You see inflation coming in. Social inflation is a, you know, phenomenon in the U.S. that's been biting at the reinsurers for a while. Natural disasters, there's been a historic correction in commercial lines. All players who depend either heavily on reinsurance, or depend on reinsurance by buying, you know, facultative and all sorts of product, see their capacity constrained.
There was not enough capacity in the reinsurance marketplace to meet the demands of the primary writers, as a result, there is a capacity constraint that is, I'd say, the most important factor right now. Plus, some caution on the part of primary carrier-... in lines of business, like property, in the U.S., property in Europe, and so on. We're not overly dependent on reinsurance. You know, we feel we're really well positioned to take advantage of the tightness that is, that is taking place.
Is this another example of where Intact's size and position in the market give it a bit of an advantage in a just a tight reinsurance space?
It definitely is a clear example of that. The other thing, Mario, is that our pricing philosophy is such that what we tell our underwriters is that if you're comfortable with the risk, take it all if we're comfortable with it. You don't need to rely on reinsurance. Many insurers actually leave room for their underwriters to buy their own reinsurance. That's what we call facultative reinsurance. We try not to do that. Either you're comfortable with it or you're not, and if you are, and you're using our pricing risk selection tools, we're happy with the risk. As a result, our dependency on reinsurance is less than our peers. It's less than 10% of our written premium.
You've made a deliberate strategic move to retain more risk. That was clear from your press release.
Mm-hmm.
You've raised your guidance for cat losses, still a manageable number, given the size of the company. Do you feel that the market can absorb the steps you need to take to protect profitability?
Yes. Yeah. There's no doubt in my mind there, Mario. I think if you look at the guidance, it used to be CAD 600 million. We upped it to CAD 700 million. It's driven by three factors. One is just the growth of the organization. Second, about a third of that is the fact that given the reinsurance market conditions, we've increased our retention, in particular at the bottom of the reinsurance tower, where we used to retain CAD 200 million in Canada, in 2023, we're retaining CAD 250 million. I'll give you, that's probably the most important example. Finally, there are just more natural disasters. We knew the reinsurance environment would be tough. We've been pricing for a number of these things and planning for a number of these things.
I think in relative terms, we're in good shape. The other thing we did, Mario, at the top end, so for tail risk type coverage, we shrunk our earthquake exposure by 40%, following the acquisition of RSA. That put us in a very strong relative position to buy the reinsurance coverage, we were looking for.
I wanna move away from that for a moment now and get to a comment you made about personal auto. You said, "We're in the zone. Things need to happen." Can you elaborate a little bit on what you mean by that? Then there are some questions that are coming in through the portal that I'll get to on personal auto as well.
When I say we're in the zone, start from Q4. When you look at Q4, 95, about 1.5 points of weather and seasonality and, you know, one point of one-time loss adjustment expense. You know, you're sub-95 right there. There's three drivers here that one needs to think about. One is done, and it is rates. You have nine points coming in. We're earning 4% or 5%, so that gap will be bridged in the coming months. It will happen because that's what the system is generating now. It's just a matter of earning. Second, we started to see inflation decelerate, 13 in Q3, 11 in Q4. We're seeing that in January as well.
You know, the denominator in 2023 is the inflated numerator of 2022, if you know what I'm saying.
Yep.
I do expect that sort of double-digit inflation to drop in the single digit zone throughout 2023. That is one thing that needs to happen for this perspective to be true. On the other end, frequency, even though driving is back to normal, is still, I would say, meaningfully lower than what it was pre-pandemic. We do expect that this will revert in part throughout the year. You have severity needs to improve, frequency can deteriorate, and with the rates coming through, we do expect to run the business sub-95 throughout 2023, with the first quarter tends to be the most seasonal quarter of the year. You've got a few points of seasonality there. Plus, the earned rate will gain more traction as the year progressed. These are the three vectors you have to think about.
I would add, where does reserve come in? Why I look at, in auto in particular, the combination of current and prior year together? That is because, you know, in trying to be cautious on long tail lines, we're not fully reflecting the drop in frequency we've observed in prior years.
