Definity Financial Corporation (DFY) Earnings Call Transcript & Summary

All right. Thank you, and welcome. We appreciate you joining us for this latest installment of our National Bank Between 2 firm series. [Operator Instructions]. We will see your posts there and do our best to get to each question as the conversation unfolds. So with that, let me introduce you to Rowan Saunders, President and CEO of Definity Financial Corporation. Rowan, thanks for giving us your time today to speak with investors.

Jaeme, great to be with you, and welcome. Happy to do it.

Great. So why don't we kick off with a pretty straightforward question around what are some of the overall key messages you want investors to leave with here today?

Well, I think the macro message that we like to share is that things are going to plan. I mean things are going pretty well for us. We've now almost 2 years as life as a public company since our IPO. And I would say when we step back, we're very pleased with the progress that we've been making. If you think about advancing the strategic agenda, there's been a lot of progress there, whether it's a shift in the mix of business that we have planned to do. But even in terms of capital deployment, part of our story is we started life as a public company with a significant financial capacity. We've been quite active in deploying that $600 million or $700 million so far as we've built out a broker distribution business that we're very pleased with. So I think on the strategic side of things, things are going well. And then I think the other point would be that the resilience of the business is also quite evident. And I think if you look at a quarter like the one we just had, which definitely had, let's call it, fair amount of unusual nat cat events, you're still seeing the power of the earnings of the business. I mean it is resilient. And so when we step back, we're very confident about the outlook and quite excited as we're -- we'll soon be turning the calendar into 2024.

Okay. Great. And I think the way I was going to set up this conversation was talking about the operating units first and then getting into M&A and capital allocation and maybe some other topics after that. So as we kind of go through this format to the investors listening in, that's kind of the progression we'll take. So why don't we kick off with personal auto, of course, Rowan. So on the earnings call, you guided to Q4 and Q1 combined ratio in the high 90s. I think what investors and myself, what we want to know is where is that combined ratio going after that? And what are the drivers of that performance?

Yes. I think that, as I said in the call, we're feeling much better about the automobile portfolio. And if we just step back for a little bit of context, the last couple or number of quarters has been much more difficult when you've had a period of elevated inflation and you've had the return to normalcy post-COVID. So what we've seen is definitely a normalization in the trends in automobile and the pressure that we saw inflationary through 2022 really peaked in the fourth quarter. And whilst year-on-year, there's still is some inflationary increases. We're now seeing several quarters where it's flat. So I think that's the good news from our perspective. So that then says your trend, your loss cost trend is definitely flattening. And we've got a significant amount of rating increases flowing through the portfolio, 13, 14 points of written rate in Q3. That translated into 6.5 points of earned rate that goes to 8.5 points of earned in Q4, and we think double digit as we roll into next year. We're confident with that because the market's been pretty disciplined and our retention rates are quite high. The point I made is that our normal guidance has been mid- to upper 90s for automobile. We guided that to upper 90s. And really, that reflected where we are both with the Sonnet business, but where we were in this inflationary period. The power of the math certainly starts to earn in Q4 of 2023, and that's the quarter where we will have crossed the line of earned rate outstripping loss cost trends. So that's the positive news. I mean I guess what your question is, well, why don't we see that faster or more significant than the guidance? We've said -- which we think it'd still be high 90s for the next couple of quarters. And that's really just the seasonality. I think we go into Canadian winter. We know that Q4 and Q1 are seasonally higher loss ratio periods for us but then that will improve the earnings power through 2024. And I think we'll then return back to the normal guidance we'll be given, which is kind of mid- to upper 90s in that line of business. I would just add to that, that as we mature the Sonnet portfolio and get that to its contribution level, our long-term or medium-term targets for personal auto is in the mid-90s.

Okay. Great. So mid-90s is where we should be thinking about this longer term, unpacking some of the dynamics that you talked about there. Let's start first on the pricing side of the equation. So how -- how do you characterize pricing right now as a whole for personal auto throughout Canada and maybe kind of focus in on, of course, on some provincial commentary and then also how competitors are priced in their business today as well?

Yes. So I think that what we would say and what we're seeing evidence of is, it's a firm market now for personal lines and the loss cost trends that I referred to in my last comments have come up in the last couple of years. And so insurance companies are now trying to capture that. And that's where you're getting significant pricing changes. What we're seeing is that with the exception of the province of Alberta that we called out on the call, which really is an outlier. Everywhere else, we're seeing pretty disciplined approach from insurance carriers, we're seeing responsible regulatory environments. Rates have been approved and pretty significant pricing power. Our main market where we have about 70% of our automobile business is Ontario. And that's been quite a constructive environment. We personally had rate increases approved. We've had segmentation increases put through. We've had innovation changes like launching UBI or affinity segmentation filings. So we find that that's been really quite conducive, and we see the whole market moving as well. I think as you go outside of that. It's a little different in Quebec because Quebec isn't regulated. It's open market there, but we're again seeing pretty disciplined approach there. Really, the only kind of, as I said, exception would be in the province of Alberta, where the industry is not able to get rates approved in line with what I think their requests have been. That's a little bit unique. And that's still late breaking news, and there's a lot of details still to be worked out with the government and their plans in the next couple of quarters.

