Definity Financial Corporation (DFY) Earnings Call Transcript & Summary

Okay, Paul, you can go ahead. Thank you very much.

Thanks, Steph. Good morning, everyone. Thanks for joining us. So most of you probably know me, but I will introduce myself anyways. Paul Holden, Senior Financials Analyst here at CIBC. And it is my pleasure this morning to be hosting Rowan Saunders, President and CEO of Definity Financial. So, Rowan, thanks for taking the time and joining us.

Thank you, Paul. Great to be with you.

And so just as a quick setup here, Definity, I think is coming out of a very strong Q4. Operating earnings up 24% year over year, book value per share up 11% year over year, dividend increase of 16%, and then on top of that, you have financial capacity of, I think, it's close to $1.3 billion available for deployment. And now as I'm just looking at my FactSet screen, stock's up 15% year to date, making it the best-performing name in my coverage universe. So very strong start to 2024 after a strong finish financially to '23. So with that, let's get into some questions, and maybe starting with personal auto. Continue to get lots of questions on the Alberta rate cap. And I think the key question there is to what extent does it actually stunt Definity's ability to grow personal auto premiums and achieve its combined ratio objectives? And I guess with the context of 1 province of multiple provinces, so you don't have those same limitations elsewhere.

Yes. Happy to provide some insight into that. I think, I would say, the first comment I'd make just generally about automobile is that we clearly feel like we passed the trough that we were in the last year or so. So things are looking up quite dramatically for that segment. And when you just step back for a moment, the environment is much more stable. We've got still elevated levels of inflation, but they're pretty flat now for several quarters and the frequency is pretty stable as well. The fourth quarter of '23 was the first quarter that we actually crossed over our earned rate over the loss cost trends. So just happened in the quarter. So as we've guided, that should be very favorable for us going forward. So clearly feeling much more optimistic about auto line of business. Your comment about the impact on Alberta and what it does on the total, a couple of things there I think are useful context. The first one would be that Alberta order represents about 12% of our total automobile portfolio. We're very much centralized in terms of Ontario. So Ontario is about 70% of the total order portfolio. That's our main market. So when you look at Alberta being 12%, you then break that down into our 2 go-to-market brands. There's the Definity Economical brand, which is about 7% of the 12%, and 5% is Sonnet. And they're in different positions. So the one is a very mature portfolio, it's profitable. And whilst we're not delighted by any means about the trading environment there, that business can continue on largely unaffected. It's the Sonnet portfolio. So that's about 5% that we obviously are more anxious about. And I would, obviously, make the point that whilst it's just 5% of the total auto, it's just proportional impact on the bottom line contribution from auto. So what that really says is, I think from a growth perspective, we can continue to grow our auto portfolio outside of the province. We're seeing good growth, particularly in Ontario, but in other markets. And we see that both in the broker business but also in the Sonnet business. So Sonnet is contracting in Alberta, but it's growing in the other parts of the provinces around that. And in terms of margin expansion, there's definitely some headwind in the province because when you think about 85% of the drivers are capped at 3.7% increase, which is less than a normalized loss cost trend. That's not good news, but it depends on your starting position, and obviously, it's just 12% of the portfolio. Outside of that, all the earn rate continues to come in quite [ quickly ]. And you may recall that our written rate is now running in the teens, like about 13.5% written rate. In the fourth quarter of last year, we had 8.5% of earned rate that will now move into double digits as we go into 2024. So that dynamics is certainly going to drive an improvement in our automobile margins.

Okay. So you talked about Ontario being 70% of the auto book, so obviously the majority, the vast majority is Ontario. My impression is that rate adequacy in Ontario has improved significantly over the last 12 months. And that's true probably for Sonnet, but also your broker-based business as well. So I guess my question is, first, is that the right impression to make? Is that true? Has rate adequacy improved a lot? And then second part is, how hard are you leaning in, in terms of gaining market share in Ontario?

