Great. So it's my pleasure to introduce our next speaker for this afternoon from Intact Financial, Mr. Patrick Barbeau, Chief Operating Officer. It's great to have you here.
Thank you. Thanks for the invitation.
Excellent. So, why don't we start out, if you can talk about some of the recent developments, highlights across the business, maybe looking a bit further out, some of the key priorities over the next 12- 18 months.
Sure. I would say, first of all, that we feel we're operating in an environment that really is playing to our strengths and where pricing sophistication and discipline is, I would say, essential. In 2025, we've expanded our ROE performance to 740 basis points, well beyond our 500 basis points target. From an NOIPS perspective, over the past decade, we've grown at a CAGR of 12%, also above our target. I say that because that is a good illustration of our ability to reach and exceed our financial targets throughout the insurance cycle. More specifically on our different segments, if I start with Canada, we're currently in a good position where we outperform on both top-line growth and bottom-line profitability across our three segments. So in personal auto, in personal property, and in commercial lines. In personal auto, we've grown at 9% in the first half of the year.
That includes about 1-2 points of units. The combined ratio was 91.5%, so better than our sub- 95% guidance. The industry, though, is not yet profitable, and there is still inflation in the pipeline. We see that hard market conditions to continue in personal auto. Similar position in personal property, we are growing at a pace of high single- digit. It was affected a bit lower in Q1, mainly because of one-time impact from our travel book of business. That was a one-time non-recurring impact. We are growing in the high single digit. We have printed a sub- 94% combined ratio despite elevated natural catastrophes in Q2. The industry needs to price for mid-single- digit inflation as well as a trend from climate change, so good outlook in there. Commercial Canada, 1% growth, but that included a full two points of drag from mix.
The mix is coming from the fact that we are growing faster in SME and mid-market space, where there is more pressure in larger accounts. That mix is only a top-line drag, because not bottom line, given we are growing where the profitability is more appealing. Moving to U.S. specialty, we are outperforming. We have been outperforming for a while in the U.S. We are focused on specialty lines. We have produced 4% growth in the first half of the year with a combined ratio in around 84%. That has been three full years now, 12 consecutive quarters with combined ratio in specialty lines below 90%, with a good margin of outperformance. So we really like the outlook of the potential in the U.S. There is ton of room left to grow.
Finally, moving into U.K. and Ireland. We had seen a good uplift in growth in Q1 compared to 2025 when we were doing more heavy remediation on the acquired book from Direct Line. We saw a bit of a slowdown in Q2, mainly driven by short-term impact as we unite all of our offers under the Intact brand, both the existing RSA products and the one acquired from Direct Line. We feel that drag on top line is short-term, and it should improve in the coming quarters. From a bottom-line perspective, we have talked about large losses and natural catastrophes affecting bottom line. We see these two as non-recurring. We see that business running in the mid-90s combined ratio currently. So more in line with what we have produced in 2025. We are confident we have a good growth plan and visibility on bringing it towards the 90%.
You asked also on top priorities. I will just mention three of them. The first one is really deploying and accelerating the deployment of AI into pricing and risk selection in commercial lines, specialty lines in particular. We see good traction there. We are accelerating. As well in the operation in sales, digital funnel, in underwriting of commercial lines, and as well in claims, with the main goal to boost and support top-line growth.
The second one would be what we just discussed, which is a big focus of all of the teams on executing our plan to improve the performance of our U.K. and Ireland portfolio. The plan is there. We see traction and the deployment of the initiatives just take a bit of time before it is fully reflected in the numbers. I would say given the very strong balance sheet position, we are actively also working on finding opportunities to deploy capital in M&As.
All business lines and geographies, I think, performing well. But some challenges, I think, with U.K. and Ireland have become a bit of an investor focus. Let's spend a little bit of time there. In 2025, I think you said the ambition was to really kind of evolve U.K. and Ireland combined ratio towards 90% in 2026. Last month, I think Charles indicated that might take 24- 36 months to get there. Can you walk us through the key factors that drove that revised outlook?