I see.
We're not in the current year, also reflecting the drop in frequency we're seeing in long tail lines. You know, the caution in the current accident year, in a way, is upset to some extent, by the release you're seeing in prior years. You need to look at those two things together. On Q4 in particular, I'd say it was higher than what I thought, to be clear. I do think that we'll be, you know, at the upper end of the range, with regards to PYD. We put all that together, Mario, and we're saying: You know, we should run that business sub-95. At sub-95, in auto, with the investment income potential we're seeing, it's good business to be in.
If we can grow more than we have last year, which would not be difficult because we were pretty cautious in terms of price point, now we're seeing that there's pickup, there's shopping, as I mentioned, then we have an appetite to grow.
Several investors, and this is one of the questions, observed that Q4 wasn't, in personal auto. Given all the advantages this company has, the scale, the underwriting capabilities, the repair networks, we just see what other things, the claims procurement and all these advantages and I'm including PYD now, I'm adding core plus PYD. There was still about a 910-basis point increase in the, in the core claims ratio. I'm sorry, and I should be clear, I'm adding back PYD. That number seemed high to some investors, and it was a little higher than I expected. Do you think there was something sort of more from a, like a random? Are these just random occurrences? Some quarters are gonna be higher than others.
Some quarters are going to be higher than other. You know, we tried to put 1.5 points to two points or 1.5 points to 2.5 points of one time we could put our finger on. You know, I mean, it's not a manufacturing business, you know? It's accidents and severity and injuries and snow, but we think we're in the zone.
Okay. That just, that did come up a fair bit. You know, it came up on your call, it's come up with a lot of investors. It's hard to figure out. You've been clear on, and probably the biggest takeaway for me coming out of the call was that you reiterated the sub-95 guidance, and now you've provided the sort of roadmap to get there.
Yeah.
Let me just move away from personal auto for a moment now and go to a different type of question. It says: Given everything that we have, everything we've learned about Intact very recently, and let me just supplement this question with, hey, solid 15% ROE over the last 12 months, but it has been trending down a little bit since RSA, because there was some equity raise. The question is: Given everything we know, what kind of ROE can we expect? Let's call this an operating ROE in 2023 and 2024.
Mario, I've never given, you know, punctual yearly guidance on ROE, and, as you mentioned at the start, I've been around for a long time, I'm not going to start today. I do think that, from an earnings momentum point of view, I think that there are many tailwinds, and I would point to how distribution income, the On Side distribution income, is contributing to ROE. I think we've got some upside on the investment side of things, and I think you were the one, on the call that really poked at the guidance that we has provided at one point, $1 billion. We continue to be focused on making sure that capital deployment is done, in a way that is contributing to the ROE.
That's my perspective on it, and, you know, I would be disappointed, Mario, if we would see a downward migration in the operating ROE. We're not managing the business at the moment, expecting that.
Okay.
You know, one of the points I've made before, I forget when, but last year, is that, yes, it's minimum 500 basis points ROE outperformance. That's the objective. We're trying to generate more, right? I mean, the machine is not geared to generate only 500 basis points, to be clear. 10 years, I think it's 640 basis points, but I want the machine to generate as much outperformance as we can. We have the option to invest it in growth outperformance if we want to. We also have the option, when the industry's performance takes you in the lower team, to say, "You know, we don't, we don't want to be in that, in that zone." It's not like the 500 basis points ROE outperformance is all this machine can produce.
I understand. Is there a lower bound? This is sort of the related question, I think. Is there a lower bound to the ROE where you kind of turn off the growth taps and say, "No, we've got to focus entirely on profitability"? Does that enter your thinking at all?
It enters our thinking, all the time. In fact, Mario, you know, part of the nature of the business is that there's a lag between the moment where the product is fully consumed and the moment where you price it, right? Sometimes you're not always right from a pricing point of view. If you look at our top line, and if you look at our units, you'll see that we're very quick to turn to protecting the bottom line. If you look at the ROE of the organization, and I will exclude the 2008, 2009, where you had big impairments, you'll remember, for normal assets.