Yes, Paul, your assumption is correct. So the first part of your question is rate accuracy has improved significantly. I'd also remind you that we were one of the leaders in terms of leaning into rate changes. So that did have an impact on our new business growth and even a little impact on our retention as well as we were earlier than most people in the marketplace. What we've seen is the entire marketplace now really in a pretty firm position and all have taken significant rate. So I would say not just for us, but for the industry, everyone has made a move up in rate adequacy and significant rate changes. We've noticed that in the last number of months where our competitive position has materially strengthened. So that's positive for us going forward in terms of the outlook and revenue growth as well. When we think about auto, what we've said is that there's a couple ways we think about how much we want to grow this. The first is strategically. So we've been trying to balance our portfolio. And if you recall, ever since the IPO, we've been growing property and personal lines and commercial lines at a great faster than automobile. And that is by design. We just wanted to have a more balanced portfolio. We made, particularly in personal insurance portfolio, great strides in doing that. The second part was about cycle management. When we went through a couple of tough years, it doesn't really make a lot of sense to add a lot of net new exposures to your portfolio. We were much more focused on rate and written premium and quality of portfolio. Now, with respect to the auto, Ontario auto, we're in a much better position. So we really feel very pleased with our broker business. And that business is now moving into the next phase of expansion, which would continue to be solid rates and pricing. But also we'll now start to see unit count growth feature into that. So it won't just be the rate, but it'll start to be unit count growth as well. And we've got a good competitive position and a very scalable platform. So this is on the Vyne platform. And so for us to rapidly scale that up, if we chose to do so, we could do so quite easily. We're still managing a balanced approach. So we do want auto to grow more than it has, but still in line with the strategic mix of commercial lines growing at a faster rate.

Okay. I want to come back to Sonnet for a bit, because obviously an important part of the story on IPO, hearing lots of questions with the Alberta rate cap, what that means for Sonnet and the target of achieving breakeven. I think on the conference call last week, you discussed now different avenues to drive profitability for Sonnet. Like that target of achieving breakeven may be achieved differently, but it's not broken I think it's the key message there. So I think it's worth digging into how you're pivoting the strategy around Sonnet and what those profit levers are for that business.

Yes. And so from Sonnet's perspective, what we've said is we're targeting breakeven by the end of this year. So Q4 this year, as we think about what's the run rate profitability of the business going forward, clearly that portfolio in Alberta is unhelpful to that cause. That being said, there's a number of actions we've taken in Alberta to minimize that slowing down new business, turning off marketing machines, et cetera. But what we have done is continue to focus on rate adequacy, quality segmentation, and keep building the group and affinity business. And that's been a really good success story for Sonnet. So the 2 focus areas have been: 1, how do we enter and disrupt that group and affinity business? So, for example, targeting nurses and targeting teachers, targeting engineers. And that's been really quite successful and a bit of a disruptive model for us; and then the other one is some corporate partnerships such as the Tangerine deal. So that's helped a lot to move that in the right direction. So for a Sonnet, it's more of a redirection, looking at areas that, A, are more profitable, more higher quality, and then the genesis of your question came out of Alberta, and it's really about continuing to shrink that portfolio until that market significantly changes.

Okay, good. So last question for me related to personal auto. I think this is one where everyone knows somebody that's had their car stolen or had their own car stolen from their driveway. There's been lots of media coverage on this topic. I think you've highlighted that theft now accounts for 7 points of loss on the personal auto book and was, what, 2 points or less I think pre-pandemic. So increased 3x or more. But we're also starting to read more about government getting organized on this, police crackdowns, people getting smarter about protecting their vehicles. So the question for me is like, okay, we know it's been bad, we know the momentum has been negative, but have we finally reached a point where maybe given all the actions that have been taken, that loss ratio has peaked out and there is a higher probability that actually starts declining versus continuing to increase?

Well, I think on that point, a couple of points. One would be there has been significant rate allocated to reflecting that trend. And so when we still see this elevated loss cost trend, theft has been a driver. If that starts to normalize and reduce, that will be good news because you'll have your earned rate flowing through with less thefts. I would say that there's a number of things we do as a company. We have tried to avoid the high-theft vehicles with our underwriting and rating rules. We have surcharged them. We selectively place the most probable vehicles that are going to be stolen into the risk-sharing pool as one tactical approach. We incentivize consumers, so we educate them, We help them fund recovery vehicles, recovery tools like [ car trackers ] and immobilizers. So there's a number of actions, but including the pricing. More recently, the government does seem to be paying a lot of attention. There was, as you referred to, this national summit, and this is really, I think, we referred to it as an whole-of-society approach. We are obviously doing things around risk management and pricing from an insurance company. But the government does need to make changes to the border services. They do need to change the judicial system. Auto manufacturers do need to step up their game and make changes as well. And all of that does seem to be on the agenda. So I think there's a good chance we'll see some good progress.

Okay. That's good. Better for us all to see more progress on that file. So switching now maybe to personal property where I think probably more questions on personal property, I think, than auto these days. And that's because of coming out of 2023, a period of very high cat losses for Definity and for the industry. And of course, climate change is very topical and probably will remain so for the foreseeable future. So I think one of your stated objectives at IPO was to grow the proportion of personal property relative to personal auto. You referenced that a bit earlier in one of your answers. Has that appetite to grow on personal property changed at all as a result of rising cat losses and climate risk?

