Good afternoon, everyone. I'm Tom MacKinnon with BMO Capital, covering insurance, diversified financials, and asset managers. We're delighted this afternoon to have Charles Brindamour, the CEO of Intact Financial, with us for a virtual fireside chat. Good afternoon, Charles.
Good afternoon, Tom.
Hey, I wanted to start with some questions with respect to the RSA acquisition.
Mm-hmm.
it's been 14 months since it's closed. I think you mentioned just last week on the call that accretion is tracking better than expected, and might be somewhere in the area of 15%. I think, like, 12 months, it was supposed to be maybe high single digits. The first part is: Why is it better? The second part is, the 36-month outlook is for high teens. Are you just tracking faster, or do you think you'd be able to exceed your high teens, estimate 36 months from close? Why?
Well, I think, Tom, I wanna keep some meat for the Investor Day. I'm not going to talk about the next 36 months, I would say a couple of things. First, the underlying performance of the business has been better than what we've modeled. That's helpful. Second, I think that we've been a little faster than anticipated in generating synergies. I think we've reported on the call last week that our run rate at this stage is CAD 175 million out of the CAD 250 million for expense synergies that we've talked about, excluding loss ratio. I think we're in very good shape. Come the Investor Day, we'll give you a fair bit of color on speed, trajectory, you know, and ultimate destination.
Okay. What have you learned about the U.K. market? What you purchased there is largely commercial lines. If we look in North America, commercial lines is experiencing some pretty good hard market conditions. Is the U.K. market any different with respect to commercial? If so, why? Is it experiencing basically the same kind of excellent fundamentals that you're seeing in North America?
We're seeing excellent fundamentals in the U.K., both in our regional mid-market business franchise, which is excellent in my mind. You're seeing, you know, upper single-digit rate increases, very good momentum there. We're seeing the same thing in the London market, which is more akin to our specialty lines operation, and in fact, is now part of our global specialty lines platform. The conditions there, Tom, are excellent as well. I would say from a timing point of view for the acquisition, this contributes, in fact, to the overall performance and to your previous question. Definitely, very strong markets in CL and SL in the U.K.
Are they fundamentally any different? like, just, I don't know, distribution-wise or product-wise, how have you been able to leverage that?
Yeah. The main difference in commercial lines, Tom, is in the SME space or in the small and micro space, there are more intermediaries in distribution. You know, aggregators play a role at the very small end of commercial lines, broker panels also, to a greater extent. RSA is not that focused or substantial at the very small end of commercial lines. It has a very good mid-market franchise. Think of 10,000 GBP average premium and up. There, it's the same sort of distribution channel you're seeing in Canada, a space we like, and it's a competitive set that we know. The big international players are there, We really like that space. We think there's a greater opportunity because it is underserved.
Great. If we go to U.K. in terms of personal lines, it might be about 10% of your total business, and I think probably the bulk of that is personal property. Is that. Then the rest would be, I think only 1% of your business might be U.K. personal auto, but it certainly gets more than 1% airplay. I bet you probably have more U.K. pet insurance than U.K. personal auto, but it's some reason people like to really talk about the U.K. personal auto.
Yeah.
Talk about those businesses that, you know, in total represent 10%. Are there some things that you would consider to be? What have you learned about that business? Are some things kind of core and non-core? How are you assessing some of that stuff?
Yeah. Well, the first thing I'll say, Tom, I'm spending a lot of time in the U.K. to make sure we understand well that space and that our actions are geared to compete in that, in that space. You know, the first thing I would say is that we have a very strong position in home insurance, where, depending on how you cut it, we're either number 2 or number 3. We have a very strong position in pet insurance, where, again, we're number 2 in that market. That forms the bulk of our personal lines business in the U.K. There is some scale there, and we can work with scale. I'll tell you a little bit about the work we're doing on that front.
Motor, you're right, motor is 1% of the IFC business. It's not a growing segment. It's very small, and, you know, that's part of the part of the challenge in that in that line. At the start of when we announced the deal, Tom, or when we closed the deal, we said, "You know, we'll conclude within 24 months on these positions in terms of whether we can win, outperform, and then whether outperformance actually generates the sort of return we're looking for." What have we been doing in personal lines in the UK? You know, beyond studying our competitors very closely, beyond trying the customer experience of our competitors, of the aggregators, and so on, to really understand, you know, the data collection, the design, the experience, and so on. It is a tough market. It is quite competitive.