Yes. Yes. And we'll touch on Alberta in just a second. I'm curious, of course, I've heard you talk about this and also your publicly traded peer. Your pricing actions were maybe a little bit ahead of the industry, and you're seeing some unit improvement. Is that something that you're building into that near-term outlook as well? Where you're seeing unit growth continuing to flow through even with these higher prices?

Yes. So I think that's exactly the way I would describe it. And I think what we do realize and what we do observe is that our bind ratio with the level of competitiveness does ebb and flow a bit based on market movement. If we take our main market Ontario, we had a second increase this year of 9.5% in the summer. And what you then do see is still pretty good retention levels but you definitely see lower new business sales for a few months. And in the last couple of weeks, we're kind of starting to see that pick back up again and so a positive trend there. So I think our view would be as we go into 2024, we're getting to capture more unit count growth in addition to the rate filing growth. And that's why as part of cycle management, we really weren't looking for a lot of revenue growth in personal auto through 2023. It was almost exclusively rates driven or average premium driven as opposed to unit count growth, and that starts to normalize a bit as we are now more confident and rate adequate. So that feature of both unit counts and average premium will manifest through 2024.

Okay. Great. So that's good news for the top line. Moving down one line to the claims side of things. Obviously, inflation seems to be stabilizing today. Maybe talk through some of those trends that are driving inflation at these levels today and how that's affecting your outlook for 2024 as well.

Yes. I think on the auto side of things, what we saw is this really step-up in the price of used cars and the price of new cars and the shortage of parts and some labor pressure. And that really drove a significant inflationary pressure. As I said, we saw that peak in the Q4 of 2022. There is more availability of used cars today. There are increasing parts. There is less pressure on used cars, and that has now stabilized. We're actually seeing other markets like the U.S., where it's started to decline. So hopefully, that trend comes to Canada soon and availability of new parts, one of the drivers or things like rental car days as the whole supply chain starts to unlock and perform better. Those days, number of rental car days seems to be reverting closer to what we would traditionally expect than the elongated rental periods. So definitely, that -- that trend on personal automobile is kind of looking pretty attractive to us now. When you dissect that, there is the automobile physical damage and then there's a bodily injury and [indiscernible] benefits. And we didn't see anything unusual than that [indiscernible] benefits and bodily injury and that still looks to be the case. So that's the good news there. It really was all the pressure came on the physical damage and that's now starting to flatten. I'd remind us that, that's still at elevated levels, but at least it's not increasing at the pace that it was. And so that just gets us back into -- we do think the normalized mid-single digits slightly better than that loss cost trend is going to return in the coming quarters. And that's where we get the margin enhancement from rates in excess of that.

Yes. Great. And one theme that's been, I guess, maybe increasing in trend or it's elevated is auto theft. So how is auto theft changed how you're thinking about underwriting and pricing? And are you taking any other non-rate actions to counter auto theft?

Yes. I mean it's actually been one of the disappointing drivers in the auto portfolio. And it is an industry-wide issue. We do have an industry body [indiscernible] that's very, very focused on this that we're all contributing to. But there's a number of things that I think that ourselves and the industry are doing. So for sure, there is pricing. So we have identified those vehicles that are high theft targets. We've changed our underwriting rules and our pricing for that. So definitely, there's a pricing element. An example would be on our most targeted lists. There are surcharges that are put into place. The industry and ourselves are likely putting more of those business into [ reassuring ] pools than we would have traditionally done. But there's a number of underwriting actions as well. We do differentiate based on where you house the vehicles. We know that if it's parked in a garage versus parked on the street. There's a different risk profile, but there's tagging and vehicle recovery devices that we're incenting and assisting customers putting in place as well. So a number of those actions. In addition to that, I think, the industry and ourselves are being quite vocal with local police and port authorities, and we are starting to get a sense that the government authorities are taking this more seriously. So there's a lot of activity on it. Hopefully, it starts to pay dividends. But in the meantime, part of this is just also the additional funding as we got to spread the premiums on to customers that have to bear the cost driver.

Yes. Good to hear. The -- I guess, the third line maybe if we can call that in the combined ratio makeup is reserve development. It has been favorable and maybe a little bit more favorable than historical levels. So how are you thinking about reserve development, favorable PYD going into 2024? And have there been any adjustments in how you're reserving given the pricing inflation and normalizing frequency dynamics that we've seen in recent years?