Yeah.
You see that the bottom is, in bad times, it's maybe low teens, and that's in bad times.
That's true. I do remember that. I was around for that. Let me just.
You don't look like that, though.
Let me touch on something else. Sort of tying in this investment stuff, this investment discussion.
Mm-hmm.
I do remember the period 2008, 2009 well. We are in a period of heightened capital markets volatility. You made that point clearly on the call. Is there any need to revisit the investment mix and investment strategy in light of this heightened capital volatility so that we can avoid a 2008, 2009 scenario? Now, I appreciate 2008, 2009 was extremely odd. It was a weird time.
Yeah.
When you sit down with your management team, do you give some thought to changing the investment mix in case maybe the market's wrong, and we are headed to a hard landing?
Mario, we, you know, we choose the investment mix with a very long-term horizon, long periods of back testing, where we try to optimize for total after-tax return in relationship with the regulatory capital attracted by, you know, each part of your asset mix. This drives a range within which my investment team operate. We try not to time the market here. We try to have a process as much as possible. What enters into the equation is, you know, capital protection, A, yes, from volatility, and B, if we think there are opportunities and things we need to act upon in the environment in which we operate. Right now, it so happens that there is a risk of meaningful volatility, and there's an environment where opportunities exist to deploy capital.
We've been running, the business from a mix point of view, about three points below our target on private credit and four points below our target on commons, all invested in cash. Cash is earning, you know, a decent return at the moment. You know, we're putting ourselves in a, what I would call, conservative position to take advantage of the environment in which we operate and make sure that we won't be squeezed by, you know, big swings in capital markets.
Going back to that question I had on the call about the investment yield, there's a meaningful gap between your book yields and your market yield. I think what the Street was trying to get at, in the nature of the questions that came out, myself included, is, why couldn't we expect a more abrupt improvement in the book yield over time? Is the company gonna take a more conservative posture here? Is that one of the reasons why we're not seeing the growth, the improvement?
You're seeing... You know, if you take Q4, and you strip areas where you've got timing issues, you know, the dividends, special dividends, stuff like that, should not necessarily extrapolated. You can take CAD 10 million, CAD 11 million off the number you've seen in Q4. You're at, give or take, you know, CAD 270-ish, 4x. You assume that the portfolio will turn over eight years, and in 2023, you'll experience half of that impact, so to speak. Right?
Yeah, I get it.
You get it. That's, I don't know, CAD 30 million, CAD 40 million or something.
Yeah.
There's the growth in the asset mix. That's how we came up with 1.1. What's the, what's the upside? The upside is, the investment yield goes up. We trade more than 1/8, and we go back to the asset mix we had a couple of years ago, which is also upside. It's not baked in the guidance we've given.
Yeah. If you were to trade more, you'd get some more realized losses, but that doesn't affect capital because it's already picked up in the AOCI.
Exactly.
The decision isn't a capital decision.
No.
It'd be more whether it's realized or unrealized.
Yes.
Okay. let me just go then to a couple of other topics that have come up. Let me go to distribution now, if I may.
Mm-hmm.
The goal is to get to CAD 5 billion by 2025. I think you recently hit CAD 3 billion, if I've got that right.
Yeah. Yeah.
Uh.
That's BrokerLink.
That's BrokerLink, right.
Mm-hmm.
To get to the CAD 5 billion, that would imply some serious growth over the next couple of years if you were to try to do it all organically. But if you assume you grow at the 10% that Louis offered us on the last call, it would imply something more like a still meaningful amount of acquisition, like CAD 1.4 billion of acquired premium. It's just a rough guideline. Is that doable?
Yeah. I think it is, Mario. The growth pattern I've described for IFC, for the organization at the start, very much apply to BrokerLink. We're starting to see personal lines growth pick up in BrokerLink. The organic growth in commercial lines is also very strong. Louis is not in his guidance, and I always tease Louis about this guidance, does not really bake in new acquisitions, actually, and BrokerLink is super active making new acquisitions. I don't think it would be prudent to give guidance, assuming a number of acquisitions, plus, I don't think it would send the right incentive in the field, 'cause I want people to make acquisition that generate 15.