Yes. No, we're continuing with that strategy. We definitely think this is manageable. I think, eyes wide open, there is a change here. We see global cat losses higher. There's now over $100 billion per annum in global cat losses. We see the same in Canada. We've had both 2022 and '23 with over $3 billion of nat cat losses. So the frequency is up and the severity is up. I think the severity has to also do with asset prices. We've had inflation, densification so that's just naturally there's more exposures to insurer. But all of this we consider. We definitely think last year was a bit of an outlier year. That being said, you'll have seen in our guidance that we are expecting cat losses to continue to grow. So we've said that as opposed to 4% of our total revenues, we budget for these cat losses. We've moved that up to 4.5%. That doesn't change our profitability in any way because it's fully funded. So really the attritional loss ratio gets better and the cat loss ratio reflects slightly higher cat losses. What it means for us is that you've just really got to be best in class in terms of managing and assessing and pricing this risk. So there's a number of things that we do from appropriate reinsurance structures which have served us well, and we've got a natcat ag program as well, pricing segmentation, some product changes, and really understanding your accumulation. So we've done some work recently. You saw that impact in the Q4 where some of the higher exposed zones we wanted to be under our natural market share weight, and so we produced some of those exposures in that area as well. But the net of it is we like property. We're very good at managing the claims, pricing the business. We think our platform is very scalable. We think there's lots of growth for us ahead. So that'll still become one of our stronger growth lines of business.

Okay. You touched on this a little bit already with your answer, but with a change in the cat loss expectation, as you said, from 4 points to 4.5 points, doesn't sound like your expectations around overall property profitability or margins has changed at all. So maybe digging into that a little bit more, what kind of actions overall, like rates, avoiding certain losses, I think it's worth diving into that, talk about how you're going to defend margins in that business, or maybe even there's an opportunity to improve margins in that business over time.

So one of the things that we've been doing is that we've been making sure that the policy has an indexation clause in it. So every year the values go up. So when there's inflation trends, we get that covered. We've really focused a lot on data and a sophisticated modeling to identify where these cat losses are going to occur and then make sure we're prepared for that. So one of the things you can imagine is they tend to be very localized, and when you do that, you have post-event inflation, not enough suppliers, not enough contractors, and so the costs go up. So being prepared for that, having pre-arranged deals with your supply chain, having advanced cat management teams all help on the margin, and this is really a relative game to your peers. I think what you've seen for about a decade now is very strong pricing, and every year there seems to be enough rate to cover the loss cost trend. You're going to have an outlier year, like last year, where we had 10 events in the third quarter, which just really was unmodeled. But that being said, the pricing, the segmentation, coverage terms can cover that. And so one of the examples, when we think about even geographic movements, there's some provinces we prefer to be in the north as opposed to the south. We change the products. So if you're in a hail cat exposed zone, we may offer replacement costs for your roof as opposed to full replacement costs. We put sewer backup deductibles in. And then the other thing that I think really helps us is once you've got the analysis done, is how do you get this underwriting segmentation to the front lines. And this is where the modern technology helps a lot. So the example that I very often use is that whilst the industry may have a flood map zone, I think what's important for us is not that you necessarily are 50 yards from a river, if you're 100 yards elevated up a hill. That type of data really helps you become more sophisticated [ and out segment ]. You can avoid the claims and you can write more business. And so that's what we've done. We've really invested heavily in our advanced analytics practices, but also being able to transport that into the front of the business. And I think that's why we have the confidence we can keep growing this line of business and make our returns. We definitely think that this is a line of business that we can comfortably continue to deliver in the mid 90s combined ratio on.

Okay. Can you give us a sense what's the current pace of rate increases in personal property roughly today?

Yes. We've got like double-digit increases going through. So if you think about, you've got a few points -- several points of indexation as well as about 8 points of rate. And if you put those together, you get into low-double-digit price changes to consumers.

I think, the big picture question we hear frequently on this one is, is there a point of, I don't know if you call it saturation, but a point where there's elasticity of demand starts to break down, right? At what point does the consumer push back on all these rate increases? Is there potential for government involvement in one way or another? How do you think about that risk over time, the capacity of consumers to absorb these rate increases?

Yes. It's interesting, and we do pay attention to this. And when consumers are in a bit more of a difficult financial position like we've had through inflation, people are more sensitive, and they do shop around more. It does feel to us that people are more sensitive to the price of their automobile insurance than they are to their homes or to their businesses. You need to have insurance if you're going to get a mortgage on your home. Your home price has also probably gone up significantly over the last decade. And so the wealth effect is helpful to consumers. So we don't get that level of price sensitivity, but we do pay attention to the fact that it is a fairly large [ bill ] to consumers. What we've also seen in some product lines where there is big exposure and certainly higher reinsurance costs is a product change. And one of the most obvious ones we've seen is earthquake, where there are pretty sizable deductibles. Very unlikely to happen, but when it does happen, the consumer does bear a pretty substantial deductible. I don't think we're there yet, but if we get a continuation of this trend for a number of years, you may have to find some form of product changes and coverage limitations that have to apply. So there's still a lot of levers before any form of government intervention. And there is no, at this stage, a way for government to get involved. It's a completely unregulated line of business, just like commercial insurance is.

