Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

Well, good morning or good afternoon, depending on where you're located for this. Welcome to the Virtual America's Select Conference. My name is John Aiken. I cover Canadian financials here at Barclays. Delighted to welcome Charles Brindamour, who's the Chief Executive Officer of Intact Financial, Canada's largest P&C insurer. And this is just after Intact reported its first quarter earnings. Charles, thank you very much for agreeing to attend the conference.

Thanks for having me. I'm glad to be here.

So Charles, wanted to start off with probably one of the obvious, but open-ended questions that we're now a few months into the lockdown. But we're actually seeing some provinces in Canada slowly lift restrictions. But I wanted to ask you, how have you seen COVID-19 impact Intact overall and how you manage its operations?

So we worked really hard in the past 3 years to make sure that we would be in a position of strength coming out of '19. And so we entered the crisis in a position of real strength, both absolute and in relative terms. And both from a financial, from a strategic and from an operational point of view. So it allowed us, John, to be the best we could be to face this crisis. And I would say sitting here today, our Crisis Management committee was up and running since January actually. And so by the moment the lockdown started, within a week, we had 99% of our 16,000 employees working from home. And service is really strong. I write to them every day. The engagement appears to be good. We've surveyed that as well. And I think, when I look at customer experience across the board, I feel like we're in very good shape. Being in a position of strength allowed us also to introduce as early as mid-March a number of relief measures for both personal and commercial lines customers ranging from financing relief, premium relief, changing risk profile as well as a number of community support initiatives. And we've got a lot of traction. Sitting here today, John, we've helped -- I was looking at the numbers this morning 515,000 people across North America and for a total of almost 150 million now. So that's what strength brings to the table. You can face disruption. You can help society. And then I think when I look at our performance from a product point of view, our perspective is that as we look forward, the underwriting performance should largely be on track. I mean, we have taken provisions in Q1. We tried to put our best foot forward on the ultimate cost and commercial lines. And clearly this is an environment that brings all sorts of external surprises. But so far, we feel like we're in really good position.

Has there been any structural changes to your organization or then maybe even longer term, is there any lessons that you've learned that you might use going forward that you may not have experienced with the impact of the virus?

Well, I think that one lesson, John, is that the infrastructure is more resilient than I thought. You keep stress testing your infrastructure. I didn't think we would be able to send 99% home. We've had no glitches. We've lifted up our cyber defenses. That's worked really well. So I think that creates a number of opportunities. The other thing is just from a talent point of view, John, what you see in a crisis, you see your A player step up like there's no tomorrow and you see where the B players might paralyze a little more in this environment. And I'm coming out of this thinking, you know what, we need to take more risk on people. We have 5 successors for every top 150 roles. And I think that I'll push harder to take risk on people coming out of this. If you think about the crisis from a macro point of view, and you forget about the near term for a moment, I mean, our perspective is that consumers will change. There is a school of thought that people will revert back to normal. I think some of it is true. But where there were heavy trends already, I think we'll see a step up and change. You can expect more savings, you can expect a greater demand for value for money. You can expect greater demand for digital engagement. And clearly, from a strategic point of view, we have a number of levers that we will pull or accelerate to respond to what consumers want from that perspective. And you look at the economic level moving away from consumers for a moment, it's clear that we'll be in a slower environment for an extended period of time. It's clear that the underwriting performance of the organization will need to compensate for slower economic and investment environment. And then when we look at our commercialized portfolio, which is very much focused on SMEs, our view is there'll be a polarization at the small end of the SME and towards the bigger end of the SME. And we'll need to make sure that our product base in the SME space, not only has more value for money, but is more differentiated for small businesses and for bigger and midsized businesses. And then from a societal point of view, I think coming out of this, clearly the issues that society was facing in terms of income gap, skill gap, and expectations of big businesses like ours to solve some of society's problems, I think this all goes up. And as leaders, we need to ask ourselves is our definition of fair, fair enough? Is our definition of right, right enough? And I think that that certainly will shape the social fabric of where we operate across North America.

That's really interesting. And when you take a look at as you argue Intact coming into this from a position of strength, that's not necessarily the same for the industry as a whole within Canada. And Intact has been very vocal about talking about the market share that's going to be dislocated or X number of years. Do you do you see this, the impact of the virus, the impact on the economy, the impact on society, having an opportunity to cause acceleration, this dislocation and present itself an opportunity for Intact?