My view is there's a fair bit of activity, and I'm very interested to see what happens to the activity driven by financial sponsors, you know, who would leverage 5x EBITDA or something, in an environment where refinancing are in the 10-ish % zone.
Exactly.
Right? You do the math, and it's interesting, but I think this should translate into opportunities for us.
You're suggesting that that pushes certain players maybe to the sideline, if only temporarily?
If only temporarily. It is a good space for financial sponsors. They're still quite active, but financing is generating a fair bit of noise now, and you see the numbers. I mean, it's if you finance at 10-ish %, profits need to show up.
No doubt. That clearly just creates an opportunity for an institution like yourself.
Yes, exactly.
I think I understand the math you're going with there.
You know, Mario, you put yourself in our shoes. one is, first of all, we don't need to finance at that level, but that's quite secondary in the mix. We have massive synergies in distribution, and we have synergies in manufacturing. We've got a number of levers to get to 15. It's a long game for us. We have deep relationships with thousands of brokers across the country, and we're trying to build the best distribution business we can.
I wanna pull together a few concepts that we've talked about. We've talked about how NII, net investment income, how it evolves, and there's some potential upside there. There's clearly some potential here on the distribution front. The observation that was made was that net operating income per share growth was sub 10% this year. There were a number of reasons for this, tax, and there was a lot of good reasons for why it would have been sub. Can I take it from everything we've talked about so far, that the 10% net operating income per share growth is still very achievable for this company?
Yes. I think, Mario, the reason why, you know, we chose 2 financial metrics to focus on. ROE outperformance, I think we've talked about that. NOIPS growth, we love as a metric, because you've got 3 levers. 1 is, grow your customer count. That's good. 2, grow your margins. 3, you've got a denominator to work with. In other words, deploy your capital in accretive fashions, and that contributes to earnings growth. That's why this metric is powerful, and it's multidimensional, and it's a great metric because it's all about earnings power. I agree, we haven't grown the NOIPS last year by 10%. That's why the objective, you know, we realize that our industry is, has cycles to it and some volatility. The objective is CAGR of 10% over time, where the ROE outperformance 500 bips minimum every year. There's a...
I look back three years, I see a CAGR of 24. I look back five years, I see a CAGR of 16-ish. I look back a decade, I see between nine and 10. We've grown the dividends on that basis. I look forward and look at where we were 10 years ago, we do have huge growth engine in the organization. I think there's an untapped opportunity to expand margins, in particular in specialty lines, which is an increasingly important part of our business. Our sandbox is much bigger than it used to be in terms of the opportunity set to deploy capital.
I put all that together, and, yeah, I feel that this business is poised to grow at that clip over time, not every year.
There are a couple of questions coming through. I wanna go to one in particular because it caught my attention when you talked about specialty lines, and you talked about sandbox being bigger. I was reminded of how exceptionally strong the U.S. business is now.
Mm-hmm.
Do you think that that business has now been right-sized? You've removed yourself from underperforming lines. Is it about the right size now? Do you would you expect to have to exit any more lines, or are you done with that in the U.S.?
The beauty of specialty lines is that, you know, we have 23 verticals across the platform at the moment, Canada, US, you know, UK, Europe. You can pick your spots in terms of where you grow all the time. That's why I think you can navigate cycles well. You can also get out of areas that don't make sense anymore. I don't want to say we're done. I'm comfortable with the businesses we're in at the moment, but, you know, if the world changes, which it will, some segments might not make as much sense going forward, as others. As such, with what we know today, job is done. Yes. The big focus from a bottom-line point of view is, first, take advantage of the hard market.
Second, and I think more importantly, I think we could be much better in risk selection, Mario. The governance is good, the information is good. We have increasingly good systems in specialty lines. I don't think we're using the science as much as we can in the field, the way we use it in commercial lines in Canada, for instance. The big area that I'm focused on with the global specialty lines team is to bring science in the field, and I think that's how you can run that business sub-90% and grow throughout the cycle.