Yes. I mean I think that I would say there's nothing significantly different with what we're doing with preserving. We like to be prudent. I think we were early to look for trends. And if you think about even going back a couple of years now, we saw this inflationary trend coming ahead of the market. We lent into that and strengthened our reserves for that trend, which ended up being an accurate call. This is a business where we like to have a confidence and prudent balance sheet and that -- nothing has changed from that perspective. And we think that we're well reserved. We think we've got an excellent balance sheet. And I think the trends that you've seen with the guidance we've given of a couple -- up to a couple of points of favorable development is likely going to continue. That's the plan.

Understood. Still in personal auto, but looking at this more from a mix perspective. The broker business is, I believe, about 85% of gross premiums in personal auto or personal lines in general. So I assume that kind of translates to personal auto as well. You did a good job of discussing Sonnet and some of the headwinds near term there. But maybe talk more a little bit about are you happy with the profitability in the broker channel today? And are you seeing any different trends there that you can capitalize upon?

Yes. I mean I would start off by saying we're very happy with the performance of our broker business. We have a great portfolio. We've got a mature book of business. Obviously, we've been in this line for a long time. We've got great technology. That technology allows us to not only give a great customer-friendly solution and interaction with our brokers, so we get access to their best quality business. It also allows us to rapidly tweak and adjust our underwriting rules and pricing, make multiple rate filings. Sometimes they're just segmentation filings. But what we see there is very strong mid-single-digit growth, high retentions. We see a profitable portfolio that is in line with our long-term average targets. So the broker business actually is performing very, very well. We're happy with it, and we want to keep running that business.

Yes, of course. If we look at Alberta specifically and the rate cap, and obviously, there's still some details to be worked out here. But I'm curious to know, is there a portion of the Sonnet auto book that could be open to higher rate increases than what's been capped to make that more profitable? Are there -- are there any areas within that rate cap where you see some opportunities within your portfolio? Or is it something that we should just think of as being maybe more on pause for Sonnet specifically?

Yes. I mean this is a really interesting one, and I think that it's a little premature to be definitive on this because this is late-breaking news. We are in discussions with the government. I mean if you actually step back, Sonnet had a 20% rate approval -- rate increase approved but never implemented because it got caught in the freeze. So we're interested to see what happens with that going forward. We do know that there's this new definition of a safe driver, which is a pretty substantial portion of all drivers in Alberta. What we don't know exactly is what will be the restrictions on the other category of drivers and how we can underwrite and price those. So that's to be determined. I think there are other items on our mind. One of the things we've done with Sonnet in Ontario is we've launched a UBI product. It's gone extremely well. It's a different rating methodology and platform. There are potentially opportunities to take that level of innovation to the Alberta marketplace, which would be at a different set of terms, conditions, pricing and underwriting appetite. So I don't think that there's nothing that we could do. I think there's options. How tangible and practical they are, we will find out really in the first quarter of next year, when the engagement and rate approvals are likely to occur. So I think that's our story there. I think if I just step back for a moment, it takes a fair bit of the management team's time on Sonnet, but for the overall company, Sonnet is Alberta auto, which is the only real part of the province we're concerned about. We do have a broker business there. You just asked about the performance, Canada-wide our broker business. In that province, it's a good business and it's doing okay. We don't like the 3.7% cap. We hope it doesn't last for too long. But that business is fine. It's going to be returning reasonable returns for us. It's really the Sonnet and if I think about the Sonnet portfolio, it's less than 2% of Definity's total revenue. So not that material for Definity, but significant for Sonnet. And what we have done is we had -- when this started, this freeze went in place, we stopped marketing. So there's very little new business being done. We stopped our digital bond innovation. Retention is down. We only renew about 2/3 of the portfolio. So it is a contracting portfolio. So that's putting some pressure on Sonnet's top line but it's the disciplined approach to do given the circumstances.

Yes. Understood. Last one for personal auto, and it's maybe a bit too early, but with Alberta putting in this government rate cap, do you -- what's your sense as to where other provincial regulators, governments and maybe specifically Ontario is what I'm thinking about here? Like might they be considering something similar or is there a different backdrop there?

No. We have no reason to believe that there's any kind of contagion expected. This has been put in place with the freeze a year ago. And when we look at the behavior in other markets and other jurisdictions, we don't see anything like that. And quite frankly, I think when you look around the world, whenever you get this level of government intervention into a free enterprise, it doesn't work well for consumers. And if you look into the U.S. in some marketplaces, there's been people exiting and withdrawing capacity. So hopefully, this is not going to be too long. I think people realize this isn't the right way to manage costs. There are other solutions like reforms that we're advocating. But I think that we've been actually very comforted by what's actually happened in other jurisdictions outside of Alberta and see no indication whatsoever of anything like that.