Yeah. Maybe before I get into what's driving that extended timeline,[ Phil], there's probably two things that are important to put our U.K. and Ireland operations in perspective. First, I would bring us back to 2021 when we made the RSA acquisition. If you apply a fair valuation multiple on the Canadian business, the implied multiple on the U.K. and Ireland business is very low, in fact, below book value. So there's a ton of value creation for the firm investors as we improve the profitability and the performance of that book of business, given the price assigned to it. But also because of that starting point of the balance sheet running in the mid '90s, 94%, 95%, like the performance of 2025, this translates into a mid single- digit ROE for that business.
It's not really a drag on the ROE of the firm, and there's actually quite a bit of uplift as we improve it towards the 90%, which is still the target. Our operations in U.K. and Ireland is going through a significant transformation on many different fronts. We're still in the process of integrating the acquired business from Direct Line called NIG. This is Direct Line's brokered commercial lines business. We've exited personal lines, but we're still of the process of finalizing it, and it will be completed by year-end. So that's also another element in the operations. We're modernizing the full tech stack across pretty much the whole company, including our core functions of underwriting and claims, which is another level of change to be managed.
As well as I mentioned earlier, starting earlier this year, we're unifying all of the existing brands, so the existing RSA brands and offers, as well as the one acquired from DLG under the Intact brand. That creates some dislocation in the short term. Brokers receive now one offer from Intact instead of receiving one from RSA and DLG. So there's a lot of work in the field to work with brokers, and you need to also realize that with the Direct Line acquisition, there's hundreds of new broker relationships that we need to work on with the business. So it's heavy lifting. It's taking a bit more time than we initially maybe anticipated, but we see traction in the field. The initiatives are working, but it takes time to translate fully into the financials.
Okay. If you thought about maybe summarizing in terms of primary drivers that get you towards that 90% combined ratio or that time horizon, how should investors think of those?
I would point to two main ones. There is a few more, but the main ones is the deployment of more sophisticated pricing. It is not about just developing the models and putting it in the system. It is about the discipline and the governance to make sure that it applies consistently in the field with underwriters. That is the key element. We are seeing traction. We are accelerating it. It is somewhat dependent as well on the second part, which is the technology modernization, because that modernization of the tooling also enables the deployment of some of these AI-based models in pricing. The first part is how we improve the loss ratio, which is pricing and risk selection, AI-based models. The second part, which is linked to the technology modernization, is productivity gain, so improving our processes, but also decommissioning the old systems, which will improve the expense ratio.
Okay, well, let us dig in a little bit on the AI theme here. Last quarter, I think you announced you had hit your goal of achieving CAD 500 million of its pre-tax recurring annualized revenues from AI investments, I think much earlier than expected. I think at last year's Investor Day, you said it would happen in 2030. Now the commentary is it is 2028. So what drove that revision of the timeline? What are the key drivers to realize those benefits? Also, how should we think about maybe kind of additional recurring benefits beyond 2028?
Very good. Yes, AI has been a key part of our strategy for a long time. We have started to invest in AI 10 years ago. We are at the point where we now have deployed 600 models or so in the operation at scale. About 2/3 of that is in pricing and risk selection, key areas of focus, and the other third is in other parts of the organization supporting underwriting sales and claims in particular. This in aggregate is currently producing north of CAD 220 million of recurring benefit annually that we can measure. We had talked, what, a year and a half ago at the Investor Day that we were seeing this number to grow to CAD 500 million by 2030.
But we've accelerated our investment recently, and we're seeing that the benefit on the pricing and risk selection side in commercial and specialty lines is actually producing better outcome than we even anticipated at the time. So that's one of the contributing factors. The other thing is, you won't be surprised to hear that the technology in AI has made a big leap forward over the past 12 months. And because of our internal expertise to develop and deploy models at scale, we now have more use case where we see opportunities. And the combination of all of these things is why, looking at our roadmap, we are confident we can get to the CAD 500 million in 2028. Maybe digging into where it will actually appear in the firm, our strategy with AI is very clear and focused on four elements.