I'll be frank, when you did the OneBeacon acquisition in the U.S., I really thought that was a precursor to a few more. There's been a period here where you really improved the business. I think in your press release, you said something like: We could see exceptional performance here. I forget the adjective; it was something like that. You know, I pay attention when companies that I think are generally quite conservative use words like that, I pay a little more attention.
Yeah.
With that as the backdrop, does the U.S. provide one of those opportunities to grow through acquisition?
100%. You know, Mario, Mike, at the Investors Day, said our GSL business is maybe CAD 5 billion now. It's running in the mid-eighties. We think we can make it CAD 10 billion by 2030. We can do that organically. And there's upside to improve how smart we are in the field. Maybe that's why I've used the word exceptional. It is a good place to be. Even if you're average in specialty lines, you outperform the market, if you know what I'm saying. You outperform the industry's performance. That's why in 2016, you know, we realized we were trying to figure out how we could expand our outperformance in Canada, and we realized that we had CAD 600 millions of business in specialty lines that nobody was really focused on.
That's when my colleagues and I said: You know what? We need to create a division of that, make sure people wake up in the morning thinking about that, go to bed at night, thinking about specialty lines. That's why we went hard in that space. The reason why we didn't deploy capital in the U.S. is, first and foremost, we wanted to prove ourselves. I'll be very transparent, Mario. In the U.S., we said, first of all, we're not going to go in personal lines-
I remember that.
Because, you know, we'll get smoked out. We were quite nervous about getting into commercial lines. The first order of business was: Make sure you can prove to yourself, that is, to us, that we can outperform in that market. I think we have proven that to ourselves now, and we've doubled the business in size, even though we've shut down a number of lines. It's now CAD two and a half billion, you know, and this was maybe not doubled completely, but increased it dramatically in segments where combined ratios start with an eight.
Okay, the U.S. is a possible place to grow this business then? Okay.
Yeah.
Because we haven't seen anything in some time. Like, OneBeacon was how long ago?
You've seen a few distribution deals.
Sure.
You'll see more of that. I like the idea in the U.S. to deepen our position without putting the balance sheet at risk too much, and expand in segments where we might have, you know, less debt through distribution first, and then put manufacturing capital at risk, which is what we're doing in the U.S. You've seen some distribution deals, and if we can do manufacturing deals, we will. At the moment, we find it's either too expensive or the appetite from a risk point of view is not right, and therefore, we're on the sideline. I would love to deploy capital in the U.S.
Okay. Let me go to some questions that are coming through now. I forgot to look over my shoulder here. One is: How have competitors behaved in different lines of business in Canada? Are you seeing any interesting differences, like pricing changes, marketing, anything recent in Canada that you would highlight for us?
I think that, I mean, this is a big question, and the beauty of Canada, is that it's different for every province where you operate. That was interesting to us. We watched that with, you know, some interest. In a world where consumers were not shopping, we've seen our competitors invest dramatically in marketing. You know, our own thesis was, by the way, we've got the two best-known brands in the country. Our thesis was, you know, if you invest a lot in marketing and people are just not shopping, that's expensive for every sale you make. That is changing now, but this was the behavior last year, and that's why in PL, you've seen nothing in terms of growth at our end. We're focused on retention.
That is changing now, and it'll be interesting to see what people do from a marketing point of view, but I was really surprised to see how much spending there was in the last year or two. That's one thing. I think that you are seeing rates move in personal automobile, where rates were flat in the past and even down during the pandemic. Now you're seeing rate momentum, and you're seeing, you know, companies not wanting to grow necessarily in the broker channel, in particular, in Alberta, obviously, at the moment. Rates moving up in personal auto is a change. Personal prop, not a ton of change, and commercial lines, still a very healthy market. Are there new disruptive plays in personal lines in Canada?
You know, Mario, we've been talking together about the future of the industry for years. We've been preparing for disruption for years. Our thesis has always been, it'll happen at the distribution level. I cannot say we've seen very successful disruptor in our space. We haven't seen major traction gained by aggregators in the space. The big trend, I think, has been consolidation of brokers, of distributors, and we've been, I think, if not the leading actor-
For sure.