What have we done so far to build on our position there? One, we have exited segments and relationships where the economics were stacked against us, and we're still in this process. You know, some of these relationships have long-dated contracts, but we're really rationalizing the footprint. By the way, we've done that in commercial lines as well, where authority was delegated, you know, where pricing was not 100% in control of the company. We've exited in commercial lines close to CAD 140 million of business, and we're 80-ish% done there. We moved really quickly to streamline the footprint, and we've done that in personal lines, and we're still in the process of executing on that in personal lines.
The second thing we've done in the U.K. is we've changed the targets, and we've changed the pricing philosophy. We're very much pricing for ROE. We're trying to be on top of trends, and we're bringing that sort of business philosophy and the governance that goes with that, in the U.K. I do think that it'll make a difference. You know, it'll be a source of pressure on growth in the near term. There's absolutely no doubt about that. I think that growth in personal lines will be really hard to do, but for us, the fundamentals matter more than growth, in a market, especially when we're trying to assess if we can outperform. The other thing we've done is, we've worked with the team to bring pricing sophistication in the lines where we operate.
We've got a few squads in the Intact Lab in Canada, working with our teams in the UK to up our game from a segmentation point of view. We've dropped some algorithmic changes earlier this fall. We've got some more changes coming in the coming weeks, actually, and as such, working on segmentation. In claims, we really like the strategy that the claims team is pursuing over there, which is very much an insourcing-type strategy, and we're making big investments in the claims system there. That'll serve well PL, that'll serve well CL as well.
As such, I think that, you know, we've got a good game plan, but clearly, there are question marks about whether we can win still in PL, and we're trying to make sure we go to the bottom of things to figure out, you know, how to win. In the meantime, it's all hands on deck to improve performance there. As you've seen so far, performance is not bad. It's not good enough for the long run, but in the near term, we can work with that.
It surprises me that you'd still be working to try to improve performance, you know, when you're number two or three, as you described in, personal property. You know, it's a business where size and scale matters there. Is it a matter of, do you have to really significantly change the strategy, or is it changing some of the risk profile?
Well, Tom, I think that... Let me be very clear. It's not because you're big, that you're good, right?
Yeah.
Outperformance is a mindset, it's an input, it's, there are many big companies that have average performance, and I think that, you know, we're working really hard on making sure we have the right target, the right governance, that we're playing in areas where the economics are in our favor. As many of the early moves we've done are along these lines. The point, and this is where you're right, because there is scale, if you choose to use it well, smartly, the odds of good performance are higher because you have scale. In motor, we don't have scale, and I think the odds there are stacked against us. What's the angle you can take in motor to win? We're still looking for it. In the meantime, we're improving the performance there, but as you said, motor is a rounding error.
Are there any parallels you can draw with the UK, personal prop, with, when you picked up OneBeacon? I think there you kind of, you know, shrunk it to grow its profitability. Is there any parallels you can draw to, you know, to, for investors to see that you're able to leverage something that you've done in the past?
I mean, look, OneBeacon, better known now as Intact Insurance Specialty Solutions in the U.S., performing really well, but it started with the team. I think Mike and team are an outstanding team in the U.S., and now Cannon team in the U.K., very strong team. The Chief Underwriting Officer in the U.K. will be a lady called Nathalie Dufresne, who comes from my team here in Canada. She's starting in September 1st. Bringing the philosophy, the know-how, the bridge with the capabilities and pricing in Canada is certainly one thing. What we've done in the U.S. with Mike, is also put in place a different governance, a different set of target, a rapid, high-frequency focus on trends and performance, and that's well in place in the U.K. at this stage.
I think, where we've been quite successful in the U.K. is, in the U.S., has been to exit quickly areas where we felt that our chances to win were small. Think of our exits in healthcare, our exits in architect and engineers, almost upon closing. We're leveraging some of that in the U.K. portfolio, at this stage to see how much improvement we can bring in this environment. A fair bit can be leveraged, in terms of the playbook in the U.S., in the U.K., in my mind.
Well, that's great. I guess RSA is, like, 14 months behind. I mean, there's still more work to be done, but what are your plans going forward in terms of capital deployment? Any more acquisitions? You know,
Yeah.
You seem to be good at it, so.
Yeah.