Great. Let's shift to personal property now. And my base view here is that there's significant upside for this segment in '24 as price increases flow through. And perhaps underwriting tightens as well to reflect what was a tougher 2023 environment. So I guess, one, am I right and maybe 2, where could things go a little bit sideways?

Yes. I think you are right. I think that the way we would look at this marketplace has been firm for quite some time. And I think when you think about the inflation drivers and this increasing trend of weather events, that's likely going to continue. I think when we step back and we look at particularly this summer, we do think this was an unusual outlier period. So we're not forecasting this level of nat cat events. We don't think that it's normal to have 10 nat cat events in Q3 of significance. So number 1 is, I think that's going to normalize. Number 2 is that there is strong pricing power. There has been rate indexation, and there's been true rate to reflect the risk. I think that's going to continue. And I think the market is going to get tighter. There are really changes to underwriting appetite and a number of actions. And so if I think about our portfolio, we've had indexation running through, we've got rates. So that puts us into the low double-digit average premium risk. And even now with these elevated nat cats, there's looking at wordings, deductibles by peril, making sure that our aggregation and accumulation management has been optimized. So there are some areas where we're either putting surcharges in or we've slowed down new business to make sure that there's a good spread of risk. And I think that will create capacity challenges into the marketplace, and that will keep the market firm for some time. Look, and I think the other part is when we think about our own portfolio, we grow by good retention, rate changes, but also portfolios, which have been a significant part of our growth rate. And those could be a little lumpy. So you might find a quarter or so where one big portfolio is transferring and before another one starts. So it's not -- there's a little bit of lumpiness to the top line, but I think the story of margin growing and solid growth for some time is going to continue in personal property.

Okay. Great. And the -- maybe something that could come into question is the reinsurance program you have in place, both an individual event and an aggregate treaty, I think the aggregate treaty continues into next year as well. But is there anything as a result of these -- as a result of the activity this year that is causing you to rethink how you structure your reinsurance programs? Or is it status quo?

No, it's not status quo, but I don't think it's really anything new. I mean if you step back for a moment, we had a $30 million net retention for the last 10 years. Clearly, the company has got much bigger from premium, there's been inflation, much bigger balance sheet. And so we were on a journey of increasing our net retention from nat cat excessive loss treaty. We did that last year, and we plan to continue that. So that's kind of an oddly progression upwards, which actually is in line with what reinsurers are looking for as well. We think the reinsurance marketplace is going to be disciplined marketplace. So I don't think dramatic changes from -- are expected, and I think that will keep everything firm going forward. You are correct in terms of the program we have in place. It was a 3-year program, it runs until the end of 2024. And I think we were very proactive in putting that into place. Not that we anticipate this level of nat cat activity. But really, because we knew we would be moving our net retentions up. We knew we will be growing into property, both commercial lines and personal lines and wanted to make that kind of a smooth and orderly transition. So that continues. But we like the personal property business. The last time we had an unusual quarter like this was back in 2013, where I think it was about 6.5 points nat cat on our total combined ratio. At this trend, assuming a normalized Q4 will be at about 6 points. So these don't happen that often, but about every 10 years or so, you do get a bit of an outlier year. That's our business. We're fine with it, and we can certainly price for that.

Yes. Understood. Going back to something you mentioned about the top line about portfolios and lumpiness. I assume this is like brokers bringing over business. And yes, maybe you can elaborate a little bit on that process, how that business comes across? Is it the Vyne technology that is the key driver? Is it coming from some of your broker acquisitions recently? Maybe talk through a little bit more about that side of the growth equation for personal lines.

Yes. And so I think on that side, one of the things that we're definitely seeing is the trend of brokers requiring less insurance company carriers than they have in the past. So as far as brokers are concerned, they want to optimize their margins. They want to work as an efficient way as they can. And one of the things in personal insurance that we think is really critical for brokers is the efficiency of interaction and the kind of broker management systems into connectivity. So that was really one of the big drivers of Vyne. So when we thought about launching Vyne, the first thing was, how do we make this better for brokers and customers. which will generate revenue. And then the second thing, how do we make this sophisticated enough so we could enhance our margins. And that is exactly what's happening. So brokers are finding they no longer need 12, 15 different personalized insurance carriers and when they move that business, they're moving it to those companies that have leading technology. And so that's actually been one of our growth drivers. It comes from across, it's not necessarily from the brokers that we have put into the McDougall network. In fact, it is not coming from them in terms of portfolio transfers. They are continuing to be stable with their insurance carriers, markets. But as many other brokers around the country that have said, "I'm not getting enough support from my existing carriers. I like the efficiency of Vyne. You've got good claims, you got competitor pricing. Let's transfer those businesses." And we've been doing that for a number of years now, and I think it's likely going to continue. So there's certainly a few points of our personal lines growth rate, particularly in property that has come from that activity.