Okay, great. And another question I want to ask on this topic is because things are changing rapidly. You talked about some of the different tools you're using. I'm assuming not all competitors are reacting the same way. So interesting to get sense of how those competitive dynamics are changing as a result of higher cat losses and climate change. And is that leading to some opportunities for Definity over time?

Yes. I think the answer is that we are already seeing some opportunities emerging, and I think there'll be more ahead. In insurance if you don't have size scale and that level of sophistication, there's the concept of anti-selection, and that may be happening to some insurance companies. And that's why you see quite a divergence in performance between the top decile and the bottom decile in terms of combined ratios and loss ratios. When I think about the activity that we're putting in and the level of sophistication, it's clear to us that some of the risks we're avoiding are going somewhere, and I think that'll have a drain on somebody else's portfolio. I think the other part that's also quite relevant is what we've seen around the world is that global reinsurers have wanted to play higher up. They've wanted to move out of the working layers. And so they define that as an expected event, a 1 in 10-year event. What they're really saying is that we don't want to sell coverage into that layer, and therefore, you need to take that onto your net account. And so as we've increased our net, mostly because we're a public and a bigger company, other organizations have had to do the same. And as such, if you're not really good at managing pricing and assessing that risk, that is going to be a drain on you. That actually may cause some people to say this is one of the reasons where smaller players are just going to have a harder time staying relevant and being profitable in the years ahead. That could be conducive to potential future M&A.

Okay. I want to remind people, because we do want to get your active participation, if you have a question, please feel free to put it in the chat. I think only I will see the questions on the chat, so don't be shy. Or if you want, send me an email, and I'll address your question to Rowan. So please keep that in mind. We do have some time left, and I have lots of questions, but if you have one, please do ask. Okay, so let's move on to commercial lines, which we haven't talked about yet. And maybe just to tie it mean we seem to be focused a lot on personal property and the cat and climate change risk there. But obviously, there is some property risk in commercial as well. So how similar or different is writing that business and the changes you're making in personal versus commercial property, and maybe also give us a sense of just how big is your commercial property exposure as well.

Yes. So the themes are similar in terms of climate change and inflation that's been affecting both property lines, but there are a few differences. What we see in commercial insurance is that the exposure to floods and to wildfires and to hail, windstorm-type events, these secondary perils, is definitely lower than it is to the personal property. And so if you think about the last number of years and you dissect the level of nat cats, it's mostly impacted the personal property portfolio more than the commercial property. There's a number of reasons for that, could be construction types, but even location types. And so one example, if you think back to last summer, a pretty significant natural cat event for us was the Kelowna wildfires where we had several total lost homes. And that's because people like building homes in beautiful places, on a lake, up against a forest. If you think about a commercial business, very frequently you would see, as part of their risk management, there wouldn't be trees right up to the fence lines of the property. They would have clear cut that. Now, optics are not as important for a commercial business, and it's mostly about preserving the operating plant. And so that's an example where commercial lines does have lower cat losses. Doesn't mean that they're completely avoided from those losses, but as a percentage, they are lower. When we think about our commercial portfolio, property is a significant part of it, but we're more diversified than we would be in the personal lines construction, because you've got commercial property and then you've got general liability, and then you've got a whole bunch of specialty products lines, as well as commercial automobile. But it's a significant part of our commercial business. It would be the largest single component of all the product coverages.

Okay, well, that leads me into the next question, because the results in commercial have been excellent, right? You've been growing premiums double digits per your target. Combined ratio results have been excellent, probably even better than target, I would say. And so my question is, has this success been broad based or there are specific lines of business within commercial that have particularly excelled and beaten your expectations when you completed the IPO?