What are the thoughts there, and the geographies, perhaps?
Very dangerous when you start thinking you're good at making acquisitions. I'll just say that, Tom, so help me sending the message that we need to stay on our toes, at least inside. Let me just come back on 14 months, because, you know, 14 months, lots has happened in those 14 months, and we're not finished. Priority number 1 is to nail the RSA integration. 85% of the Canadian portfolio, which is where the synergy is coming from, is on our system and our product. By that, I mean personal lines, broker distribution, as well as, small to mid-sized commercial lines. We have some work left for specialty lines conversion in Canada and some of the conversion in the direct channel, but that is in very good shape. I'm very happy with the integration.
Retention is better than I thought. Of course, we're doing all that in a market that is very, very supportive. The other thing that's in place from a synergy point of view, that was in place very quickly, is the shared services of the organization and the defensive lines. By that, I mean finance, you know, governance, legal, risk, et cetera, the investment side of the house. All that has been integrated very quickly. It's working really well. That includes reinsurance as well. You've seen rationalization of the footprint, a quick exit from Denmark. Great gain there, by the way. An exit from the Middle East, fairly quick. One year in, cash in our pockets in the Middle East, I think, is the testament to the team who's executed on that.
I think, very good progress in the U.K., and you've seen the performance there. That's the first 14 months. We're not done. I think before, you know, I feel that we've got this behind us, you'll see a certain reluctance on our part to deploy more capital. Focus, very important, to win and certainly part of our playbook here at Intact.
Sure.
In terms of capital deployment, with all this being said, the first point I would make is that if I think about the next decade, I think we have all the tools in our toolbox today to meet our objective about performance and growing the earnings per share at the speed we've grown it in the last decade, or at least above 10% per year on average. You're highly unlikely to see us deploy capital outside of the sandboxes in which we operate today, which is Canada, specialty lines in North America, and now with global capabilities or UK and Ireland, Main Street retail and commercial lines business. We have all the tools, and we should seek the growth in the markets where we operate. Our first priority today, Tom, is Canada. I think the Canadian business can get meaningfully bigger.
We have a relationship with 1 in 4 Canadians and 1 in 4 businesses. Hard for me to think that we cannot take this to 1 in 3, and as a result, that is number 1 in my mind. You know, we'll see when opportunities present themselves, but that's what we wanna capitalize on. Having a very strong base at home, maintaining a big portion of our business, here in Canada, I think is very important strategically to be successful abroad. Number 2, U.S. I think in the coming decade, specialty lines in the U.S. will be a big area of growth. I told investors in 2017, the first order of business in the U.S. is to show outperformance and show solid performance. I feel we're in that zone now.
You've seen us invest in Q2 in an MGA in the U.S., something I told investors we'd be doing. You're seeing capital being deployed there. That's low risk capital, but really increases our expertise. Number 3. That's ongoing, you'll see us deploying capital in distribution, both in Canada and in the U.S. I think a very strong first half for the BrokerLink team, who's built one big distribution machine that's highly performing. I would say these are the 3 big capital deployment priorities, Tom. With regards to the U.K. and Ireland, we're really focused on improving performance there. We really like the Irish platform. We think it's performing really well. Its market positioning is good.
If there were opportunities, we'd certainly consider them, but big capital deployment, I would say, will be North American in nature, in my mind, in the next few years.
I mean, if you wanna go from, you know, touching, or products touching one in four Canadians to one in three, can you do that organically or is the, would that have to be inorganic?
I think it'll be a combination of both, as it was in the past. The only difference I would say, Tom, is that the organic growth muscle of the organization today is much stronger than what it's been in the last decade. It's a question of how much we wanna use it, you know, depending on the market conditions in which you operate. Our investments in brands have been solid. We have the two best-recognized brands in the P&C space in Canada. Those brands are differentiated. We've invested massively in digital. If you look at our digital experience, you just look at the Google score on our apps, you'll see that they're the best appreciated and recognized digital value proposition in the country. We've really built up distribution.
You add to that our product capability in specialty lines, which is, at this stage, I think, underutilized in the context of the Canadian marketplace. You put all that together, and you've got a great organic growth muscle, in my mind, to grow our position in Canada, but acquisitions are an accelerator for us. We have a playbook. We've done that many times. Obviously, if opportunities present themselves that we think are on strategy, you'll see us try to act within our own economic parameters. It'll be a combination of both, I think. I'm pretty bullish about our organic growth capability.