And they are in our view, in order of priority. The first one, again, pricing and risk selection deployment, especially in commercial and specialty lines. That's the top, the first priority. And the reason for it is this tackles CAD 0.50- CAD 0.60 in the dollar, the loss ratio. So big opportunity to continue to push it there. Second order of priority is to help grow top line. And by that we mean improving customer journeys and the experience also of the distributors, the brokers. This brings efficiency gains, but the focus is how can we reduce timelines, simplify processes to help support top-line growth. So that's the second. The third one, agentic AI and generative AI is really accelerating the speed at which we can develop software. And at Intact, we develop a lot of software, especially in the core parts of the business, underwriting and so forth.
And so our third pillar is to bring value faster to the front line, so accelerating our development of AI. So you can see it as a multiplier on the first two priorities. And the fourth one is pure productivity gains, mainly in other parts of the operations. And the reason why it's fourth is because controllable expense for us is 15- 20 points in the dollar. Our expense ratio is higher than that, but there's not much you can do on the premium tax and commission. We still work on that, and it will be part of the CAD 500 million benefits, but it's really in this order of priority that we are tackling the roadmap. I finish on what's beyond 2028. At the speed at which this is evolving, there's much more potential beyond 2028.
We're not done after that, but we want to focus on getting to that key milestone within two and a half years. But there's no doubt there's more opportunities after.
Okay, we're going to change gears a little bit, and I guess we'll talk about kind of navigating the price environment. Again, I think investors continue to grapple with a bit of a complex landscape, right? You've got strong industry profitability, and that's contrasting, I think, with concerns of a bifurcated price environment and market cycle transitions. To start, maybe just walk us through kind of how you expect pricing across personal lines to unfold over the next 12- 18 months.
Good. Well, first, personal lines for us is Canada now. We've exited. That's where we do personal lines. I would say the short answer on where the market is going in our view in the next 12 months, it's we expect the hard market condition to persist in both personal auto and personal property for slightly different reasons or drivers. Personal auto, the industry in 2025 and even into the first quarter of 2026 was not really profitable. So there's more rates needed to bring the full industry to profitability. But also, even if it has not been as present in recent discussion about personal auto, there's mid-single-digit inflation that has been stable over the past six to eight quarters, but sustained. It's still mid-single digit. And it's driven a lot by the price of the car parts, driven by technology in cars that continue to evolve.
That's not going away. So you look at an industry that's still in a bit of rates to start with to get to profitability, and then mid-single- digit inflation, that should sustain hard market conditions over at least 12 months. There is some tailwind coming from the Alberta reforms in January 2026, which will probably reduce the average premium. But at the same time, this is an area where we are enjoying a good level of outperformance. So we'll probably get comfortable about the outlook of the profitability in Alberta before our peers, and we're preparing ourself to capture market share in this environment. Personal property, I mean, 2025, the industry looked more profitable, but mainly because of lower CATs. But if you go back to 2023, 2024, and even this summer, I think is a reminder that climate is real.
The industry need to price for also a mid-single digit inflation rate in personal property, as well as what we estimate to be 1-2 points of impact from longer term climate trends like projection. It is varying from year to year, but if you project over next 15 years, we estimate it's at least 1.5 Points. So these two together, inflation and the climate trends, is likely to help the hard market condition to persist. I would say in personal property, probably even more than the next 12 months.
Okay. In commercial and specialty lines, I think the last year has seen this very much of a bifurcated price environment, and there is certainly debate across the industry whether this is the earlier stages of a soft market forming or whether this is different from past cycles and the market products have become more fragmented. I guess my question to you is, how would you describe commercial and the specialty lines market today, and how do you see things evolving over the next year?