Okay. Good to hear. Let's shift to commercial. It didn't get any airtime on the quarterly conference call. So maybe you could give us the quick highlights. And what is your outlook for this segment in '24 to kick us off on commercial?

Look, I think we're really happy with the commercial business. And again, if you just step back for a moment, this was a massive transformation over a few years ago. Economical used to really be SME. We brought a team in that's built out mid-market specialty in addition to the SME. And there's lots of opportunity there. We've had very strong growth for a number of years. Clearly, the firm market condition has been supportive where we've got strong rate in addition to unit count. And if I just step back as recent as this last quarter, we're getting upper single-digit rate increases. And mid-single-digit unit count increases. And so that is what's driving good growth and that's going to continue. In the SME area, we have digitized that business as Vyne Commercial. Now a little over 50% of all of that business, that SME business is broker self-serve. So they really like that. It's very efficient for them to do that. We also think that's important because through various market cycles ahead. That really makes that business pretty sticky. And I think -- that is something that's important from our cycle management philosophy. In mid-market, we've got great trading underwriters. We've got deep relationships. It's a decentralized model. We specialize in certain verticals. All of those are gaining share as well as enjoying the trading environment. And then in our specialty business, we see lots of opportunity. That's the one that's kind of grown the most. We've got 30-plus percent growth rates in our specialty lines. And quite frankly, after bringing teams of talent in over the last, let's call it, 1.5 years, there's some good upside for us there. So our outlook, I think, we've kind of said is that this can run in the low teens for some time assuming a decent market environment. The brokers are very supportive. We're gaining share. And we're able to keep broadening out our comprehensive product suite. So I think there's more products we can still bring to market. And particularly in those specialty lines, are natural -- we're still well below our natural market share and so good growth there. The performance is good. We did call out that we were a little flatted in the last quarter by more of a benign cat period. The nat cats hit personal lines and not commercial lines. But I think when you step back and normalize for that, our level of confidence for this running in the low 90s in the year or 2 ahead, still looks very good to us.

Okay. Great. You did mention the Vyne as well. I'm just curious, what's -- what has been the take-up rate on Vyne Commercial? Is that a key driver of new broker wins are brokers using Vyne Commercial in all 3 segments of the commercial. How does that fit into the growth strategy and the contribution to your growth thus far?

Yes. So I think on that one, brokers are really engaged in the small commercial and less so -- I mean, this is more internally driven the technology and the processing on specialty and mid-market, but brokers are exposed to the Vyne small commercial. And it has been a game changer for us. One of the drivers, very similar to what we've seen in personal insurance is that there are portfolios that are transferring into that portfolio. But many brokers are just saying, look, particularly for that small market commercial I only need 3 or 4 markets. I really don't need as many as I otherwise do in commercial lines because you typically do have more carriers, more markets as a broker in commercial lines just given it's much less homogenous. And that is one of the big drivers of brokers concentrating. So we're gaining significant share of wallet on our leading brokers, small business portfolios with more to come. So that small business would be the next fastest-growing component other than specialty of our commercial operation.

Okay. Great. The growth has been strong. The profits have been strong across the commercial segments. I guess what I'm wondering is, why hasn't competition become more aggressive to sort of take more share in this market or prevent Definity from taking that share?

I think there are a couple of things. One would be some of the personal lines trends read over to commercial lines. We've had a period of inflation and [ weak ] period. So people are reflecting that. There are elevated weather events and more volatility in weather, people are reflecting that. And I think that there are other items, too. So for example, for most of the major players tend to be multi-line carriers. And we've been through a period where you have this lag of rates over loss cost in personal automobile, which has suppressed margins in personal automobile. And I think people take that into consideration in the portfolio underwriting approach. You want to make sure that in a period where you are not getting your normalized earnings from personal lines automobile that your other lines of business are stepping up and contributing. And so I think that's an issue there. And then I do -- the other thing that the market has matured, data is better. People are better at pricing for exposure than purely just experience. And the perception is that there clearly risks ahead, whether it's inflation, cybersecurity, nat cat, you name it. And so we are seeing more discipline in the market. I think the final point I would add is that in this pressure of servicing customers, not as much remarketing of business has happened. And so one of the drivers has been people are quite content across the industry to enjoy higher retention ratios. That doesn't mean that market won't get a bit more competitive. And in some pockets, you see a little bit of more competitiveness on pricing new business. And those typically seem to be in those lines of business or areas that have been the hardest or longest for a number of years now. So not concerning and no real shifts ahead that we can see.

Okay. And maybe last on the commercial, it's given perhaps it's a bit more sensitive to macro factors. Maybe identify some of those macro risks or other risks that may be worrying you in the commercial lines business at this time?

