Definity Financial Corporation (DFY) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us today. I'm pleased to have President and CEO of Definity Financial, Rowan Saunders. Rowan, thank you for joining us. I appreciate it.

Great to be here with you, Mario.

So why don't you get us started? What are some of the things that are top of mind? I always -- you've had a great few years. How long has it been? 5 years as a public company, maybe a little longer?

Yes. So coming up on that, right? So that's exactly right. This fall, the fall of 2021.

You're ticking all the boxes. It's doing what you said you were going to do and the stocks reacted accordingly. So maybe just give us your -- what's top of mind for you?

Well, thanks for that. Look, I would say we've had a really nice start to the year. As you mentioned, the last number of years, we've been very active deploying our strategy, building new capabilities and the company has effectively with the Travelers deal doubled in the last couple of years, which is great for a long-term mutual -- ex mutual company. We're really delighted with the start to this year, and this year has been a really important year for Definity. And I would say the top 2 things on my mind that I'm really pleased about. The first one would, of course, be the transformational acquisition of the Travelers Canadian business. That closed on January 2 of this year. And we've spent a lot of time getting ready for that and it's going really well. So I think the strategic impact of that is very important that gets us to a top 5 player. It gives us a whole bunch of new capabilities. It gives us much more relevance with the broker channel. And of course, financially allowed us to do a number of things like optimize our balance sheet, et cetera. So we're off to a very good start. I would say when I look at the actual transaction, that went really well. Acquisition costs were lower than expected. Interest costs and financing costs were lower than we had modeled. And we ended up in a stronger capital position. So I think that part of it, the transaction following the due diligence and negotiation went really, really well. Then the integration, I know we're only 1 quarter in, but it's really going quite nicely. It's on track. We see very good broker support. We see the portfolio retention where we would like it to be. And the talent has stayed. I think they like the story that we have and what they're happy to join. So that's all moving quickly. On our results call, we also shared that we've accelerated the synergy and the synergy capture. So that's encouraging, and the teams are really doing a good job there. So when I step back, I say that's a big objective and a really important part of our strategy. And 1 quarter in, really going quite nicely. And then I think what about the rest of the business? And so this was a very strong quarter for us. I think when you step back and you see big premium growth over 35%, you see us delivering a really a record underwriting result in the first quarter, $100 million in a quarter that typically is somewhat tough through Canadian winters is a good result and good contribution from more lines of business. That was a core of less than 93%. That's inclusive of the Travelers portfolio that we brought in. And again, I'll remind everybody, that's all pre the synergies. And then I'd say our diversified earnings also look pretty good, strong net investment income, which we believe will be higher through the course of the year and really a strong contribution from our broker distribution platform, 25% operating earnings in that area. So a lot to like about the first quarter. Look, we know we're 1 quarter in. We know there's a lot still to do, and the teams are very busy, very focused, but it's a really nice start to the year.

Before I get started on my questions [Operator Instructions] I'm not going to go to my e-mail too much because it's kind of hard for me to do that while we're running these questions, but I will look over my left shoulder at the Q&A box, and I'll read out your question when I get it. And I encourage you to do it because I quite enjoy seeing other people's perspective as well. Rowan, let me go very short term for a moment.

Sure.

You described the acquired business as a breakeven business. So when I sat down with the model and I was thinking about how to model earnings this quarter and going forward, I kind of locked in the Travelers business. I did a little attrition estimate, locked it in at a 100% combined ratio and just gave you the benefit of the investment income. But the underwriting income came in a lot better. And so I couldn't help but think -- and you can see I kind of mused about it in my report. It's right there in the [ tunnel ] of my report. It seemed like Travelers was better than breakeven to me. Is -- there's going to come a time when there's no way you can answer this question. The business will be so integrated, there's no way to break down the 2. I know that. But in the very short term, you can kind of give us a window, I think, into how profitable was Travelers on an underwriting basis this quarter.