Right. There has been some pressure on larger accounts. I am not sure to what extent we see it as a huge bifurcation. But this environment, again, I think plays to our strength. We think we are operating globally in commercial lines and in a constructive environment. There is plenty of areas to grow profitability. The pressure is coming from large accounts in a few segments of the specialty lines, and we are very disciplined in how we price in this area. When you look at more specifically in North America, we have been outperforming from a top-line perspective in both U.S. and Canada over the past few quarters. And we are confident we can continue to do so going forward for a few reasons. One is, the SME and mid-market space is still behaving quite rationally, and it has not really moved over the past few quarters.
Our book is more heavily weighted on SME and mid-market versus large losses than our competitors. And in specialty lines, we are managing a number of verticals, 12- 16 verticals, depending on the geography. And what we see is we can be very deliberate in where we grow. We are actually growing double digits in the most profitable segments of specialty lines and almost flat in the ones where we are forecasting combined ratio above 90%. So that mix is also helpful. In terms of outlook, we expect the industry to grow mid-single- digit in the U.S. and low to mid-single- digit in Canada and U.K. and Ireland. Commercial lines, specialty lines combined. And we are confident we can at least grow at that pace or perform given our disciplined approach and where we are focused.
Okay. And how long would you expect this, I will call it this bifurcation, whether it is large accounts, small to medium, or within specialty lines. How long do you think this bifurcation is going to persist, and again, what factors do we need to force an inflection?
Mm-hmm. I guess, [Phil], the one thing I think that's important is we're comfortable in this environment. We see quite a bit of opportunities for growth. We focus on the areas that are profitable, and there's a ton of room in specialty lines and other areas where we outperform. The one thing that is important is we're not counting on a change or the bifurcation to achieve our financial objectives. Hard to predict exactly when and how fast the market might turn, again, in the larger account space. I would say in terms of the factors that can create the difference, again, I would point to we see pricing go down on large accounts, and we're ready to walk away from these accounts when the pricing gets below what we believe is the target price for good returns.
We know that many of these accounts are being priced right now unprofitably, and there's still inflation in the other way in the loss costs, close to the mid-single- digit that we see in personal lines. It cannot be really long before these two things converge to a point where especially the maybe less sophisticated players start to change their view on pricing. We don't count on that, and we feel we have plenty of room to grow profitably in the current environment, and confident we can deliver on both our outperformance objective and NOIPS growth.
Excellent. We'll change gears again a little bit and maybe focus a bit on M&A. Intact's holding strong levels of excess capital, and clearly M&A opportunities have been a topical area of discussion for investors. How's the current M&A environment unfolding? Again, if you can talk to what areas do you currently have the most appetite for?
Yeah. We've been signaling over the past couple of quarters that we feel the environment for M&A is improving. We certainly think it is continuing to improve. Our balance sheet fundamentals are really strong. At the end of Q2, we had CAD 3.8 billion of excess capital. We target to run the business with about CAD 2.5 billion excess capital. There's at least CAD 1.3 billion available today. Looking at leverage, our debt-to-capital ratio is currently at 16%. Our long-term target is 20%, and for a strategic acquisition, we're comfortable to go to 25%. On prefs, preferred shares, to capital ratio, we're at 8%, and our target is 10%. When you combine all of this, we could do an acquisition of around CAD 6 billion without issuing shares.
And if you add on top the ability to issue shares in the funding, we are probably talking mid-teens billions in terms of size. So, good place to be. In terms of how we evaluate opportunities, we really apply three key criteria: strategic fit, financial fit, and then actionability. What I mean by that, from a strategic fit perspective, maybe that is the core of your question. We have first appetite is within the existing geographies. We are not into trying to plant flags in new areas. Canada, first we are just below 20% market share. We really can grow that by 50%. So a lot of appetite there. In the U.S., we have built out performance, ton of room to grow, and opportunities to apply what we have built in the U.S. at a larger scale, specialty in particular. In fact, more globally, specialty lines is performing well.