Well, I think that the 2 big things that we're focused a lot on and spend a lot of time with our team on are what happens if we do move into a recession. And what happens if the market does shift from a firm market to less firm? And how are we positioned to do that? And what do we think? So there's lots of leading indicators. There's lots of attention on that. I think on the first one, should we go into a recessionary environment. There definitely would be a headwind on the revenue, less so on the bottom line. Again, when we think about that, it's not dramatic when we looked at past cycles and particularly relating to Definity's portfolio because our portfolio is less exposed to some of those economically sensitive areas of tourism and entertainment and segments like that, they typically have a harder time in a recession. But it's something that we pay attention to. And then the other one would be, if we get to a less firm or a softening in a marketplace, that clearly would have more impact on the margin of the business. And so we think about that. And we've been disciplined, number one, in terms of how we keep pricing new business and how we keep pricing our retention portfolio, but also not to chase segments that we think look good in the short term, but in a different market cycle are really programmatic. And so we passed up on some opportunities because we know that those segments or portfolios are more likely to be programmatic in a different market environment. But back to the comment I made just a minute or 2 ago, even if the market starts to taper off, there's still a lot of power in terms of burn rate to come through. Currently, we're still pricing at prices above the loss cost trends. So we are kind of actually building or maintaining that margin. And we're really not seeing any undisciplined behavior in the marketplace. So our outlook looks pretty consistent with what we shared before.

Not to put you on the spot here, but do you care to be specific on certain lines where you've maybe been a bit more cautious and not stepping into what might be a trendy piece of the commercial segment?

I mean, I think, some of the areas are there. It's often segments that come with like a big premium attached. There are things like long-haul trucking into the U.S. that comes with a big premium, small policy account that help move your top line but are the first segments to start seeing price reductions and being cut. There is residential realty programs, which the market does tend to move quite quickly up or down based on the cycle. And so these are big programs where you could write tens of millions of dollars of premium but the rates get cut pretty quickly, and they're the first to go in a soft market. And so when we think about where we expose our capital, we would rather avoid that as opposed to making good margin for 2 years and losing margin for the next couple of years, we just step aside from those type of segments.

Okay. Great. And before shifting to the M&A, I just wanted to address a question coming in. And I think it applies to all 3 business lines, and it's just a curious question as to how the market has perceived the brand Definity compared to the brand Economical? And have you seen any adjustment periods? Or is there anything of note to mention on that type of theme?

Look, I think -- when I think about that, the market in the insurance market, we today trade on our Sonnet brand for direct. We still trade on economical for the broker business as a subsidiary of Definity. But I think it's gone very well. I mean in one way, it's representative of the transformation we've done, economical, the mutual to Definity the public company and the cultural shift we'd be to the business transformation that we've made. I would say there's a couple of other areas which were very pleasing to us, and one of them has to do with talent. And I think since becoming public, that Definity brand has helped us retain top talent and very importantly, attract top talent that perhaps wouldn't have thought about Economical a mutual company as a destination for them. So by and large, it's been a positive transition for us.

Yes. Good to hear. So let's talk about M&A here for the back part of this conversation. Our view is that M&A is going to drive a couple of points of ROE whenever it does come in that first year or so. Is that about the right way to think about it from your perspective? Is that the math that you guys are running on your end when we think about M&A and driving that ROE accretion story.

Well, I think what we've said in terms of the guidance of upper single digit to below teens, that's an optimized balance sheet and that's all organic kind of growth. And we do have some improvement just natural improvement as Sonnet gets more profitable as we get more investment income as we get more distribution income and then certainly this year after a heavy cat season, we'll have more underwriting income. That's our forecast. So that's all the direction of travel. But what we are doing and what we do believe is that as we optimize our balance sheet and the happy path for us is actually deploying that excess capital into M&A. That does drive a few points of ROE in the years ahead. So then you get down to timing. And that's the one that's more difficult to say. But we clearly do believe that as we deploy the excess capital, there is another couple few points of ROE enhancement with that optimized balance sheet.

Yes, yes. Exactly. So maybe just stepping back in terms of the overall market for deals in this environment. What is the competition like as you're looking at potential targets? And are there certain conditions today that need to change to drive perhaps a more attractive market for Definity in terms of M&A and thinking more on the manufacturing side than on the distribution side where you have been active.

Well, I think that's a good point. And I think that, firstly, what we see in distribution, it is a very active marketplace. And there is consolidation going on. So lots of opportunity there that I think is going to continue for a while. On the carrier side or manufacturing side, there really have been just a few deals in the last several years now, which is unusual. Normally, there is 1 to 2 points of market share that changes hand each and every year. And we do think our thesis is that, that trend will come back. I think that people are realizing you need significant scale to afford the technology and the branding, the data that's required, customer and broker expectations keep being elevated. And when you combine that with the fact that -- the operating environment has gotten a little bit tougher. We've had to deal with inflation. We've had to deal with nat cat, tighter global reinsurance structures. We think all of this is going to bring some deals to the marketplace. So that's kind of our thesis. It's not that you need more buyers. I think there are buyers, there is capacity in the marketplace. We just need more sellers to come to the marketplace. And I think those points that I mentioned are all directionally going to -- driving more opportunity. Of course, it's really difficult. These are opportunistic to predict exactly when that's going to happen.