Yes. John, one of the things that I've learned, I should have said that in your first question, is that we're in -- as a management team, we're very conservative. We're a little bit paranoid, we're a little bit control freaks, and every week I challenge myself on whether we're too much of these things. And I can tell you, when these things happen, it reinforces my view that being paranoid, conservative, control freak is actually maybe annoying to some people, but very good behaviors to have. And I think that to your question specifically, yes, I think that our thesis, which was 15 to 20 points to market share will change hands in the coming period, this fuels that thesis. We used to say 25 to 30, half of it is done, we think it's 15 to 20 points. And you look at it globally. Clearly, a number of players globally are already weaker, if not much weaker position today. So that is one point. I think this environment exacerbates the importance of size. The industry has taken a bit of a bath from a capital point of view. We came out strong from a capital point of view. We used our toolbox which we developed back in '08 to make sure that we'd be in a position of strength, both to defend against a much worse environment, but also to seize opportunities if they present themselves. And I think the combination of an industry with a low ROE, an industry that has a bit less capital now than it did 3 months ago. Global dislocation, I can't see why this would not contribute to our thesis.

And do you think that, I mean, you did mention global. But do you think that this presents an opportunity for you in the U.S. as well to add-on to one beacon that at some point if you find the right asset?

Yes, I think that the U.S. entering into this crisis was in a hard market. Evaluations clearly have come down, if you look at the publicly traded companies in the U.S., and I think that one of the triggers for the hard market was actually inflation in the liability and in casualty in the U.S. And I think for me COVID-19 is a liability event. I mean, you'll see class actions pop up, right, left and center in the [ NO ] and EPL or employment liability and so on. And I think that, on one hand, this will fuel the hard market. On the other hand I think this might create opportunities, and as such, both at the manufacturing and distribution level I think that this could be a source of opportunity and clearly 3 years into it now, we -- the underlying performance of our U.S. business is really good. We have a great management team with Mike Miller. And I think we're all performing at this stage. And as you know, I've been saying from day one, when we issued a press release about our U.S. acquisition that what we were looking for a sustainable low 90%s performance. And that's what we've delivered last year, and the underlying performance in Q1 of the U.S. business was very much in that range.

And I do want to touch upon that because the -- you did -- you mentioned this in your first answer, but you did take charges in the U.S. business. And I was wondering if you could -- sorry, in the first quarter. I was wondering if you could I guess elaborate on what those charges were and why you have comfort that you believe at least at this point in time that that will be able to cover off all of the eventualities that you foresee?

Yes. We put up $83 million of reserves for COVID direct losses. And it's not because we received $83 million worth of claims. The actual case incurred is pretty small, but what we've done is a review of our portfolio where there was language that would lead to coverage and basically tried to assess what the ultimate cost would be. So we think the $83 million is our best foot forward, $50 million in Canada, $33 million in the U.S. And we've put up reserves for stuff like tuition reimbursement, event cancellation, a number of areas where one could expect lawsuits as well as business interruption where there's customized coverage. We don't have much of that on the portfolio, but 1.5% of our portfolio you have limited customized business interruption. We've put up reserves for that. So as I said, $50 million in Canada, $33 million in the U.S., and if you strip out those reserves, you will see that the U.S. is running at about 91% and same thing in Canada. It is round up, there's very little activity. Countries are starting to open up. So we think it's the ultimate, it's our best foot forward. We'll refine that as we go along, this is a new thing for everybody, for us included. But we think we probably should be in the ballpark. We told the street journalists if we are in a protracted extended slowdown, our business is very resilient to the economic cycles. But one where you see massive drop in GDP as we're likely to see in Q2, very high unemployment, you don't have as many data points to start to test your performance in that regard. So we're just being prudent and we're telling investors, look, there might be indirect losses as a result of the economic slowdown. You can think of moral hazard, you can think of surety, the impact of vacancy and so on, that we'll see as we come along. No signs of that now. But when it comes to actual direct losses, we feel like we've put our best foot forward.

And then I guess in terms of the evolving market on both sides of the border of the U.S. versus Canada, at this stage in the game, do you have a belief as to whether or not one market may be hit worse than the other? And what's underpinning that belief?