Yes. I'm delighted with our commercial business. I think that the team has done a fantastic job. And we've created a tremendous amount of value there. And as you point out, there have been a number of years where we've had significant double-digit growth, 15% last year, and very strong combined ratios as well. And what's encouraging to me is that the market is certainly conducive for this. And so we're still in an environment where we're able to charge rates in excess of our technical price. So, in fact, we're building margin as opposed to eating into margin. So I think the outlook looks good for us there. Definitely the composition is broad, and I think that's encouraging. So the 2 main points I would make would be, one, there's broad-based growth. When we think about our commercial business, essentially, there are 3 main segments: there's the SME segment; there's the middle market segment; and then there's specialty. The areas that have grown fastest for us are the small business and the specialty. Now, in the small business, that's a good market to grow in for a couple of reasons. Firstly, it's quite concentrated, so the top 5 carriers really control a lot of that business, and therefore it's more disciplined than many other product lines. And where we've been winning with is our Vyne platform. So this is a technological advantage that we brought to the marketplace. It's very easy for brokers to quote and bind. In fact, 50% of new business is self-quote, self-bind. And that does a couple of things. It makes it for a very easy broker value proposition, and it allows us to redirect our underwriting talent into other areas. So that's been a very strong growth area. The other one has been in specialty. And if you think about the history of Definity or Economical, before that was very much just a small, middle enterprise type appetite. What we've done is we've built and acquired teams of talent that have brought specialty capabilities to us. Brokers are very supportive and they love the one stop shopping. There's not that many companies in Canada that really have a full suite of offerings from small business to middle market to various product lines, including fleets to specialty. And so that has really helped us with our broker value proposition. And the other point I would make is that our starting point on specialty was really quite modest. And as such, there's lots of room for upside. So I think that's a good growth. There's still lots of potential ahead of us. The second main theme that I would say is that the conditions have been pretty good to grow. So roughly 60-40 is our split between rate and exposure growth. So we're gaining share without a doubt in the marketplace. But the biggest component of our growth is actually pure rate. And so I think that gives us a lot of confidence in the forward-looking profitability of that line of business.

Good. Starting to get some questions coming in from the audience, but I want to ask a couple of follow-up on the commercial first, I guess. You mentioned market share gains are accounting for roughly 40% of the growth. That's still a significant amount in a fairly competitive market. So how are those market shares being achieved I guess is the first follow on question. I'll ask the other one after.

Yes. And I think part of it is brokers are selecting very carefully who their future partners are. And I think Definity is one of the markets that they really like. Brokers have a limiting factor. They don't want to be overdependent on any one insurance company, and they want to make sure they're staying with people that are there for the long run. So that stability of underwriting capacity is important. So what we've seen is our strategic brokers disproportionately growing with us. So these are the largest, more sophisticated brokers. They typically have given lots of volume to our business. And I think part of it has to do also, again, with the proposition we have, the trading relationships, and also our broad product suite. So we have brought new products to marketplace. They have great propositions. We've got great claim service. And so that gives me a lot of comfort that we're winning. We also watch very carefully things like our quote to bind ratio to make sure we're not overly competitive in certain segments, and we're comfortable with that. I think the other part that I would make as well is that we've done a very good job on our retention. And given my experience in overseeing commercial businesses, I've never seen our retention rate as high as it has been for the last couple of years. And that's encouraging because there is a balance you need to manage in terms of your growth, new business as a percentage of your retention, because as you would expect, your new business has less margin than your renewal portfolio. And so you've got to be aware that you don't want to write all new business with the churn in your existing portfolio. And the fact that, that is so high is a great advantage for us, not just from helping revenue, but also in terms of maintaining margin in the portfolio.

[indiscernible] the retention rate is obviously a very important dynamic. So the second question I want to ask you is, I think you mentioned 60% of the growth is coming from rate increases. A frequent question I hear and one I ask about is how long can this hard market cycle continue. It feels like it's already extended longer than the typical cycle. What could change to maybe make that hard market cycle become just firm or hopefully not a soft cycle, but slow down that pace of rate increases? What's your view on this?

As recently as last week, talking to the teams, we're not seeing anything material in terms of the market conditions. It's still firm and that's a good environment. We're able to keep our retention rates up. We've seen that in the last number of months and getting the prices we're putting into the marketplace winning. So I like that view. I think that generally the market is anticipating there's going to continue to be natcat activity. We still have a lingering inflation, whilst it's not going up as much as it was, it's still quite elevated from where it was a couple of years ago and people want to keep covering that cost. So there has been that level of discipline. And then, as I said, in certain areas, like small commercial, it's quite a consolidated market and many of those insurers are also multiline carriers. And when you don't have the margins in all of your portfolio, i.e., the auto is not contributing as much as you would traditionally like it to be, I think that leads you to be a little bit more disciplined on some parts of your commercial line. So all of these things seem to be pretty disciplined going forward there. Your question would be what would typically change it? We're not seeing anything that would change it materially. I think that on the margin, there are a couple of pockets that you will see some tapering and pools of more competition. Very often that's in specialty or program-type business. And it's not to say that we haven't lost any accounts. In the fourth quarter, we actually lost a pretty sizable fleet, which the team was very disciplined and said, look at that price, we're not prepared to renew it and we'll let it go. So I'm happy to see that discipline in the business, but that's really on the margin. The other one would be, of course, we make underwriting income and we make investment income in the industry. And whilst investment income yields have gone up quite nicely, they're still, on an absolute return basis, not at the level that you could afford to run a combined ratio of much below mid-90s. And so I think that outlook is important, and most people are thinking that the rates will be where they are or down a bit in the next couple of years. And so that's not at all a driver for any more competition on the underwriting pricing equation.