Yes. So of course, very difficult to predict timing, difficult to predict what it would look like. But one of the areas where maybe we can get a little bit of insight on is the potential integration of a transaction. So maybe you can sort of discuss what sort of infrastructure you have put in place today to manage the integration process of what could be a larger scale acquisition?

Yes. And I would say that this is our strategy, right? So we have a strategy for organic growth and we built these growth engines and then we have an inorganic strategy. This is what we're working on. This is what we spend time talking to the Board about. And we have built a platform for a bigger business than Definity. And so I think that is a really important point. We've in a way, overinvested for the size that Definity is today. So that it puts us in a position to be a legitimate buyer to be able to take somebody else's business and improve on it, run it better than it has been run today, enhance margins and do so in a very efficient way. So if you think about our technology that is one example, Vyne and personal lines, is a system that could handle a much bigger business than we had today. If we bought $1 billion or a couple of billion dollars of revenue, put that on to Vyne. Really, we don't need many people in personal insurance. Of course, there's more people on the claims side, I think, to service claims. But that's a good example of significant synergies that we would have. And the same thing we're building across commercial lines and our claims transformation. We're probably halfway through our claims transformation today. And that's significant because that helps with leakage, it helps with efficiency and helps with customer satisfaction. So we haven't got to the end of the journey even of our transformation, albeit mostly, we're a good way through that. The other things that we're doing, we have built a very experienced corporate development team. We have executives that have a lot of experience in M&A and integration. At the next level down, we specifically hired people that have track records of integration that when we are successful in landing something we could make sure we could deliver on the synergies and the commitments that we make. And the other final point I would make is that when you go back to the transformation that Definity has been on -- we've done some pretty complicated things. And why Economical hasn't itself bought a significant insurance company, just taking the various brands of Economical, consolidated them into one, building the Vyne platform, dealing with all the regulators, all the brokers, all the pricing dislocation, systems and data conversions. All of that was done through the period leading up to IPO. And in a way, that's actually more complicated than simply just acquiring a business and integrating it. And so I do think we've got the skills and experience required that gives us confidence to do that.

Yes. Great to hear. Moving to the broker side of the M&A strategy. We've had lots of conversations with investors as well on the merits of that strategy. Is the strategy to continue to push further into that broker channel and drive distribution income higher? And what is the strategy in terms of, I guess, going about that? I've seen a couple of smaller deals through the industry newsletters that come through. But is that the move? Or are there other larger opportunities that are potentially available as well? What do you need to continue to bolster that business?

Yes. I think the opportunity is there. We wanted to build a platform, and that platform really was landing McDougall and then McFarlan Rowlands, which gives us an excellent Ontario platform. Drayden, which we closed in the fourth quarter now gives us an access and a leading broker in Alberta. And so what we'd like to do is kind of round that out. We'd like to see this as a national platform. And once we've done that, then it's much more programmatic M&A. So we're not waiting for that. You saw, as you just mentioned, McDougall has done a couple of small deals in the quarter. And that will continue. We like that because the valuations are lower. The synergies are higher when you do smaller kind of transactions, but that will continue. We, quite frankly are delighted that we were able to build such a substantial broker distribution business so quickly. When we acquired McDougall, it was about $0.5 billion worth of premium. We're almost at $1 billion today in just over a year. And we'll look to refresh that kind of guidance at the end of the fourth quarter as we update the general guidance for next year. But I would say we're seeing lots of opportunities, it's a great model people really resonate with. And we do like more [ bodies ] bolt-ons because they're really brokers do benefit from scale that generally drives much higher margins internally for them and that's important. And so when I step back and I say, well, like, look, this is really accretive to our operating ROE. It's stable and predictable good margin -- high-margin revenue. And in addition to that, it's strategic because it gives us access to a high-quality portfolio of business, of which we could be one of the leading underwriters. So we get 2 sorts of income. We get the distribution income and we get the underwriting income. And when you put that together, it's a pretty compelling story.

Yes, absolutely. I agree 100%. And it certainly seems like that $1 billion premiums objective or target is going to be moving higher with the success so far. As I think about like capital allocation, distribution versus manufacturing or maybe even overall? Like is there a target level of capital deployed that you're looking to achieve in the next year? Or is there a time frame? Have you set any sort of objectives around capital deployed from that perspective for the company?