In terms of pricing in commercial --

Yes.

-- John? Yes?

Yes.

So my observation to-date is that in the U.S., there doesn't seem to be any meaningful change in the marketplace, quite frankly. We're seeing that in our numbers and the business flows and that's kind of what we're hearing. And so I don't expect a whole lot of change there. And if anything, John, if you enter into a hard market and then investment income potential drops, and the liability potential increases, then I think that those 2 changes in themselves should add fuel to the hard market in the U.S. would be my read. Now in Canada, we make a difference there because of the actions we have taken as a leader in the market. We have 25% of the SME roughly marketplace. And Canada was in a hard market before the U.S. by about 6 months. We've decided for about 1/3 of the portfolio to extend price and conditions for 6 months because if you're in a shutdown, you don't want to see a rate increase, I don't think, and you don't want to lose your insurance either. It's really important to do business to stay in business. So our call was we extend for 1/3 of the portfolio for 6 months, same terms and conditions. So when I guide so to speak on the market and the outlook, I have that in the back of our mind. So this will cost a few points to the top line because I think it's the right thing to do and we're in a position to do it. I haven't seen that necessarily in other markets or on the part of other competitors here in Canada, but this tempers the momentum of the hard market that we were experiencing walking into this places. That being said, 6 months top, the industry at a 5% ROE coming into this investment income potential is dropping. My view is that there is a good 18 to 24 months of hard market left after the crisis, and I don't think it has changed. If anything, it's adding fuel to the fire.

And then I'm sticking with the commercial business. It's been a focus of Intact to try to work on the specialty lines and I guess use some of the expertise that was acquired with OneBeacon. Can you talk about I guess the normal operations get missed in the current environment, but can you tell us how the progress has been moving forward in the specialty lines in Canada?

Well, the specialty lines in Canada, I mean, we had the -- when we created the specialty lines division, we built this division out of about $0.5 billion of business and we're now north -- well north of $1 billion. We've added segments, we've brought important expertise from the U.S. in areas like entertainment, technology and so on. And then we did the guarantee company of North America, really doubled our surety exposure in Canada and scale and clearly the leader in that space. And so the specialty lines division in Canada is now really meaningful business north of $1 billion. We've had no issues attracting talent. And a big portion of the growth comes from the fact that we have more people, more experts working with us. And obviously we're using our distribution firepower in Canada to deploy these products. So very good momentum there and very good performance as well. And Mike Miller is running the whole North American specialty lines platform. So what you see now is that in the areas that makes sense, we do have North American business units and which is good because we're now -- we can now compete head-to-head with North American and international players, which was not the case a few years back. So that business in aggregate is performing really well both in Canada and across North America in a zone that's much closer to the objectives we have given ourselves.

And then still in commercial in Canada unique to Intact is the agreement that you have with Uber in terms of that it was the commercial very innovative contract that was put in place. Obviously, the shutdown is having an impact. How is that relationship with Uber working and what implications do you think are going to happen going forward?

Well, I think it is a very good relationship. I mean, we've been with them from the start in Canada. We opened doors with regulatory bodies and so on for them to make sure that they have the right sort of product to offer wall-to-wall coverage to passengers. And that's worked quite well. Obviously, driving is down meaningfully in Canada, but our perspective is our thesis is that the sharing economy is one of the heaviest trends taking place. And we don't think that this will stop because of COVID-19 coming out of this. So clearly less driving at the moment, a very good relationship and it's been a product that worked well for both parties. And we're hoping that we'll have a growing relationship with them over time, but then again, we're a big company and we don't have an over reliance on any customer that would like to grow that business with them.

Charles, one of the interesting aspects of the virus has been obviously with the shutdown, the fact that people are just are not driving. Nobody's going to work. You're seeing significant -- the congestion data is actually quite staggering. What have you been seeing in terms of frequency of accidents in your personal book? And what do you think this is going to mean to the combined ratio going forward?