Okay. So, again, a few questions from the audience. So thanks for these and hopefully by reading these off will encourage even more. So the first one is, with respect to distribution, there's a couple of different components to it. I guess the first is what proportion of Definity's business is now going through brokers versus direct, and that's inclusive of your own distribution business, the brokers you've been buying up in the last couple of years? And then the second part of the question, which is an interesting one is, how do you mitigate the issue of independence in terms of your distribution through now, I'm not going to say wholly owned because they're not wholly owned, but your partly-owned or majority-owned brokers?

Yes. So at the macro level, we are still very much an intermediated business. 90% of all of our business comes through brokers, whether it's ones we have investment in or completely independent. And really our direct-to-consumer business is a little under 10% of the total. So that's the first I guess lens. In terms of the business that we've built. And if you think about a little over a year ago, whilst we had a relationship with McDougall, we didn't have a owned vertical integration strategy into the broker distribution channel. So very quickly we have built $1 billion business. We originally thought about that when we acquired McDougall's in end of '22, it was a $500 million business. We set a target for it to be double again to $1 billion. We thought that would take more like 5 years. We did it much faster than we thought. And that's why on the call I mentioned that we see in the next few years another $500 million coming up. So that business is important to us for a number of reasons. Firstly, we get good, high-margin, repeatable, complementary broker distribution income, but also we get underwriting premiums from that as well. We don't disclose and break down exactly how much of that business we write ourselves and how much is in the market. But you would imagine that they're a pretty significant and strategic partner for us. And so we would be one of their top few insurance companies. And that leads us into the question of how do you maintain that independence. Different strategies are in the marketplace. The one we feel quite passionate about is that we bought this to be an entrepreneurial, independent channel, and so we run it like that. We want it to maintain its independence, its agility, ownership in the game. So you would have noticed that when we acquire these brokers, roughly 25% is the equity that the distribution owners maintain through their organization. So they have skin in the game, they treat it like it's their own business, helps with perpetuation planning, et cetera. So I think that's one of the differentiating features of our proposition. And as such, because there's a strong minority interest in the business, they do the right thing for the business. We, again, encourage that. So what we don't do is we don't facilitate them reducing their levels of other markets and transferring business to us, we win business. Now, there's a number of things that we do. We're strategically aligned with them. We give them great claim service. We can create some bespoke products. So there's a number of mutually beneficial actions we take in place that helps their customers. And if we help their customers, over time we will earn more of that business. And so that's the way we really think about it. And so I've always said the definition of independence to us is more what happens at the front counter than the financial ownership structure of the business.

Okay. Very good. So I guess going back to a question from me that tacks on to this is maybe talking a little bit more about your future plans regarding further broker consolidation and acquisitions.

Yes. What I really wanted to do was to get a sizable platform because if you believe in this strategy, you want a high-performing business. We were, quite frankly, very fortunate that we had this longstanding relationship with McDougall's. We then acquired McFarlan Rowlands, which was a second, let's call it, anchor broker in Ontario, and then we acquired Drayden in the west. It was important to get those big anchor brokers in place because from there you can do these programmatic or bolt-on acquisitions. And I think that's really the plan going forward. If we find another high-quality, scarce opportunity, like we did in the last few deals, we would absolutely lean into that. But there really is not a big pool of that size, the scale, and professional brokers remaining in the marketplace. And so more likely this is about those brokers doing a roll up, a more programmatic approach. There's a very strong pipeline that they've got. People love the story. They love the independence. They love the fact they can continue to participate in the wealth creation by minority interests. And so that's most likely the way that that's going to continue for us. And we see lots of opportunity. As I mentioned, I think that the next milestone we have is taking it from $1 billion to $1.5 billion, and I think that trend will then continue for some years to come.

Okay. So a question I've gotten in the past in terms of that strategy is just given brokers tend to trade at higher multiples than necessarily manufacturing business. And so there's this concern that maybe it's ROE dilutive. I don't believe that's the case, but I think it's a good question to put to you just so you can explain to people why the ROI and ROE math do work.