Well, that's great. I wanna turn to Canada here. Obviously, personal auto gets a lot of airplay, might be 25%-30% of your total business. You seem to be a little bit more cautious in tone on the call last week. I think you're suggesting below mid-90s. Let's talk about inflation and how can you beat it? I got some follow-up questions with respect to that.
Yeah, I think that we were pretty factual, I think, on the call. We said, look, inflation in Q1 was 5%, it's jumped to 8% in Q2. That is not a small jump. It's physical damage driven. If you look at the 3-point delta, Tom, you have a point of parts, really repairs, drove 1 point of the delta, total losses and theft drove the remaining 2 points. There's more inflation in the system. We are, you know, pretty clear that we'll run that business sub-95%, there's a number of reasons why, you know, we're comfortable with that game plan. The first one is that the sources of inflation are not new to us. We've been tackling inflation on many fronts, including technology in cars, physical damage, theft, and injuries for at least three years.
Our outlook was very clear coming in the pandemic. We said, look, frequency and driving is dropping, but when we come out of this, you'll see inflation picking up again. Tom, not only have we priced for that historically, but the approach we've taken during the pandemic was inspired by that view, by that outlook. You know, we're not putting that out there just for entertainment purposes. We're actually running the business with that. As a result, our price point and how we've provided relief during the pandemic, and we've provided, as you know, a lot of relief, but a big portion of that relief was one time in nature.
We said, how do we drop rates now for products that will be consumed over 12 to, say, 18 months, once you throw the average accident date in the mix, if we don't know where driving is going? That's why we chose to do relief. Other thing we've done is that we took a fairly cautious stance in terms of reserving, in particular for long tail lines, in light of the drop in frequency, because we thought we don't know where severity is going here, so we should take a very cautious approach. There, we've really distanced ourselves from the industry, and I've talked about that before, but we have a very strong balance sheet, and you've seen that done in Q2, with close to 5 points of PYD, both on short- and on long tail lines.
That strength on the balance sheet is still very much there. With the jump in frequency, we've cranked up some of the rate actions that we intend to do. What's baked in in the system now is four points between rate and what we call drift, or that's the increase in sum insured, going to 9% towards the end of the year, largely approved, largely in the system. We're renewing business for September and October today, so we know what's coming in terms of written rates, and you'll see, you know, a meaningful increase from that point of view. What else gives us comfort? 40% of claims, in CAD terms, are related to liability and injuries, and there we're not seeing much inflation.
As I said, for both the current accident year and the prior accident year, you know, we're taking a fairly cautious stance from a reserving point of view. There are reforms that are keeping stability in that segment of the portfolio. That's important. It's important that we keep an eye on that, though. That, in my view, is very good. Then there's the supply chain. The supply chain, not new, obviously, for us. The fact that we have a salvage operation is a big offset to the inflationary pressure that other players globally would see. The fact that we're sending an increasing amount of our customers, at their choice, in our preferred provider network makes a big difference. Because we have established pricing in advance.
B, they're providing the rental car, which tends to be used longer because of the fact that parts are backordered. C, we're actually purchasing parts on their behalf. That's also helpful because we have a fair bit of leverage from that point of view. The whole supply chain part of this equation is very significant. In claims to date, Tom, we've introduced, in the past couple of months, 25 additional very concrete actions that are being taken to tighten the impact of inflation. When you put all that together, you know, we're saying: Look, we think we can run that business sub-95 in the next 12 months. There is a fair bit of, you know, pricing power to a certain extent here, and, as a result, we'll leverage that.
What the market does, we think the market will catch up with our position, but frankly, it's kind of secondary to us in the near term, because we know from a business philosophy point of view, that if you miss the trend, it's a problem, and as a result, bottom line should be your focus in the near term.
like, massage investors' fears as to how personal auto might has been playing out in the U.S.? I think there's differences in the product that has probably brought in more inflation there. Are there any kind of other structural differences that you see that people shouldn't necessarily bring over to Canada, some of the personal auto issues they may be seeing in the U.S.
I don't know if you said manage investors' fears or massage investor fears?
Yeah. Massage, yeah.