Yes. So it didn't impact much Q1 because the lockdown started in the latter part of March, but it's clear that at the top of the lockdown or at the bottom of the lockdown if I can see driving was down by about 50% and we measure we have massive telematics database. So every day we have good sense of what's going on from a driving point of view. And we've seen a drop in driving of about 50%. Now in the past 2 weeks, we've seen a gradual pick up in driving by 10% to 20%, depending on the day, depending on the weather. So it's clear to me that driving is actually coming back and it came back before economies opened up. But clearly, for about 4 weeks, driving was down 40%, and you can naturally expect frequency to follow that. Now when you look at the makeup of the portfolio, there's about 20% of people who drove as much or more. Think of the fact that a number of people actually started to use their car to go to work, while they used to take public transportation for instance. And so I'm not sure of all the causes why, but the reality is that 10% to 20%, depending on where you look are driving more, or at least the same as before. That's why the relief program, John, which is really important because your question is about combined ratio is one that is tailored to those who need it the most, and those whose behavior has changed. And if you're in both those categories, very easy to call us, send us an e-mail and we'll give you a discount of minimum 15%. If you store your vehicle, we'll give you a 75% discount. And that's in part the relief that I was talking about at the start of our conversation, which obviously goes against the drop in frequency in terms of benefit. The other thing that's important to keep in mind is 2 things. First of all, when the profile of accidents change, severity changes. And I'll point out 2 -- 3 things. So first of all, there is still physical damage severity in the marketplace. Second of all, an argument can be made that the accident and the speed will lead to higher severity. And third of all, it's very early to judge on whether the driving and the physical damage frequency what it means for accident benefit and BI which is half the product across the land. And I can tell you in periods of economic slowdown, you've got to keep your eyes on disability and pain and suffering works. And so our messages were providing a lot of relief because there is lot of driving, but one has to be careful about this environment than assuming that your frequency and all your costs are coming down by that amount because it's not the case. So obviously we will get as much relief as we can and as we think it's appropriate. And that'll go against the benefits of reduced frequency.

How has the request from your customer base been coming in, in terms of proportion of number clients or in terms of premiums? Have you seen a material request for relief?

Yes. So look, we have done a lot of publicity. I mean, if -- we're on TV, we're on social media, we're in the papers, we're in the regional papers, we're in the national papers to say we want to help with stuff. We want to help. Here's how we're helping. Call us, call your broker, send us an e-mail. And there has been a lot of traction. And in fact, we have reassigned almost 1,000 people since the start of this to deal with the extra volume of billing requests to extend payments or premium rebates. And so far it's above 500,000 people, 515,000 I think I said earlier, 515,000 people who've asked us for relief. And so that's real traction. I mean, find one business that has provided $150 million of relief to more than half a million Canadians. This is more than a marketing talk. It's real money for many people across the land, and hopefully everybody understands that.

Absolutely. And how good -- because auto is so regulated in Canada, how have the discussions with the regulators gone? Now I know that this is a hot topic for investors because of the concern is what it may mean for premiums on go-forward basis. But I also understand from your comments on the quarterly call that you're not as concerned, but I wanted to give you the opportunity to allay any investor fears on this topic.

Yes. Well, look, we're engaged with regulators and elected officials. Every week, every couple of weeks I have an update with them to share what we're seeing in the field. Obviously we have the biggest data set in the country; what we're doing from a relief point of view and whether there's traction. I think if there was no traction regulators would say, guys, you should not have a big windfall out of this obviously. And that's not our intention. That's why we're providing relief. So I think the discussion with regulators is quite constructive. It's one -- they want to understand what's going on, they want to understand what we're doing and they want to make sure that we're doing enough given that the risk has dropped for a short period of time and given we're in a crisis and that's what we're doing. And I don't feel there is lot of tension or pressure, but there is a discussion and they're keeping an eye on the amount of relief going on. And I would do exactly that if I'd be a regulator.

Now my next question I know is going to be a little bit unfair given all the uncertainty, but you gave us an outlook in terms of pricing on the commercial side. Are you able to give us an outlook in terms of where you think pricing may head on auto and home going forward in Canada?