Yes, look, I think a lot of this goes to the quality of the assets that we're buying, right? And so when we look at these brokers, I think that for sure there's a premium required for the quality and the scarcity that they have. But these are businesses with very high margins, good organic growth rates, and so that justifies a very strong multiple itself. I think our solution here is also really more than just top price. In fact, in each one of these we've done, not once have we been the high bidder. And I think that's important because these assets don't always trade on just what's the top price in the marketplace. They very much think about how is this good for my partners, my employees, and my customers. If I'm going to keep equity in this business, what's the future look like, wealth creation of that equity that I have. So I think those are a couple of the points for us. We are not deploying capital. That doesn't help us on our journey to a double-digit ROE. So everything we do has to be accretive. Now, I take the point that if you're coming out of fixed income, anything is quite easy to make it accretive, but we talk about it contributive to our operating ROE targets, so very much they are. And then I think the other component that is a little unique to us as an insurance company acquirer is not only do we get distribution income, the EBITDA from the business, but we do get access to this pool of high-quality insurance premiums. And as we become and continue to be a leading underwriter, we also get future underwriting income. So you're getting underwriting contribution as well as distribution income. And I can tell you that it's a profitable strategy for us and our investors.

Okay. Good. Another audience question, and this one is with respect to the investment portfolio. I think they're just looking around for more details on the proportion of the investment portfolio in equities and want to get a better sense of your strategy around investing in common equity and maybe I'll throw open the preferred equity there. Just starting with what percentage of the investment book is it? Is there capacity to own more given regulatory requirements on equities and just broadly what the strategy is with that equity sleeve?

Yes, look, I think the way we think about that would be there's a wide variety of flexibility if we chose to move that around. Of course, you've got to consider a couple of things, including the capital requirements. So there's more of a capital burden if you're requiring fixed -- sorry, equities as opposed to fixed income. So we think about those, we think about tax returns, which some products are more efficient at dividends. We have drifted up a little bit in terms of our equity weightings from where we are. We're in the 12-ish percent, then you add some dividends to that, we're probably as high as we really planned to be. We're really a fixed income shop. And so I think that investors should not expect to see a dramatic or material shift in terms of that portfolio construction. I think that whilst we've got a very capable investment management team, our core competency is really not to try to outsmart and make greater-than-market returns on the investment. It's really about deploying our risk in the insurance risk. That's where we're experts. That's what our core capability is. And so you'll always see us really with a pretty conservative, prudent, high-quality investment portfolio. Of course, there's some opportunities to do better on the yield. We're now approaching about 4% and clearly benefited from the change in yields in the fixed income portfolio. We do a little bit of private debt, but it's really very small. Our teams haven't felt that there's an appropriate risk-reward trade there. So whilst we think about all these things, I think the way to think about it is clearly we will continue to optimize our investment portfolio, but it's still going to be pretty prudent and look quite similar to the way it looks today.

Okay, I'm going to layer on a question there because there has been a little bit of a change and that changes with respect to dividend taxability. So does that influence -- I know you said you don't expect it to change, but does that influence at all, the portfolio allocation decision making given now you have to pay, or we assume you're going to have to pay taxes on common dividends?

Yes, we assume so on the common, and I think it hasn't actually fully taken effect yet. When we looked at that -- a couple of points, when it first came out, we thought, look, this is about $8 million impact for the year for us. When we think about what the impact is on common versus prefs, it's about $5 million on prefs and $3 million on common. So really the news on the common is very favorable to us. So it's, again, not very material for us. We could potentially pay $3 million in additional taxes, but absolutely it's one of the points of consideration for the teams. For an organization, such as ourselves, it does mean holding common equity. Canadian common equity is less favorable than it was prior to this. So it's a point of consideration. But again, I go back to my previous comment, unlikely to make material changes in our portfolio composition.

Okay. Again, audience question. This one1's with respect to the restructuring. So just a reminder for the audience, Definity did announce $11 million of restructuring charges with the Q4, I think, mostly split between real estate and headcount. But we want to let you fill that in. The question is, I guess, really twofold: are you through this? I guess, i.e., is there potentially more to come? And then 2, what are the long term expected savings associated with the restructuring?

Yes. So maybe to take that almost in reverse order. I would say that we're really through this. We're not expecting any other meaningful restructuring charges to come through '24 and ahead. So I think that's the main point. This was more taken out of the fact that we're changing styles of work. Hybrid is the future. We no longer need quite the same level of footprint we had before, the types of offices and the structure, to make it very efficient and effective. Has to have some modernization in our buildings. And so that's what we took the opportunity to do. So it's more driven by that. Of course, there's some headcount implications and some productivity gains there. But we're a growing business, and so it's not that we're looking to have big restructuring charges going forward. I think for us there's more opportunity in operational leverage as we continue to grow our revenue at a rate faster than our expense growth. So I think that's the way we improve the operating ratio and we can get more operating leverage in the business going forward than restructuring charges. There's nothing anticipated going forward. It will help us. Obviously, you can see the impact in the MD&A of what it was, but ultimately, over time, the lease payments are behind us now. But those are long term leases, so it'll be noticeable, but not that material in any one year.