Yes. No, Mario, I did read your report there. I know that was one of the kind of the key items you referred to. I think that the best way to describe that is, you're right, it -- these numbers are going to blur over the course of the year. But we have some early indications. You step back and you go, well, the first quarter, 92.9%, really strong results. Travelers itself, we have expected it to come in at about a breakeven. And the reality is that we could see from -- there's a little bit of new business that already has merged, but the bulk of the renewals are still isolated is still really around that breakeven level. And that's not unexpected. I mean this is just the activity they've been doing rolling through. And if you remember, there's a couple of points of drag that we feel it will have. Just simply, you add around 100 combined ratio to our low 90s. It drags us up a couple of points. That's the investment. And that differs by line of business. And so it's closer to 3% or a little over 3% in commercial lines and then about 2% on the auto and about 1% on personal property pre-synergies. So that normalizes. And that's why I think I'm pretty excited about the first quarter because if you kind of unpack that or let's call it, try to normalize that, I think what that gives you is a Definity portfolio that's operating in the low 90s and doing well all lines of business. I'm particularly pleased with that because I think that when you look at the personal property, which had a very strong quarter, that is some really good underlying performance. And actually, that comes from both of those portfolios. The commercial lines, which the market has been more difficult than in prior years, continues. The Definitive portfolio is really running very strongly. So there's really no margin deterioration there. So that's really the net of it. We fully expect that the loss ratios and the expense ratios will merge over the next couple of years. And when you step back, really what we've thought is by line of business, it's a little different. The biggest opportunity, let's say that $100 million plus is about -- translates into about 7 points on the Travelers combined ratio. It's mostly expenses. And that's why we are excited we're off to a good start, and we think we can get those -- that benefit. On the loss ratio side, there will be some improvements. And I think the portfolio that really has the most opportunity is personal auto. So I think we're closer on the loss ratio on commercial and closer on personal property. But that personal auto, there is a gap between the 2 businesses. And that's mostly because we've got the modern Vyne platform. We're able to be more sophisticated, more proactive on pricing over the last couple of years along with underwriting. And that will take a little time because we've got to first convert it on to our Vyne platform and then earn in. But that's why we said, look, we do believe there's that $100 million or so of expense synergies. But over time, there will also be a bit of a loss ratio improvement as well. So I think really as expected, Definity core business, really running low 90s. Travelers comes in, prince the first quarter around breakeven.

Yes. So let me editorialize for a moment. If Travelers is instrumental in driving that 35% increase in revenue -- now clearly, Definity is a growing company, too. Travelers made a meaningful contribution and Travelers is at 100%. You can't help but believe that the underlying business, the incumbent business had a very strong quarter. Because It must have. And is it -- would it be your view that we should be careful not to read too much into how strong the underlying result was from the incumbent business? Like what made that so special that existing business this quarter?

I think when you look at what our expectations are, I think that the automobile is in that range we would have expected it to be. Travelers is a little higher, Definity in the -- just under the 95% kind of range. And I don't think that there's a dramatic difference in terms of expectation there for the few quarters. What really made it very good was the personal property. That was an exceptional quarter, good underlying and good business. But I would also then say it's not just personal property because whilst the commercial lines business underlying, we printed a little over 90%, 93% there. If you normalize that [indiscernible] expense impact, that business would also have been running in the low 90s. And I think that gives us good confidence that our portfolio composition in these markets is still able to generate a very strong loss ratio. And that's really unchanged from the last several quarters. So it's giving me confidence that through a number of tactics and portfolio adjustments, we can hold the margin that we had from last year from the underlying...

The reason I'm asking that and sort of drilling down a little more is I don't want to make the mistake myself of reading too much into that and building expectations into Q2 and Q3 that may be unreasonable. We'll see how what the market gives us, but just -- I know for myself, I can make that mistake when I see a quarter that beats me that much. I tend to -- recency bias kind of screws these things up a little bit. Let me be a little bit more long term in our thinking now. It's 3 years from now, it's maybe 3 or 4 years from now, you're looking back and reflecting on this transaction. You can never measure the success of the transaction with one metric. But what would make you feel like this went really well? Is it a materially higher ROE, a lower combined ratio, satisfied broker channel? There's going to be a bunch of things that's going to make you feel good about this deal 3 to 5 years from now. Help me think about that.

Yes. No, it's a great question, Mario. And I think I go back to the first one would be -- we believe that what we've done since we've become public is we've built a really strong core Definity business. This is a business that can take share, grow much faster than the marketplace and generate combined ratio outperformance. So what would really make us pleased is that the Travelers portfolio post integration migrates to the Definity story. And so that -- what we have is we can have strong financial performance out of Travelers. So it, too, that portfolio, ends up also running at a low 90s combined ratio. So that's the first one. The financial performance of the Travelers gets to the low 90s. If it does, that along with our other initiatives, gives us a high deal of confidence that we walk our operating ROE up into the mid-teens. So that's that plan. I think the second item to look at would just be around that synergy realization. And there are 2 elements to that. The one we've really talked to the market about is the cost synergies. That's the $100 million or so of cost synergies. And we fully expect to get that earned in. It's a bit accelerated. It will be completed by the end of '28. There's the technology element. There's the kind of head office corporate costs and there's the efficiency that comes with putting it onto our platform. Some of it comes nice and quickly. The technology takes some time. We've got to complete the cycle. There's just no way around that. But that, we would love to make sure we can deliver. And then the other item is actually revenue synergies. And we really think that as we look at the positive surprises, there's even more broker support than we anticipated. The retention is even better than we anticipated. We do think that there is the ability to cross-sell and get bigger share of wallet out of our broker channel and partners over time. So obviously, 1 quarter in, the first few quarters are very much about onboarding the talent, getting them to use the systems, getting them to understand our rates, our underwriting rules, our philosophies. And then that capacity will just keep building each quarter as more and more of their underwriters are trained and come on to our platforms, our systems. And then as we roll into next year, we think there will be a big opportunity for more cross-sell, upsell. So I think that we get more revenue out of that. So that would be the second one. And then the third priority would really be about the talent. I'd love to look at a few years back and say we were successful in retaining the top talent in the business because particularly in claims and commercial lines and pricing, this is a hard to source experienced capability and talent, and we're delighted with some of the expertise that has come over. And I think if we do that, you go back and you say, well, the Travelers will be operating just like Definity, but now we're going to be a much bigger business. We'll be more relevant to our broker partners. And actually, not only has it been a financially compelling transaction, but it's been a strategically compelling transaction. So those are the 3-year things, the key metrics that I would look at.