Either case, I'm, you know, I'm trying to be open and honest, and if I'm fearful about something, I want the investors to be fearful, and when I'm not, I hope they're not. There are big differences, Tom. I think I've touched on a few of them. One is the percentage of liability in the product in Canada is bigger than it is in the U.S. As a result, it makes a difference on inflation, and I think we've got a big chunk of that covered, both from a pricing and reserving point of view. The second point is, my read, is that the U.S. players have been more aggressive from a pricing point of view during the pandemic.
Sure enough, when driving comes back, and it comes back with inflation, you know, if you haven't priced for that, it'll come and hit you a little harder than it otherwise would. Third, there's the whole supply chain management part, which I think is different. Salvage, in particular, I understand, is a big difference. As a result, I would say, Tom MacKinnon, that these are three big differences with the U.S. marketplace. The last point I would make is, you know, you've heard in the last year people talk about technology embedded in cars and so on. We've been talking about that since 2018.
It's not to say that inflation cannot get worse, I think, in Canada, but we're on it as much as we can, and we're pricing for it, we're managing the supply chain for it, and the balance sheet anticipates some inflation. For all these reasons, I think we can navigate this environment differently than what you've seen in other jurisdictions.
I got a couple questions come in, so I'm just gonna circle back and ask some of the questions that have come in.
Sure.
One, interesting one here is with respect to the U.K. personal lines.
Yeah.
If the product's kind of sold to some extent on a bundled basis, you're a big player in personal property or in home, but not a big player in auto.
Yeah.
A, if you weren't in auto, would you be, you know, how much of that business is kind of sold on a bundled basis? Kind of help us walk through the thoughts.
Yes.
with respect to that.
Yes, it's an argument that, you know, when we debate where we can win and everything, you know, it's an argument that people make. Now, when I look at the numbers, I don't see it. I don't see a great degree of overlap between home and auto. I'm used to the Canadian portfolio as, you know, I don't have the latest data point, but it's well north of 50% where customers have both product, right? I think, in fact, it's north of 60, but for the sake of being cautious here, let's just say north of 50. In the UK, at least in the RSA portfolio, it's minimal.
The second point I would make, because of the aggregators, people tend to shop every year, both their home and their motor, and you see a much lower retention than what I'm used to there. I think a few players have had some degree of success in terms of cross-selling. I think that more and more are trying to cross-sell, the fact that the distribution in the UK has changed so much or is very different than it is here in Canada, I think cross-selling is much less significant and much tougher to achieve in that market than it is here. As a result, from a strategic point of view, in my own mind, I feel we've got a fair bit of freedom in terms of choosing where we play.
Another question with respect to pricing in UK personal. Has it, in your opinion, has the pricing lagged loss cost inflation?
Yeah.
What are you guys trying to do about it? Is it more so in personal home, or is it more so in personal auto?
I think that the backdrop for UK personal lines, which people need to understand, you know, and related to your previous question, Tom, you know, we get in this market and, you know, we hear about these reforms, which are instigated by the FCA, the market compliance regulator. A big portion of the reform is about the fact that new business pricing is much lower than renewal pricing. I mean, much, much lower. The regulator came in, rightly so, and said: Look, doesn't make sense. Price for new business and renewal should be roughly the same. We kind of agree with that concept. The issue with 2022 and judging 2022, Tom, is that January 1st, these reforms kicked in. There's massive dislocation at the moment where new business prices are up and renewal prices are down.
One would hope that in aggregate, your margins would be neutral. I think if you throw inflation in the mix, my own read, in the first six months of the year in the U.K. market, insurers have left margins on the table. Is the industry on top of trends in the U.K.? That is not my read. That's not my conclusion. I think we're starting to see momentum now to start to tackle, it's about time, to my opinion, to start to tackle the inflation. As a result, if you look at the RSA personal lines portfolio, you'll see a shrinking portfolio, because we're trying to price for inflation, and competitive set is interesting, but there's no point leaving money. There's no point not trying to price for inflation at this stage.
I don't think the market is there. I do expect some momentum in that market.
Right. Another question that came in is the losses from the derecho storm in May. It seemed to be, you know, probably, despite those losses, you seem to do quite, significantly better. Maybe talk about the pressure on the system in terms of servicing those claims. Has that been a distraction? You've been going through others like that. Are you able to, you know, work towards those claims in a timely manner? You know, One thing about, you know, always in, it seems insurance is everybody likes it until they have to file a claim, and if it's not done properly, they don't like the insurer anymore.