Good. Okay, well, we have maybe 10 minutes left, and again, thanks for the questions that have been asked, and I'll encourage more for anyone that does have more. One topic we haven't talked about yet, Rowan, really, is future capital deployment. Again, part of my opening remarks, you have, I think, nearly $1.3 billion of financial capacity. I know you've mentioned organic growth is the priority, which is always a good message, because that tends to be the highest ROE growth, and in some cases the highest quality. So that's good. But when I look at your organic capital generation, the ROE you're generating, it looks to me like you can probably fund most of that organic growth from organic capital generation. Is that fair at this point, given your ROE expectations?

Yes.

Okay.

No. If you think about our targeted broadly 10% growth rate, mid-90s combined ratio, we're generating enough internal capital to keep funding the business. And so really, I think the way to think about it is that $1.3 billion, the way we get to utilize that, in our ideal way, optimal way, is through inorganic activity.

Okay. So let's talk about that inorganic growth potential. Just remind us of what your acquisition priorities look like today, and how would you characterize the M&A landscape in terms of the capacity to actually deploy that capital?

Yes. And I think I would go back to one of the previous topics we just had, which is we have deployed about $700 million in building a broker distribution platform. And so I think you can see from that, that there's certainly an willingness and an ability internally to wisely and accretively deploy our capital. So we're not the type of team that just sits on that. With respect to insurance carrier M&A. There's a couple of things there. One is the market, we think, the thesis is that more and more opportunities will come ahead. And these are really opportunistic. If you think about the long-term trend in Canadian P&C, a couple of points of market share typically trades hands every year. In the last couple of years, there's really been a dearth of acquisitions. There hasn't been any activity. And so our thesis is that is going to return over the next couple of years. It's very difficult to, as you can imagine, be precise about the timing. There are buyers, but there have to be sellers to get a deal. But some of the drivers that we talked about over the last 45, 50 minutes, I think, are conducive. In personal lines, you do need scale and you need data and you need modern technology systems and you need broker relevance. All of these type of things are going to be important. In commercial lines, if you're flatlining your growth because you don't have a one-stop proposition for brokers, if you don't have the best talent, if you can't buy effective reinsurance programs, this puts a lot of pressure on you. So all of these items, I think, are pushing us forward to more M&A activity ahead. And what we've been very focused on is making sure that, #1, we've been building this excess capital, and now we're a CBCA company, we can use some leverage. That certainly helps us move to the $1.3 billion. But the other thing is getting ourselves operationally ready for this, so that we've built this business where we can grow nicely, organically, we can retain our customers, we can run better loss ratios, we can run better expense ratios, and we've got a scalable platform. And so the obvious example that I like to use is Vyne. Vyne is built for a much bigger business. If we acquired a larger personal lines business, we could drop that onto Vyne. And yes, you would need some extra people in the claims team to pick up the associated claims, but you wouldn't need any more underwriting, pricing, and servicing people. So significant synergies would be there for us. What I could say is that we're active. We've got a sophisticated corporate development team. It's taking up some management time. Sometimes when you're in an environment like this, something could happen in a couple of quarters, sometimes it could take a few years. So that's one of these ones where it's difficult to be more precise, other than to say our priority is on fulfilling our stated aspiration of being a top 5 insurance carrier. We do think that we've made good progress organically. That'll continue, but it will take a meaningful acquisition to get us into a top 5 ranking.

Okay, good. So, look, I think we've covered a lot of ground there. And again, I think Definity has shown very strong execution and results since IPO, so congrats on that. And maybe just, Rowan, I'll give you an opportunity, any closing thoughts, how would you summarize this here in terms of what investors should expect from the business over the next 1 to 3 years?

Well, look, I hope that our investors, you see that we've delivered what we said we would do since IPO, and I think we're starting to build a track record of a public company of delivery. We wanted to continue strong growth, and I think that strong growth is going to continue. We wanted to keep shaping our portfolio and particularly building our commercial lines business out. I think that's going to continue. I feel much better now that we've diversified our earnings. When you think about the contribution that comes from distribution, which was brand new, and now better net investment income. So if you deconstruct those ROE points, less is now dependent on slightly more volatile underwriting components. So I feel that looks pretty good. You've seen us move our dividend up 16%. That's clearly a sign of the confidence in our earnings growth over the next number of years. And I think that we feel we've got a very strong, engaged team. We know that the broker support is excellent for us, and the macroenvironment is still very conducive for a P&C insurance company. So it feels to us like we're entering 2024 in a stronger position and with less headwinds than we entered 2023. So we're excited about the year ahead.

Great. Rowan, thanks for the time. Thanks for all your answers, and thanks to the audience for joining us as well. So have a great day, everyone.

Thank you, everyone. Thank you.