And it sounds like 2 to 3 years is reasonable to arrive at that.

It is. I think it is. I mean I think that -- in the early days, there's lots to like about this. The last piece is really just getting all the systems completed. I think that's the final element. But before you do that, it doesn't mean we can't take new products to the marketplace. We actually just launched a couple of new products at the end of the first quarter. It doesn't mean we can't move into a larger addressable market with the talent that we've got. So all of these things don't require a full 3-year integration plan before we start pulling them. We'll be pulling those levers concurrently.

There's a great question that emerged over my left shoulder here on commercial, and I'm going to ask it, but just not right away, just so the person who submitted that, I'm definitely going to get to that because that's an important question. But before we do, just a quick summary here. The large companies that I cover, the really large banks and life insurance companies I cover, and I even put Intact in there as well, are very clear about returning capital to shareholders. Now they are in a different snack bracket to Definity. I don't think we should be going down that road yet about returning capital in the form of buybacks. I think there's a lot more going on here. So I don't think -- for myself, I'm not expecting you to talk about buybacks anytime soon, and I think most analysts and investors aren't either. But what I will say did surprise me on that call was openly talking about M&A. I did not expect you to go down that road so soon. So maybe just for the benefit of everybody listening in, what did you say on M&A, and I might want to flesh that out a little bit.

Yes. So I think, Mario, on that point, firstly, I would agree with your comments on share buybacks. When I look at our capital, if I just start there for a moment, we're in a very good position. And in fact, we've got more capital than we had anticipated. And part of that is just because of the strong earnings we've had in the last little while, including the $100 million underwriting profit in the first quarter. It also came from the fact we acquired a business with more capital and a really strong balance sheet. So I think that actually works really well. We've done a few things, like bring Travelers on to our reinsurance program. We brought in their investment portfolio. We really had no equities. So all of that freed up extra capital for us. So yes, we're in a good position. I think that -- you go back to our story and our story is we believe there will be consolidation in the marketplace. We believe we are a good legitimate participant in that. We believe our platforms enable good synergies. And therefore, we're much more focused on, number one, organically growing the business; number two, moving the dividend up; and number three, more M&A. So the buyback is always the last at this stage of our maturity, let's put it that way. I think we would also say we've shown that we're not undisciplined in terms of active capital management. So it's not like we just sat on capital since we went public. We've built a top 10 broker by deploying about $1 billion into that channel and then the $3.3 billion acquisition of Travelers. So we have a history of deploying it. And we're very much a deployment story than a return story, but we're disciplined. I think the question you raised about M&A, to me, I think the main message is we don't feel like we're sidelined. We don't feel like we've done -- this is a once-and-done deal. And boy, we've done a nice big transformation and we don't need to do anything else or we can't do anything else. Our objective used to be top 5. Now it's top 3. We think that as we model our organic growth at a rate faster than the industry, we still need $1 billion to $2 billion of acquired revenue to get there. And so that's why we think M&A is still on our cause as part of the strategy of how we achieve that top 5. We sit today with about $1.2 billion of financial capacity pre raising any equity if we needed to. And so that's why I think we're open for M&A. We're open for bolt-ons for sure. We're open for something more scalable as well. And these things take a bit of time. It's like the reaction with Travelers. When I first was in New York talking to the Travelers, Allan and the team about this, look, this took a while. It was pretty well a year before we actually had a deal. Then you've got to go through regulatory approvals. And so at the pace of our integration and how well it's going, even if we engaged with something very, very soon, there's still multiple quarters before we get to close. And that's why I believe that we have the capacity to not be on the sideline and to keep looking and being an active participant in a marketplace that we think is more and more likely to consolidate. And what I've said to many people is if you think of our Travelers, I mean, this is a really impressive global organization, huge in the United States, had a nice Canadian business at $1.5 billion. They felt that was subscale to be a leader and compete well in the Canadian marketplace. And there are many other companies that size or smaller that I think are going to come to the same realization that really scale does matter unless you're really focused on being an agile niche player. Being stuck in the middle is going to be more and more difficult with today, data, scale, technology, supply chain influence, brand, et cetera. And so that's why we're still -- part of our strategy is M&A.

The last point was an important one. The notion that you could start a conversation today, figure out a deal in a year and still get 6 months for approval. It could be a long time. One of the reasons I asked about that is there have been a few transactions in the years I've been covering financials that have gone very poorly. It's not polite to mention them, but I think folks on this line know there have been some really bad ones, less so in the P&C space, but clearly in banking and life insurance. And when I think about what went wrong on those deals, some of them were just poorly conceived. Other ones, it wasn't a poorly conceived deal, it was just really bad execution. Things just went wrong when they put them together. So when you think about Travelers, this is an awfully important transaction for your company. Help me think through like what could go wrong here from an execution perspective and what you're doing to address those risks.