Yeah, maybe you can talk a little bit about your ability to handle increased claims, volumes, and if you're overwhelmed and what the reaction has been from customers with respect to your capabilities there.
Yeah. I think, Tom MacKinnon, there's many things going on in society at the moment, which has an impact on service. I would say, first of all, when it comes to claims, our Net Promoter Score historically in claims, for those who know that score, is about 70%, which is very strong. A Net Promoter Score is who promotes you versus who your detractors are. I would say it slipped in the last 6 months, and the reason why it slipped is in part because the supply chain has been an issue. In motor, for instance, or in personal automobile, motor is what we use in the U.K. In personal automobile, we used to have, you know, in normal times, 20%-25% of parts backorder. It was north of 50% a couple of months ago.
As a result, the cycle time in motor insurance in auto was longer than it's been historically. That's not good for customer satisfaction. As you know, one of our differentiators, we built a capability to get people back on track by insourcing and getting involved in the supply chain and adding exclusive arrangements in our own service centers. The problem when the supply chain has issues is that you own the problem. You're not just about cutting a check, that's putting pressure on satisfaction. The second point, Tom, is that as for many companies, turnover for call center employees in the latter part of 2021 has been higher than it's been historically.
My team in claims and in the direct channel, where we have massive call centers, has done an awesome job to make sure that we have, you know, we're largely back to service standards. However, the average maturity of employees has dropped because the turnover increased in the last year. This has an impact on service. I know this is not exactly 100% your question, but it's very important for us. We're really focused on supply chain and quality of the experience that our staff is providing. I would say these are the two top issues we're focused on at this stage. When it comes to natural disasters and me, overall, you know, we're in the process of building a home restoration business, which really helps from a supply point of view.
It allows us to get the on-site business, which, by the way, contributed very nicely to earnings in Q2. That really helps speed at which we can get customers back on track. The other thing is that our claims operation is geared for CATs, Tom. We have 24/7, at Intact, you call us. If we don't start your claim within half an hour, we reimburse your premium. That gives you a sense of how confident we are, the speed at which we can get things going. The issue is how long it takes to resolve things in this current environment. The other thing is we have CAT-dedicated teams, who all they do is manage CATs, as opposed to do that on top of their daily job. That makes a difference for the experience.
I would say service is not where it's been historically, but in relationship with property, I think it's still, very good, and we're focused on improving it.
Yeah, presumably, if there was dissatisfaction, you would that would show up in terms of renewals, and I don't believe we're necessarily seeing that then, right?
Oh, no. No. The retentions are at historical highs.
Right
... at this stage, Tom. The complaints, we see them, we track them, some of them get to my desk, and we're trying to be on top of those right now. We're very focused on that because customers decide who wins, and it's very clear to us.
Maybe another question that came in is just, you know, every CEO has got to work with, you know, people working from home and not working from home. I'm not sure what the policy is there at Intact, but has it affected productivity at all? I mean, I assume you can still kind of, you can work on claims files, whether you're home or whether you're in the office, but there certainly is integration aspects that are probably more teamwork needed. Has any of this thing changed the productivity of Intact here?
First of all, we want to give our employees, you know, flexibility. There's no doubt about it, at this stage, you know, people are working with flexible arrangements that are established by teams, and every team sort of looks at flexibility differently. There's upside to working from home, I would say one is for the firm, that is, one is that in the RSA integration, we've done our fastest people integration ever. I think we spoke, I forget if it's 6,000 people in 2 weeks, confirmed their boss, where they work, and what their role is. That was really good. From a speed of integration, that certainly helped. I cannot say there's a productivity issue at Intact. I'm not concerned about that, quite frankly. I think people are doing their utmost. They're totally engaged.
My worry, Tom, is that in fact, from a competitive point of view, as an edge, I think from a values and from a culture point of view, we have an edge from a loyalty point of view. We're known and measured as one of North America's best employer, and I just worry about maintaining that edge. It's not productivity at the individual level or even at the team level that I'm concerned about, it's productivity at the firm level. I don't see signs that there are big cracks or anything like that, but I would say this is a topic that I'm actively engaged with my team to make sure that on one hand, we remain a best employer and give flexibility to our employees.
On the other hand, customer experience, broker experience, and outperformance are, you know, top decile as they've been historically. I think it's a tension that we'll be managing in the coming months.