Whether it is in North America or U.K. and Ireland. U.K. CL would be less high on the priority, not because of strategic fit in the long term, but because of the focus of the team right now on integrating Direct Line. So that is how I would see strategic fit. Financial fit, for us, when we model on all of the potential targets, we aim to deliver 15% IRR. Our track record has been more in the 20% over all of the past acquisitions, but we model for a minimum of 15%, and that is assuming that our capital structure is at target, so 70% capital, 20% debt, and 10% prefs. We also have a few other criteria on accretion of NOIPS and ROE.
Then we force ourself to have visibility on how we bring back the debt-to-capital ratio to the target of 20% within a maximum of three years. So the environment is improving when we are applying these constraints that we put on ourselves to the environment. We keep models on what we see as strategic fit on a regular basis, and we have a strong balance sheet to act on it when the opportunity is there.
Okay. I think your team has talked about complexity as a source of unlocking value in M&A. My question is, how should investors think about both the opportunities and also the limitations of that approach?
Right. Well, again, there needs to be a strong strategic fit, as I described first. We are not afraid of more complex deals. RSA was a good example. I think we are ourselves comfortable with more complex deals. Sometimes there are fewer players who can act on these more complex deals. RSA was a good example where we went in with a partner for the Scandinavian business. We quickly sold our share of that business after closing. We also sold the operation in Middle East since it was not strategic. We gave ourself a few quarters to evaluate if personal lines in the U.K. would become strategic and decided that we wanted to exit. All of these pieces were, at the end of the day, quite successful. When you look at the RSA acquisition overall, it created an IRR, or it is creating an IRR that is beyond 20%.
Really not walking away from considering more complex deals. Again, depends on the strategic fit.
Okay. To close out the conversation, want to dig into, I guess, what many investors view as a bit of a potential valuation disconnect. Last year, the team talked about shifting to a higher zone for ROE, moving from mid-teen to upper- teen. However, the stock is now trading well below recent historical average P/E multiple. First, what are the key drivers that have shifted your ROE into a sustainable upper zone? What do you think needs to happen to close that valuation disconnect, and what additional actions do you think your team could take?
Yeah. Starting with the ROE, quickly, I guess I would point to probably three elements that are really shifting the ROE in the upper teen zone, so a higher zone. Our growth in global specialty lines is one of the key factors. That is a line of business that is operating at higher ROEs, and we have built on top of that outperformance, and that has grown in terms of how much of Intact that represents today. So that is one key factor. I think the diverse source of income is another one. If you look at distribution income and investment income for IFC, the two together alone, before any underwriting profit, is producing close to 10% ROE. That is about 1/3 of the outperformance as well. But in absolute terms, that is 10% or close to 10% ROE. So that is the second key element.
I think the scale in Canada is also an important factor. It allows for deployment of even more sophisticated pricing. We are into fourth generation of AI-based models deployed in pricing in personal lines. It also supports the whole claims contribution to outperformance and ROE. Given the concentration, the high market share in Canada, we have fully internalized the claims process. We have one of the largest law firm in Canada within staff to defend our clients, and we have gone far into the supply chain with the purchase of On Side, and we also have around 40 service centers for car repairs across Canada. When we do that in claims, you need scale, you need to build expertise. It takes time. We have been at it for 20 years, but now we can apply it to a larger scale.
When you do that, there are benefits on the loss ratio, better control in indemnity. There is also improvement on loss adjustment expense, because you are capturing some of the margins that your third parties involved in claims would otherwise be involved. It is also a much better customer experience. We have seen the NPS go up significantly. That scale in Canada is also a factor in this. In terms of valuation disconnect, we are focused on what we control. We are confident that we can replicate our track record of ROE outperformance over the next decade. We have good visibility on how we can grow NOIPS as well, at least at the 10% compounded click. That is what we are really focused on. I will not go further than that, given the time. We have good visibility on that. We are confident to it and focused on it.
All right. Well, excellent conversation. Again, Patrick, thank you for taking the time to talk with us today. Again, I would also like to thank the Intact team for lending their time to meet with investors today and support the event, so very much appreciated.
Thank you very much.