Yes. The first thing I would say is, look, this is our absolute #1 priority. When we think about our 6,000 employees, what are they focusing on? They are focusing on delivering the core business as usual and the integration of Travelers. This is the #1 item at the Board level. We've got dedicated teams. We've got external support. So without a doubt, Mario, even though we're still open for M&A and keep building and be innovative and all the things we're doing, this, we're really, really dialed into to make sure this is a success. We do start with the position that this is a market we know. This is an in-market transaction. We understand all the regulatory environments and have those relationships. We have all the broker relationships. And so I think that, number one, dramatically derisks an acquisition like this. But to your point, I think that there are really 3 things that we're focused on that could create some execution risk or integration risk. The first one is about the systems risk. And I mean the reality is what we are doing here is we're extracting and migrating from the Travelers, let's call it, legacy technology onto the Definity modern platforms. So the good news there is that there's a massive uplift in performance and broker engagement, customer engagement, et cetera. But that's still a lot of work to do where you actually have to move off multiple legacy systems onto our modern systems. That's deep -- we're deep into that phase. And actually, the next couple of quarters are going to be really important for us because that's when the conversion starts and all of these tens of thousands of policies start migrating over. So that is one. Again, we feel very comfortable. We've done something very similar to this. If you go back to before we went public, we had 4 regulated insurance companies. We ended up amalgamated them into 1. So it was almost like doing an acquisition. Back then, regulatory filings, product changes, broker dislocation, all these management attack actions. But that, for sure, is something we're very, very dialed into the system. I think the other 1 is the people risk and particularly as you get into the specialized lines of business and claims handling. But over here, I actually feel the risk was bigger before close. This is when you do. When we announced this, there were other competitors that try to attract people, that try to win some portfolios, that try to incent brokers to move the business away and that were really unsuccessful. I think we were very proactive on that. We relied on our broker relationships. We were in the field very quickly. And essentially, we feel that, that risk window has largely passed. The brokers are committed, the portfolios aren't moving. They're staying with us, retention is high and the talent is here. And I will say that the talent seems to be quite happy with joining a Canadian champion and a Canadian business and -- as opposed to being in the 12th largest company in Canada and really a part of a much bigger business, they're now in the core business that's one of the leaders in Canada. So I think those are the really the 3 risks that we're focused on. And I would say the people risk is really diminishing. The portfolio risk, the retention risk looks very good. I'll be happier when we get another couple of quarters done. And then the system risk, we're right in that now. And early days looks pretty good. We have monthly and weekly dashboards. But this is an important couple of quarters for us before we actually start renewing the Travelers policies under the Definity platform.

I want to go back -- take you back a year now, maybe a year and a bit. There were questions on your conference call and on other P&C company conference calls on something like this. How is it possible that we've gone through -- I think the number we were using is 5, 6 years of very firm pricing conditions. And the questions were something like every single line is firm. Market's hard in every line and it's been so for years and years. And no sooner did we, as an analyst community, investment community start asking the question, did that come to an end? And it really started in large case commercial. So help me think through, what was the tipping point? Why did we go from everything is great to large case commercial looks soft? How did that flip?

Well, I think that you have to step back for a moment and say, well, like how do we get to we got to, right? And if you think about it, we had 4 hard years. 4 years of hard market pricing. And in those years, what happens is businesses get rerated, the prices change dramatically. You put loss quality control improvements in the business, terms and conditions favor the underwriters. So you get to a position where actually there is a very good margin in those accounts. And so they have the ability to give up some of that margin because it's above their technical price, if you would look at it like that. And that's kind of what's happening now. So that is one piece. I think the reinsurance market also changed. It was very hard in '23 and then shifted in '24 and '25. That provided some additional capacity and flexibility for some underwriters. Some rely on reinsurance more than others. And then I think people in that space said, look, I need to defend the portfolios that I've got. It was a very attractive profit pool. Some new capital came in to target that, and there is capacity to do that. So that's kind of, I think, Mario, what we see happening there. And we've definitely seen in that segment, and it really is just a segment of the commercial marketplace, intensification of competition. Personally, I feel there's still a way to go on that because I think there is still sufficient margin in that segment.

That's sort of a good segue into the next question because you said it was in that very specific large case segment. So the question is, your commercial competition pronounced in large case, but are you seeing any incremental pressure from MGAs backed by foreign capital in the small case market? That's the first part of the question.