Question, kind of about how long, I'm gonna paraphrase this one a bit, but how long these great times for P&C insurance might last, especially in the wake of rising interest rates? I mean, you can look back years ago, and you can see, you know, you could get a pretty good ROE when interest rates were, like, 8% by. You could still underwrite business that was just modestly under, a 100 combined ratio, right? You could still kinda, if you had the right investment leverage and underwriting leverage, that you could hit your target ROE. Now, with interest rates moving up, is that gonna cause any slippage here in terms of, you know, the good fundamentals that we've seen with respect to hard market conditions?
Are people eventually gonna start to price for, you know, market share and think they can make up the difference in terms of investment, net investment income or something like that?
Yeah.
I think I've given you enough to, you know, chew on there, so take it away.
Yeah. I think. First of all, Tom, I'm not one who's a big believer in this concept of float, and I don't wanna engage on a debate about that. You know, we price the business with ROE targets, and every customer should stand on its own from a pricing and risk selection point of view. That is very much our business, and that's the starting, our philosophy, sorry, and that is our starting point. It is ROE driven. You know, in theory, interest rate are part of that equation. The reality, Tom, is that you look at the five-year or even the 10-year yield curve, I mean, the 10-year Canada is what? 3.2%, 3.3%-ish.
I'm not exactly sure where it is today, we're far, I think, from the interest rate zone, where I think market behavior and P&C could change. That's my own perspective. That's how we're running the business. What the industry needs to deal with, in my mind, is the headwinds of the environment in which we operate, we're talking commercial lines in particular. You know, two years ago, the industry's combined ratio in commercial lines here in Canada was north of 100%. Let's just keep that in mind. In the US, you hear about inflation, both in property and social inflation, a term I'm not super keen on, just to paraphrase what investors might have heard about. You've had a high-level increase in natural disasters on the property side of the product.
COVID in commercial lines has been pretty expensive for the industry globally. You layer on top of that the fact that it is a hard market for reinsurers as well. The global market, you know, has taken a bath when it comes to COVID-type claims as well as natural disasters. You stack all that together against, you know, yes, a rapid increase in interest rate, but in absolute terms, it's still low interest rate. My own perspective is you have 12 months of hard markets ahead of you, comfortable. You'll hear anecdotes here and there, but, you know, when you look at the numbers, and we deal in facts here, there's plenty of support, I think, for a pretty hard, you know, firm pricing environment for the next 12 months.
What would you tell investors to look for as signals that these hard markets might be turning?
I think that what investors need to understand is that in the P&C business, Tom, you have two factors driving markets. People think it's supply and capital. You hear that, plenty of capital, therefore, soft market. The reality, if you've been in it long enough, demand or cost is a much bigger portion of markets, certainly in personal lines and equally in commercial lines. I would say that investors need to keep an eye on the trends that will, in fact, the cost equation, to figure out where the market is going. I think that obviously there's two things, two metrics that are interesting to keep an eye on, as far as I'm concerned.
One, the ROE of the industry, or that is in commercial lines or the combined ratio in commercial lines, I think is the most relevant leading indicator to market. Should not be a leading indicator. Frankly, we see these as resulting of the behaviors we take, and you should be focused on trends, but trends are harder for investors to see. That's why I'm saying the best read you can have on the inflation points or the cost pressure points is very important because they tend to drive cycle. I would say when you see ROEs, you know, in the bottom quartile or the top quartile of the historical distribution of returns, so call it upper teens and sub 5%, these are interesting points to watch if there's a change in the market behavior.
The other thing, which is a leading indicator of cost, in my mind, is PYD. You know, when cost is running somewhat out of hand, reactive companies, which is a big portion of the market, that's why you really want to outperform in the P&C space. Rapid movement in PYD can be an indicator of what's to come. When you see PYD shift from positive to negative, there's a good chance you're headed for a firm pricing environment. I mean, this is pretty rustic, I guess, as an answer, but because we're looking at the world differently, we're not overly influenced by markets and by our competitors' behavior. We wanna make sure we outperform every year, but we're focused on customer experience and where costs are going, and we're pricing to achieve a certain ROE in that context.
These would be a few indicators I would look at.
I mean, your PYD has been pretty steady all the way along, all the way through.
Yeah.
I guess if you saw it become unfavorable, well, you know, that signals issues, but it also could, in your opinion, it signals that pricing is gonna be firming?