On this front, we remain ready for disruption in the space. We've invested accordingly.
I don't want to put words in your mouth, but the impression I'm getting from you now is that while personal lines have not grown in the last few years, top line's not been there, we're at an inflection point, possibly? Like, Intact.
I think so.
can now grow the top line a little.
Yep.
What's a reasonable number for me to earmark here? At where, like, low single digits in the sort of three, four range now? I don't want to go more than that because this is an enormous company. Growing is hard when you're this big, so...
Growing is hard when you're this big, you're right, and we're risk takers. Keep that in mind.
Right.
You know, if we were a manufacturer, want to grow as fast as you can to reduce your cost per unit, that's not how it works in our business.
For sure, I get it.
Unfortunately, not everybody understands that. That's why we can outperform. I don't want to quote a number, Mario, because we're pricing for adequacy, we're investing increasingly in marketing now, and we'll try to grab as many opportunities as we can. I'm hoping for more organic growth, but at the end of the day, pricing adequacy is what's most important to us.
I shouldn't be surprised if I see the top line improve a little bit.
No, no. In fact, you should be disappointed if you don't.
Got it.
Would be my perspective. There are, as you know, we've made big investments in the digital front, there are inefficiencies that we're trying to grind away at the moment in the funnel, so to speak. Big focus on improving the funnel. Just there, in my mind, there's a fair bit of upside. I'm, the teams are focused on that at the moment, and if I judge by, you know, the last, the end of the fourth quarter and what I'm seeing at the start of the year, I think that this work is paying off.
I got it. I want to go to, before we get into the M&A, because I think M&A is coming up in some. Just looking at the questions that are coming through, clearly, I'm going to have to get there at some point. Here's another one that came up on the call. I'm sure, I think I was part of the group asking questions. The question is: What is the long-term vision for the UK business, and would you consider entering new markets? This question is flipping it as on its head, expanding even further. Will you address that?
Yeah. I'll take you back to your question on the U.S., Mario, that's the mindset I'm in in the U.K. at the moment. First, prove out performance, think about capital deployment. I think today, I would deploy capital in commercial lines in the regions, in the U.K., if there was an opportunity. I would not deploy capital in personal lines in the U.K. at the moment. The other part that is quite valuable, which came to us, you know, for very little, but that's worth a lot, is the global capabilities we've acquired based in the U.K. The specialty lines business in the U.K., the global network in Ireland, and some strengths in Europe. Not ready to deploy capital just yet. These businesses are performing really well. I would like to see some growth in the next two years there.
I would like to see, our North American customer base take advantage of that value proposition, where we now have global capabilities. I'd say on the other side of the pond, it is about proving outperformance, and in first lines, outperformance is not enough. That's my conclusion. If in some segments of first lines, even if you outperform, you're not making enough money to justify leaving the capital there.
I understand.
You know, that's what we're working on at the moment.
You know, this next question, I read it a couple of times. It's a bit prickly. Let me ask it anyway and take it as you like it.
It's unlike you, Mario.
You know?
It'll be uncomfortable to you.
Very few things make me uncomfortable, as you know. This person's saying that historically, if you buy an institution with a 15%, 16% ROE, and you pay a price to book of 2x or more, it's not led to a good investment return. The question is something like this: Intact wouldn't buy a company for over 2x book, generating a 15% ROE. Why should investors make that trade? I think what the person's referring to is Intact itself. Company trades at over 2x book, has a 15%, 16% ROE.
Yeah.
Do you see where he's going with this?
Yeah. Yeah.
It's a tricky question.
Yes. First of all, we would buy ourselves, and we do. Just, you know, put that out there. Let me, let me start from how we look at the world and why, for us, it's a no-brainer. Then I'll try to translate that into this person's perspective, maybe as an investor. First of all, we aim to generate 15% return on the capital we deploy. Okay? Not on the book, on the capital we deploy in acquisitions. Why? Because there are risks when you acquire. If you look at our track record of, say, the last decade's worth of deal, that 15 is actually 21-ish%, I think. How can you achieve that? You can achieve that if you outperform.