No. We really -- we're definitely seeing some buildup of MGAs, and we're seeing it on certain segments. And this is sometimes often more difficult segments like highly protected risk or unprotected risk where there is a bit more of a friction and a challenge in the marketplace in standard. It's not the standard business. So yes, there is more competition. It's not in the small commercial space. The small commercial space is an interesting one. But really to participate in that space, it's very technology-based. It's very similar to personal lines. You have to have this automated underwriting system. It's a flow business. This is small premiums, a lot of unit count as opposed to the big business, which is a few policy counts, big premium. You have to have a big claims team to handle the frequency of losses and you've got to have broad distribution. And if you think about where that large commercial space is and where the competition is, most of the -- or many of the players, particularly the international players, they really just play in that space because they haven't got big Canadian footprints. They don't have supply chain networks. They don't have broad-based claims. They certainly don't even have broad distribution. The distribution is highly concentrated on the big national brokers, the top 10 to 15 brokers. So it's not that they couldn't, over time, go to small commercial. It's just not something you can do quickly. It's a multiyear investment to do that. And I think a good proof point, what we shared on the call is that in our small commercial in Q1, we're still getting upper single-digit rate increases.

It's important. I think sort of the follow-up question from this individual was along the lines of are there parts of the commercial segment that Definity will shy away from in this period of increased competition? Do you actually pull back from the large case market? I mean I know it's not the biggest part of your business. Am I right in suggesting it's 1/3 of commercial? [indiscernible] move away from it?

We believe it's about 1/3 of the industry. But from us, we're less than 20% of our portfolio. So we're definitely underweighting it. And the answer is yes. I mean I think if you think about our underlying growth trend, underlying growth trend has slowed. And partly it slowed because you don't have as much rate going through the system across as you used to because inflation has become lower. But what we are doing is we're seeing a mix of business shift. And where we're really growing and winning is in the specialty and in the small commercial. And so when I look at the unit count growth, we're taking share in small commercial and we're taking share in specialty. That unit count is growing. It's not growing in the large commercial. And in fact, we're actually reducing our unit count in the large commercial. That is because we're not finding as much new business activity that meets our standards and price points. The deviation required is too much. So our new business writings have been down. And we have been disciplined, including walking away from some, we think, underpriced accounts. So that's a bit of the reaction. So I think as you get deeper into that cycle of that large commercial, it does change our mix a little bit. We will have a lower proportion of that large account. Let's call it a little under 20%. I don't know exactly where that will go, but it will be a few points lower as the mix shifts. And that's one way we can hold the margin. And so I think that's what we can say to the market, look, we can still grow in commercial. There's good underlying growth and we're not seeing margin deterioration. And that is because we're shifting the mix of business.

That's it. Let's assume for a moment that, that 20% declines in 19%, 18%, 17%. While it's declining, as that mix shift is happening, your top line is not going to look great, as good in commercial. The underlying profitability might just be fine. Like underwriting might be great. So you're going to have to keep us on our toes there because guys like me are going to write top line is not growing in commercial. You're going to have to remind us that it's the mix and the underwriting is fine. Am I right in suggesting that?

No, you are. I think you're right. And I think when I look at it, what I'm mostly focused on in commercial, #1, the Travelers portfolio, are we retaining it? So we dialed into that and it looks pretty good. It's actually been getting better month by month. So that's my #1 focus is that happening. My #2 focus is our organic growth still high quality, margin contributing, and it will be lower than it has before. I think it's going to be mid-single digit. It was upper single digits and above that in previous times. One, we're bigger; but two, the market is a little different and I'm totally fine with that. I think that's what we should really be expecting. And I step back and I say, well, you know what? In this environment in commercial, which has got a bit more difficult than it was a couple of years ago, the best thing we can do is we've just acquired a $1.5 billion block of, let's call it, new business. That's the Travelers. And that is the best way we can add value, is by focusing on retaining that, optimizing that with hands down as opposed to competing in the open market file by file to win unit count growth. So that is really the priority. That being said, the Definity story is still resonating. There will be organic growth, but it won't be at the same pace. The underlying growth rate won't be at the same pace as it has been in commercial lines for the past few years. And that's -- we're totally fine with that. And as the cycle matures and we find the middle market or -- not the middle, sorry, the large commercial normalizes, and then we've got all the capabilities and all the products to cross-sell in that and grow back into that. So I think that will then get us back into upper single-digit growth when the market is ready for us.

And that's an evolution from the company that I met 4.5 years ago because the company I met 4.5 years ago in your offering memorandum talks about really strong growth in commercial, which you delivered prior to the Travelers deal. So you're trying to massage us into the next stage of Definity now, where commercial doesn't grow at 12%.

I think that's right. I think it depends on the game in the market and what the cycle is, where the opportunities are. But the reality for us, what we're mostly focused on is that margin. We want to run this in the low 90s. And so we will protect that. And if it means that we slow the organic underlying growth to mid-single digit for a period of time, we're totally fine with that. That's the right thing to do. I still think with these new capabilities, once you roll another year or 18 months down the line, there'll be more opportunities and we'll probably go back up into stronger growth. But for the next 18 months, I'm mostly focused on retaining the Travelers business and mid-single-digit growth in commercial lines and holding that margin.

Before I move on to some of the other segments, I do want to touch on one thing. The extent to which the next big -- and let's call it organic move for Definity could be into the specialty space. I mean I know you're a specialty player. Does Travelers give you some capabilities to push a little further into specialty?