Yeah. That, that would be my perspective.
Yeah.
Especially when the delta is big. I guess I'm making comments for the industry. Tom, you've.
Yeah
... seen a fair bit of steadiness in our case. I think the more on top of trends you are, the steadier you can be as a firm if ROE is your measure of success.
Maybe we could just close with comments about AI and digital capabilities. Is this business becoming more and more AI and digital? Certainly telematics would suggest it would be. How are you gonna win at that game? How does it benefit the shareholders? How is it gonna benefit customers? And talk about your capabilities in that regard.
Yeah. Well, look, I think that you're putting many things in your question.
Yeah
here. I would say that for me, there's two key success factors here. One is, who's best at matching where customers' expectations are going? The other one is, who's best at leveraging technology to be smart about pricing and choosing customers? 'Cause we're risk takers, so that part is really important. I would put them in two different categories. Consumer expectations are rising very fast. Why are they rising very fast? Because their experiences with different suppliers is changing very quickly. Yes, digital is a big portion of why expectations are changing. The other reason why expectations are changing is people are better informed. There's greater expectations of their providers in general, in society, and there are social tensions at the moment, and I think the cost of living crisis, in my mind, is a driver that is pushing expectations up.
In practice, it means that, A, your digital game needs to be top quartile because that is becoming table stake, and that means good design, consistency amongst the channel in which you operate, and I think the cost of living crisis means that you wanna do a good job to demonstrate value for money. These are the areas we're focused on in terms of transforming the customer experience. Beyond digital, in our case, the business we're in is to get people back on track when something bad happens. Doubling down on the claims experience, very much in the physical world, is super important. We've been focused on it for many years. Your question earlier, you see that it's painful for me when I feel that there are slippage in customer experience, but that's a big differentiator for us.
What have we done as a firm? Well, we've invested in our brands big time. We have a big digital lab that is focused on design, 200 people. They have very much transformed our value prop, in particular in PL. What we're not talking about, Tom, is that we've modernized over the past decade, our back end. We're not stuck with multiple systems of, you know, various ages. We have a pretty clean and modern back end, and where it's not finished, we're within, you know, 10, 15-ish% of the modernization effort. That puts us in a very good position to follow customers where they're going.
Obviously, our investment in distribution, Tom, whether it's direct channel, whether it's building BrokerLink, which is hitting close to CAD 3 billion now, bringing Intact Insurance online, gives us an edge in terms of meeting customer expectations. I think the other side of the equation, which is, you know, being smarter about pricing and selecting risk is an area where we've been investing more than others for decades. That's important, because you don't become good at risk selection overnight. You need the right data, you need lots of data. That's where scale comes in. You need the right intelligence, and by that, I mean the right capabilities. We have incredible capabilities from a risk selection.
We have a huge actuarial team, and then we have a huge machine learning team, and we've deployed close to 275 machine learning applications in the field. I think it's unmatched in, across FI, and across many P&C markets globally. Our objective is to be the best AI shop in the insurance world, and from a risk selection point of view, I think we're in, we're in pretty good shape, would be my perspective. We've been on this for many years. People know that. We were talking about that on Investor Day, 5 years ago, about AI in particular, and we've doubled down on what we've done there. In aggregate, I think, we're in good shape.
We have discipline on risk selection to put the science to work in the field and ignore the weird behaviors that competitors can have from time to time.
Well, we're coming up on the hour. if you had to, leave investors with any kind of message and relate it in about 20 seconds, what would that message be with respect to Intact?
I think that, first, the RSA integration is very much on track. It's accelerated our strategy in Canada, big time, both in terms of mix and distribution. It's really given us a lot of tools to grow our global specialty lines platform, and we're making good progress in the UK and Ireland to improve performance and change the footprint of the organization. That in itself is good source of earnings potential. Second, the markets are conducive to our strategy and the position we're in, and we're making the most of this environment. The third point I would leave the investors with is that, you know, Intact is a values-driven organization. We're open, honest, we put reality as it is. We put an action plan, and then we try to beat it.
That's been part of our, you know, way of working in the past decade. Investors can count on that for the next decade.
Well said. Charles, thanks again for your time this afternoon, we'll look forward to the Investor Day in September. Thanks again. All right.
Thank you. Thanks, Tom.
Bye-bye.