Even if you buy a business, you have 500 basis points, say, of ROE outperformance, you can bring on the platform when you buy it. That's why our number one priority is Canada, and that's why when we went in the U.S., we wanted to prove to ourselves outperformance. It's precisely because of that. It's because if you wanna generate 15% return and above in a deal, you need to bring something to the table. That's how we deploy capital ourselves. Yes, you know, we have paid 2x books at times for companies, good companies, which we were able to improve. Now, if you're an investor, so there's, you know, price to book is really correlated to the ROE of the business, right?
Sure.
price earnings is really a perpetuity of earnings divided by cost of capital minus growth.
Mm-hmm.
this is just a rule of three, essentially, at least, in your world. We use DCS.
Sure.
You know, the world clicks differently. I think part of the answer is that there is investing in a company that is generating 15-ish at a price to book above two. I think if you grow your earnings phase at a clip that is at or above your cost of capital, you get in a different zone, in my mind. I think that's the Intact Financial story. That's why I think many investors have been telling us that, you know, they didn't get in because it was too expensive every year for the last 15 years.
Right.
Your, you know, question on NOIPS is really important. That's how it all works in my mind.
The way I've addressed that question, because I've received that question myself about Intact and others, because occasionally, like a Royal Bank will trade above two, not right now, but they have in the past. Part of the way I address it, and I'm interested in your view on this, is if you build a machine, as you described it, that is skillful at extracting value from other machines, then the machine you build is worth a lot more. Because if that machine can extract value from something that other people will only pay 1x book for, and you can buy it for 1x book and make it worth something that was worth a lot more than 1x book, that's what earns you the privilege of trading at a big multiple. The question always comes back.
I always ask the question, Louis and I have had this conversation in the past. The biggest mistake I can see a company like yours making would be to mess up that equation. If you ever do a deal that's a mess, then you ruin that thesis I have, that the machine is able to add value. I guess that really goes to the point why you can never get too far out of your lane, because if you screw up, you lose that privilege.
I think there is something else upriver in that thought process, Mario, and it is that you can only do that if you can beat your peers day in, day out in the market.
Right.
If you don't have outperformance, it's hard to take a one-time book machine and turn it into a 2.5x book machine. Yeah, scale is interesting, you know, but you need to be very deliberate about using scale and turning it into an advantage. It's not just about expenses.
I understand.
Bottom line don't screw up the deals you're making. That's why I get that, and that's why the bar is high.
Yeah, Louis and I have had this conversation on a few occasions, and in a very simple way, that's essentially the thing I always remind him of. You just cannot screw up a deal, or you lose the privilege of doing big deals and raising a bunch of equity.
Mm-hmm.
On that topic, this is a question that comes up all the time, we haven't seen any big deals in Canada in a couple of years. I mean, the last one was the one you did. Why has it been light? Why have there not been much on the horizon? Is it because the market's firm and companies are making money, they don't need to sell? Is it as simple as that?
I think that when I look at deal making, you know, when you look at the industry in Canada, you have big international players who own a portion of the space. You have other financial institutions who own, you know, a portion of the space. You have smaller domestic, public or private companies who are in the space, and then you've got mutuals. I think the trigger for a trade is different for each of those layers, and that's why it's tricky to think about M&A in Canada, the macro with, you know, the sort of macro.
Yes
Elements you would normally use. I would say a number of the deals we've done, Mario, were either leadership driven or strategy driven, regardless of the performance, or the state of the cycle.
I understand.
I would say those two factors maybe are more important than the state of the cycle itself, and therefore, it is a long game. You were talking about the, you know, my tenure. I'm not too sure what to do with that, but I can see it in my face when I look on the screen. The length and the quality of the relationships you build with the stakeholders in the marketplace is beyond the ROE outperformance, a key M&A weapon, and you need longevity for that. At Intact, we do. By that I mean five successors really within five years for the top 250.