It absolutely does. And I think that was one of the things we liked about their business is they were more advanced than we were. They had more intellectual property. They had more products. They had a strong reputation in that large commercial specialty lines. And whilst we did specialty, their appetite and their capabilities are broader. And so if you take something like D&O, we might have done D&O, but mostly nonprofit D&O and they'll be doing larger for-profit D&O. So we're really rounding out that appetite. There are new things like Ocean Marine, we didn't do. Technology, we didn't do things like that. We've got a much better cross-border facility capability now than we had. So that really helps us quite a bit. And again, #1 priority, let's onboard that, let's get that on to our kind of platforms and then let's start kind of cross-selling. And I think the cross-selling is a nice opportunity because many of our existing customers buy that product from somebody else. We have the relationship with the customer. We have the relationship with the broker. And so that should, as we go forward, produce really nice, strong growth for us in that specialty line. And I think -- because it looks like the integration is doing so well, we really thought about that as a 2027 initiative, but it's likely we'll pull that forward a bit.

Okay. I want to flip over to the next segment, auto. I got the impression from the call, and I think I got this right, and help me flesh that a little bit, that auto would decline as a proportion of Definity over time. It would not be the growth story for Definity. Help me understand why you said that on the call.

Well, I think what we say, look, the big strategy has been -- we've always wanted to grow the other parts, personal property and commercial lines at a rate faster than auto. That's going to vary by market conditions. And we've had a period of time of really good growth in auto. We've had really good rates in auto. So we're happy to take that. But the long-term plan is to have a more balanced portfolio. If you go back many years or several years, we had over half our business in personal auto, and it's now down to, let's call it, closer to the 40% range. Would we like that to become a little lower? Yes, over time. But really, the big driver of that is actually going to be M&A because it's hard to move that. Personal auto always has a mid-single-digit loss cost trend, and therefore, you typically cover that with weight. So it's a portfolio that just keeps -- does keep growing, at least in revenue, if not in unit count growth. The other item is Sonet, which is coming on stream. That's going to get better over the next couple of years from a growth contribution aspect. So it's not that easy to kind of limit the size of auto, but it's -- what moves the needle is mostly M&A. And I think if you look at something like Travelers, commercial lines was 30% of our business. And I think by the time we end, it's going to be 33% of our business now, right, so 1/3. So we are trying to shift a bit in that direction. And it's not that we don't like auto. It's just simply that there is generally a regulatory cap. It's hard to do on a sustainable basis, much better than the 95% on auto. And on the other lines like commercial and personal property, we know we can do much better than that.

So let's talk about the auto environment. It remains reasonably firm. I don't see any real risk to that in the near term. How do you feel about auto?

No, totally the same as you. I think that we see inflation is stable here. In fact, it's come down because you had that theft issue a couple of years ago. The theft issue seems to have solved itself. And so that's actually reducing some short-term trend in the loss ratio. So it's stable. Look, there's still some uncertainty. There's geopolitical events going on that are impacting energy prices. We've got to see exactly where we land on tariffs. And that may change the trend. We're not convinced that it will. We haven't seen any of that flow through yet. So it's been absorbed in the supply chain. So that's a good part. But I do think that overall, the industry will respond to that. And I think you've seen that over the last couple of years. Should there be a tick up in inflation, the industry will respond. Most of the players are still closer to 100% combined ratio they need, therefore, rate. And actually, we've seen a little bit of a slowdown in rate taking recently. And I think there are 2 reasons for that. The first reason would be that big rate was taken last year, like double-digit rate as people try to catch up with trend. That's earning in. The other issue is that most of the smaller players don't have the capacity to do multiple rate filings as well as reform filings. And if you remember, we're all programming our systems for Ontario midyear and Alberta start of next year. That's a massive technology undertaking and many people just can't do both. And so I think what you're seeing and what companies like us, like ourselves are doing is we feel we're rate adequate. We like our rate position. But what we are doing is segmentation filings. And the segmentation filing, if you do it right, is as efficient as any significant rate filing.

Remind us, you referred to the midyear change. Is it July when folks like me, an Ontario driver will be able to skinny up my policy if I choose to? Maybe just remind everybody what's coming down the pipe there.

Yes. In Ontario, it's mostly around more choice, and you will have some choice. And I think that this isn't -- firstly, we don't anticipate most people like to reduce coverage. But for some people, you may, you have that choice to do. The renewals will go out with the full coverage. But if you want to opt out of them, you could do so. And that's why we don't think that the take-up will be up. If it does, it's probably less than $100 savings, so they're not that material. And even if your policy -- let's say, average policy $1,500 to $2,000, if you get $100 for the segment that chooses it, there's a commensurate reduction in trend or coverage of loss costs. So we think this is good for a portion of the Ontario population. Choice is always good, but we're not actually anticipating a material top or bottom line impact from that. The Alberta ones that come next year are much more significant. There is a bodily injury trend in Alberta that has been growing significantly. That's why the system is effectively moving to a no-fault system that will reduce those bodily injury costs, the legal costs, and that really does actually take cost out of the system. So those reforms are actually much more meaningful, I think, in terms of impacting the combined ratios.