Yes. I think what we haven't done is like earmarked or limited opportunities to say, well, we'd only spend so much on distribution or so much on manufacturing. The capital is available. If you look at what we expect our financial capacity to be at something like $1.2 billion. When you adjust for the Drayden acquisition of a couple of hundred million. So it's about $1 billion that we think is available to us in the short term there. And we're happy to deploy all of that. I mean if we find the right opportunity, there's no reason why we couldn't lean in and deploy that next year if the opportunities were there.

Yes, absolutely. And the other side of capital allocation. I mean, there is -- the dividend is in place. And I think the cadence would suggest that we should hear a little bit more about that in the next quarter. So I'm just curious how you're thinking through dividend growth and how that fits into the capital allocation strategy.

Yes. When we think about our capital management, I think we've been moving nicely on all of that. And I mean, it's something that's a high priority for us. we want to invest in them and what we've said is we want to invest it in organic growth, keep building the business. It's important for us to have a growing and consistently growing dividend. So we expect that to continue from there. We get into M&A. And then lastly, capital return of some sort, which we don't see as imminent because of the opportunities we think will happen in the short term. So to your question, our dividends, I mean, we will update at the end of the year as we talk to our Board about it. But our intention is we've got a lot of confidence in what the earnings profile looks like going forward. And we expect that to continue to be a consistently growing part of the story.

Yes. And just refresh, is it a growth with earnings strategy? Or is it a payout ratio? I just -- forgive me if I'm asking.

I mean I think we can -- these are the points of considerations. So for sure, something like a payout ratio, we would take into consideration in terms of what -- thinking about what that -- what they would look like. All in mind of being competitive and demonstrating the confidence we have for earnings growth ahead.

Okay. Great. Only a few minutes left, but maybe -- maybe we'll touch on one part that's been obviously a tailwind for all insurers, and that's the investment portfolio. You mentioned on the call, the investment yield is still far in excess of the book yield of the business. So there are more tailwinds there. Is there anything else that your team is looking to do to enhance yield, whether it's extending duration or looking at alternatives like what else is there to continue to enhance that yield? Or is it really just enjoying the benefits of the rate environment today?

Look, I think to answer the question directly, is there are some opportunities that we consider more in the line of private debt where we haven't allocated a significant amount, but we have an allocation that we could do that based on what we see as an attractive -- when we see there's attractive returns. But I would say nothing kind of material should be expected and certainly nothing kind of exotic here. We on the call guided to we're now at $170 million of net investment income. There is about 100 basis points between new yields and book yields. Our investment team has traded to capitalize on the better returns. And so I think that gives us some confidence for some years ahead in terms of what that net investment income would look like. So definitely, we're seeing a trend of increasing net income. That's very supportive to operating ROE, but I wouldn't expect anything significant in terms of our portfolio allocation.

Yes. Understood. So why don't we take the last minute here to get any of your closing thoughts and if I could, maybe just direct you to what aspect of the Definity story in general, do you think investors maybe not noticing today with all of the upside we're talking about, what is the aspect that you think might be missing in investors' thought process at this point just to close it up.

I mean I think one of the points in our mind is we do spend and we have a lot of discussion about excess capital and how much capital we have kind of remaining and still opportunities to raise more and move forward. But I think sometimes we forget that we've actually been pretty proactive in our 2 years of life as a public company. We have deployed $600 million or $700 million of excess capital because we've been generative. We've now still got $1 billion or plus of financial capacity ahead. I think that the investment so far in terms of the inorganic plans, is really working quite nicely on track. I think that the significance of building a broker distribution platform is maybe not fully reflected broadly yet by all. It is very strategic to us. It's operationally helpful for revenue generation and good underwriting profits. And of course, the lift to operating ROE given the margins that come out of a brokerage and significant time ahead. So I think that when we think about, we have demonstrated that we can deploy capital inorganically. The next thing for us, which is the more opportunistic thing is the carrier M&A. You asked a question about it. I think we feel very good about our abilities to do that. Hopefully, that's the next leg of the story for us. And that's kind of, I think, is still what's ahead. So I believe we've got a good story to tell on deployment of capital. What we've done so far and what's ahead. And then the second part of that is, I think, that we believe our culture, this innovative attitude we bring, whether it's Sonnet or whether it's Vyne or whether it's Vyne Commercial or whether it's UBI, we're disruptive. We're a bit more innovative than the market. And this all powers our organic growth story. So I think I'll step back. I feel pretty good about not just our inorganic story but also our organic story. And you put that together, that's why we're pretty confident of a couple of years ahead of us.

Yes. I agree the growth story and the ROE expansion story is still very much intact that underpinned what is our favorable thesis on the company as well. So Rowan, thanks again for spending the hour with us today, and we look forward to catching up again soon.

Great. Thanks so much for having us. Bye, Jaeme. It was a pleasure.

Thank you.