There is depth, there is continuity, and you're exposed to a number of these people, either, you know, on the earnings call or at the investor's day, et cetera, and that's a big portion of what I do as well.
I've always felt that in a transaction, you have to bring a lot more than just the wallet.
Oh, yeah.
What do you think Intact brings? Let's just say maybe the next two years, the next three years will be more active. It's entirely possible. Conditions could evolve that way. What does Intact bring beyond, obviously a big valuation and a lot of excess capital?
You know, Mario, the valuation, just to take that part of your point.
Sure
Is not a big element of our decision-making process in M&A. Accretion is interesting, but it's a secondary or third derivative. What we're looking for is the economic value we can create, with the dollar of capital, and that is IRR-based, and that's why we define that. It so happens that when you use your currency, it makes it even better.
Sure.
Case in point, the RSA deal with the noise accretion close to 20% over three years. what we really bring to the table, though, It depends on the deal, but I would say because of the point I've made about succession, we can put boots on the ground really quickly. We have boots on the ground in the U.K., top talent. We have Now, our GSL team is very strong and well-blended in the rest of the organization. There's horsepower at Intact. That makes a big difference. Second, it's simple, but just discipline. You know, people say that, we breed that. just the governance and how we run businesses from a philosophy, call it ROE point of view, is a big differentiator.
I say that with the experience of seeing how some of the businesses we bought were run before we showed up. Performance goes up just because the metrics you use to run the business change. You get into the hard stuff. In domestic deals, it's not so hard because you move everything to your platforms, risk selection, knowledge and AI, claims and supply chain management. I have to say, we don't talk about these guys often enough, but finance, treasury, investment, capital management, a big portion of the ROE advantage over time has been generated by these guys. When we acquire, you end up buying a pool of opportunities to optimize your performance. I'll just use that question to bring you back to the one-time CAD 58 million tax benefit in Q4. We call this one time, but it's not an accounting entry.
It's us tapping in a pool of operating losses that could not be used in a business we bought. We're trying to use every stone, turn every stone to create value, but it really start with the ROE outperformance and the people.
We only have 1 minute left. I do want to ask this one question. It came up. It's an interesting question. It says: Intact's done very well in Canada. Does the structure of competition and the regulatory environment limit the degree of improvement left in Canada, the degree to which you could drive a better ROE in Canada, for example? Is the structure such that you've kind of tapped out your growth and profitability here, and that we really do need to look outside Canada going forward?
I think there are great growth opportunities outside Canada, where we have outperformance, but Canada is where we would deploy our next dollar of capital if we could.
Okay.
You know, there's clearly M&A. From an organic growth point of view, there's a fair bit of upside just to be better at our game and flex the muscles we've built over time. Lots of room to grow our distribution business. By the way, it's a big distribution business we've built now, in the last decade. I was Friday night with our guy who runs OnSide. This is growing like there's no tomorrow. It's starting to contribute to the bottom line of the organization. It's only 40% of our customers. So I see customer experience upside, bottom line upside, and they're now starting to gain market share, outside our own customer base at a pretty good clip, as well.
I just look at all these elements, Mario, and I would say, plenty of room left to grow in Canada.
We're gonna end it here, but just a couple of things I want to paraphrase then. The level of outperformance from an ROE and a top-line perspective could improve. Personal lines, top line is improving, earnings, sorry, top line momentum, sub-95 combined ratio. You sound optimistic about 2023. Am I overstating it, or is that fair? You feel pretty good about 2023?
I feel good about the toolbox; the tools we have in the toolbox to generate good performance in 2023. I think we want to be optimistic in the environment in which we operate. yes.
Any other closing remarks?
I think that the strategy is very much on track. There are headwinds in this environment, and I think we've zoomed in, Mario, on many of the strengths of Intact. There are headwinds in this environment, you know, we're trying to be on it as much as we can. Where we have opportunities to de-risk, our position, we are, using that environment as well. I think the team is pretty energized about 2023.
I appreciate you taking the time again, Charles.
Thank you.
Thank you to everyone who joined us. Have a good afternoon.
Thank you. Bye-bye.