Yes, I had a conversation with the broker about the Ontario reforms, and it's almost not worth the effort. I'm almost surprised how much attention it got when it -- at least for a driver like me, I don't think I'm going to go through the effort for $75 savings, which is what it worked out to.

The brokers that we discuss with, and of course, we have one we own, they're not anticipating a big take-up. And in prior reforms, we've had these type of choices. People are quite reluctant to take choice away. What you might find it is on some of the new business because new accounts may say, I'm looking for a slightly lower price, and this would be the one. So that's a big communication focus for us.

Let's flip over to property for a moment. As you described, like a really, really good property quarter. Is it as simple as just the weather cooperated, as simple as cats being low? What made property so good? It wasn't unique to Definity, it was just -- it was a great property quarter.

Yes, it's an interesting one. But I think that a couple of things happened. Number one, yes, year-on-year, the cats were lower, the major cats, weather cats were lower. But that's because we think last year was actually an unusual year. It was very elevated last year. So when we look at what our modeled expectations for weather losses are in Q1, it was a little better, but not dramatically better than what we expected. So it did help us, but it wasn't the only or the main driver of the quarter. I think a lot of it from our perspective has been the work we've done over the last couple of years where we have put new products in place. We've got the segmentation right. We've derisked the higher cat zone areas. And there has been a lot of value escalation in indexation as well as rate changes in -- through our product, but in the industry as well. And so that doesn't surprise me that there was a pretty solid quarter. If you just step back what we expect on personal property, we expect a reasonable first quarter. We have cat exposure in Q2 and Q3, and then we typically have a very strong fourth quarter. So we really need to make our money in Q1 and Q4 because there is the cats to fund in the middle 2 quarters.

And then taking personal lines together, auto and property, both seem pretty solid right now. Do you see any meaningful risk that we could go into a soft market the way we did in large case commercial? I know they're very different markets. Personal lines are very different from what we're talking about large case. Do you see meaningful risk in the next 12 months, you could be having that conversation?

We do not see that. We really don't. And I think we look around what's happening in the world. We see what's happening in the U.S. We're very different. The regulation, we didn't get the rates nearly as high as some of the other markets have done. We didn't print 80s and 70 combined ratios. There just isn't the room to do it. And I think the relationship with the regulators is about stability, so that's highly unlikely.

I follow you entirely on that. The uncomfortable thing is during U.S. reporting season, when Progressive, Allstate and others are reporting some like return of premium in the case of Florida, I look -- again, I look over my left shoulder and I look at the post screen, and I see stocks going down, that doesn't apply to you. So I appreciate your comments. The market sometimes makes connections that aren't there, so I think it's just an important point for you to make on your calls that there is a difference there, but...

We do -- I mean, individual investor calls, we often have that and we get that kind of question, the read across to the U.S. And as we've said in many things, it is a different market in Canada, and I don't think it's as simple as just a read across. And I think that's a very good example as is the small commercial one where we have a structurally different market in Canada. So no, we absolutely are not anticipating that. And look, Mario, we've got so many forward-looking indicators. We're tracking the market. We're looking at trends. We're really not seeing anything that concerns us.

For someone like me that sits and looks at the entire financial service industry in Canada because I cover the unique place of covering the banks, lifecos and the P&C. For anyone listening and paying attention at home, the read-through from U.S. banks to Canadian banks is pretty strong. It's mild on the life insurance space, and it's almost nonexistent in the P&C space. And this is after a lot of years of watching U.S. institutions and how they feed into Canada. It just doesn't flow well. I don't gain anything from looking at Allstate's auto exposure, to read anything into [indiscernible] I just wanted to offer that for those listening at home. It works in the banking space. It works mildly in life insurance. It does not work in P&C world. So I just wanted to offer that. Let me go into sort of a different direction now. So now you've got this big business. We're a few years removed. What do you think Definity feels like in 5 years? And I'm thinking of it from a mix of business perspective. Is this a big commercial player with like a growing specialty line, a really big property business? And you addressed this a little bit when we talk about auto. But is that what this feels like over the next 5 years? Because the growth -- it seems like we're headed there, a big commercial player with smaller personal lines.

Yes. Again, it goes back to where the opportunities are. Number one is I think we go back and we put a -- we had a 10-year plan. We're into year 2 of it now with our Board where we tripled the company, and that's all looking pretty good. That does mean everything is moving forward. Personal is going up, commercial is going up, distribution is going up. So that's the way we see it. I do think the point about we are likely to see more M&A opportunities come from the commercial line side. There's more opportunity that I think is going to capitulate over the next couple of years. And so that's exciting for us, and I think we could play that. I think the other thing that we're seeing is really in the broker world, a condensation like a concentration of markets. And so our share of wallet is going up. And even in personal lines, the organic growth is big. We keep winning portfolios. In fact, even though we're doing Travelers today, which is a huge portfolio we're bringing on, we're still winning portfolios, which is part of our normal course of business where brokers are saying, look, I can't do what I used to do. I can't deal with a dozen or 15 insurers. I've got to have integrated platforms. I've got to have the modern technology. And of course, table stakes is great claims and a competitive product and price. And so that's coming. So I think all of those grow, but I do think we are well on the way to triple the company. And I think that there's lots of space in Canada. We still -- what is it 7% or 7.5% market share. Until we kind of double that, we've got lots of focus. We don't need to take our focus off the Canadian marketplace. And I do think the commercial element will be one of the stronger growth players in that area. I think the other one for us, too, we still like our broker distribution. That generates now, what is it, a little over $100 million or so of earnings a year. It was $95 million last year, growing 20%, good first quarter. There's still bolt-on programmatic acquisitions there. So that continues to come. And then I think the other issue is clearly, I think one of the earlier points you made, when we brought on Travelers, we brought in a big investment portfolio. And that, again, has moved our investment income up 60% in the first quarter. So lots of sources of growth for us. But I would look at the company, and I would say we'd love to be a top 3 player. We'd love to be bigger in commercial today. And I think that the specialty capabilities that have come with Travelers has advanced our ambitions by 5 years. And I think that's what's partly exciting with that transaction.

You mentioned brokers, and this is sort of a related question that popped up a moment ago, and it was about the broker channel and made sense, which the broker channel could be harmed by AI or disintermediated away. What are the brokers saying -- when you meet with brokers and you talk about doing a deal with a broker, are they selling because they see the writing on the wall? And what are they saying about AI and how it affects their business?

Yes. If you speak to a lot of brokers, they don't say that. And I think that we just went through our quarterly business review with our own broker, and we ask the same stories and looking for the evidence. And interesting, one of the conversations was, well, the day before 1 of the farmers walked in with a couple of thousand dollars and $100 bills and paid his premium, he's not buying insurance through ChatGPT. So this is still a small town in Canada. That being said, look, I think that our view is -- the reason for broker selling is actually not about the fear of AI. I think it's more about demographics and size and scale that's required. So we've seen concentration in the broker force actually outpaced concentration in the underwriters. And with that comes size of sophistication and scale. This is a big opportunity. And I think when we look at AI, certainly to talk forever about what it does for Definity and we're leaders in it. So we've been doing this for well over a decade. It's pervasive across our business. But in the broker side, it's the same thing. There's a lot of friction. There's a lot of paperwork. There's a lot of admin. All of that's getting automated. AI tools being deployed into that channel. The leaders are actually getting more margin, not less margin out of it. Will there be disruption? I think the view from our side would be certainly not on the complex commercial side. It's more on the discovery side of personal lines. So where it's more commoditized, there has to be some element of disruption there. We think it's manageable. What AI can do today is not that much, but we have to extrapolate what it could do in a number of years. But it fulfills a function on the discovery very much like what aggregators do and aggregators have only a meaningful impact on the marketplace. Most customers -- 40% of people today are still linking to a broker for that advice and service. This is the most important asset a home, individuals own, et cetera. So our view is there will be some disruption. But overall, this is an enhancement, I think, in terms of the capabilities deployed through the broker channel. So we're not really worried about that. What it might do is actually accelerate some of the pipeline. And if it does accelerate the pipeline, I think that's an excellent position if you are a big consolidator.

I'm going to shut this down at 52. So there's a minute left. I'm going to give you a number and I'm going to ask you for an over under on this number. Are you over or you under this number in 3 years, and it's for your ROE. This is the game I'm playing on my own here. The over under number is 14% ROE in 3 years. What side of that bet would you take, the over or the under? And I'm not holding you to it. This is what you think.

Phil is going to kill me for kind of getting drawn on that. Look, I think, Mario, on that one, what I would say is you can see where our ROE is today. That's been helped a bit by 4 quarters of decent kind of weather. So we're probably halfway in our target of 10% to below teens. We have another 0.5 points of expense ratio improvement coming through. Over the next 2 years, we've got another point of claims ratio coming through. And if we do the job we said we would do and we expect to do on the Travelers side and get that 200-plus basis points, then we're going to be a little higher than your number. Now that there's a lot of things that could move that. We're in a cat business. The cat could easily move that 1.5 points each way. But we have a high degree of confidence that these organic levers were actually at or better than we said we would do. And from what we could see today, Travelers looks to be an outstanding acquisition for us. So there's still work to be done, and it's not an easy environment, and these are complicated things to be -- to do. But assuming we do the things we think we can do, I mean, we've been very confident that we can get into that mid-teens. And so I think that's certainly our target.

I'll take the over then. I know you can't say. I'll take the over on that. Rowan, thank you very much for doing this, and...

You're welcome.

For all of us that joined us, and good luck on the integration. Thank you, Rowan.

Thanks so much, Mario. Much appreciate it. Thank you.

Have a good afternoon.