Yes. We entered this crisis with upper single-digit rate increases across the board in all lines of business, and certainly in automobile insurance as well. And I think that for me all else being equal, this is the sort of environment we'll be in. That being said, we've been doing a fair bit of work with regulators to reform the product, which is mandated by the government. And in most jurisdictions, we have very clear recommendations for regulators to act upon. You're quite familiar with some of these reforms, John. I mean they bring them every so many years. And I do think that in this environment, an environment where there's a greater demand for value for money, is the point I was making about trends coming out of this, I do think that we will see reforms. And I think reforms imply to me that the cost benefits you get out of reforms will flow through rates, as we've shown in the past. And so that's the first point that I think will change the landscape in automobile insurance. The second point is that if there is less driving on the permanent/structural basis for any reason, people don't consume as much, people work from home to a greater extent, people just don't use their car as much. And obviously the competitive landscape will take care of that. I mean, people will say, okay, the world has changed, there's less frequency here. We will adjust prices accordingly. But frankly, in aggregate my perspective on automobile insurance, if I think an investor's lens, which I do all the time because I am an investor is the fact that we've gone through a tough time in automobile insurance where we ran this business in the upper 90%s for 3 years, which in our book is not good. We're now very well-positioned to run that business mid-90%s, as we said we would, comfortably I might add and we'll take that into account as we price the environment going forward. But I feel good about where we are from a pricing point of view in automobile insurance, and I feel good about the actions we've taken. We entered 2020 January and February and March with a decline in frequency of 10% to 15%. Some of it was weather. Some of it was all the actions we've taken over the years. This heavy trend is very much still present. So I personally feel good about automobile insurance.

Charles, one of the issues that's been dogging the industry, not just Intact, is the catastrophe losses that have been seemingly increasing every year. Can you give us your outlook on where this sits in terms of how you're dealing with it? And then I guess more specifically, any update in terms of what's been happening in Fort McMurray, and the floods that have been in the headlines recently?

Yes. Yes. Yes, so your previous question, John, about personalized pricing, I focused on auto, but obviously personal prop is in a relatively hard market environment with mid to upper single-digit rate increases that's likely to continue. And a big portion of the driver for that is natural disaster which is what you're asking about now. And we've been on this for many years. I mean, we have run the business, we realized 10 years ago there was a problem, a structural problem because of natural disasters. We changed the product. We changed the supply chain. We have established natural disaster management teams and claims and in-sourced the supply chain. And I've been running the business sub-95% in good or bad times for the past 5 years. In fact, look at the past 5 years including Q1, you'll see that our combined ratio in home insurance is at about 90%, if not a touch better. So the product is priced, the supply chain is organized, the claims organization is organized to really have a sustainable performance even though natural disasters are increasing. And I think we're well ahead of our competitors on that front and outperforming as a result, growing as a result. And I'm personally quite keen on derisking Canada for natural disasters because we found a way to do it on a sustainable basis. You have seen us also invest in the Intact Centre on Climate Adaptation with the University of Waterloo. And the objective there is to help cities, provinces and the federal government to find ways to better adapt infrastructure or otherwise to natural disasters because economic resiliency really requires climate resiliency as far as we're concerned.

And then, Charles, we're coming close to the end of our time unfortunately, but wanted to close with a question for you about we touched on acquisitions beforehand or consolidation in the industry. But one of the things that I find it gets missed when we're discussing Intact is all of the acquisitions that you do outside of the "P&C Insurance," so distribution --

Yes.

-- your recent acquisition of On Side; one, can you tell us how those 2 specific areas are going, but also talk about where you're deploying capital where you actually see potential growth outside of more traditional areas that you operate in?

Yes. So you're right. People don't pay as much attention to our investments in distribution. We built quite a business there with an earnings power close to $250 million will be hit a little bit because of growth pressure related to COVID-19, but this is a wonderful steady growing business, I will say much easier to run than an insurance company is my conclusion there. And we're really keen to participate in the consolidation of distribution. And we're also keen to bolster our specialty lines business in the U.S. through distribution, because it's not as risky as putting manufacturing capital on the table. So I would say big appetite for that. The checks are not as big. And therefore they're not as headline grabbing, but they're certainly value creating big time. And so we'll keep doing that. On Side goes back to your previous question. On Side is a strategy of long term in-sourcing of the supply chain. It is about dealing with weak links in the customer experience. And it is about putting capital where we know the risk pool is just getting bigger because of natural disaster. So On Side is really touching many of the boxes of our strategic framework. We've made a first step there, it's going well, a bit slower because of COVID-19. But otherwise, natural disasters won't stop and the need for that business is only going up. And there's a capacity issue. So I would say on track. And we have some of our folks working with the management team. They are embedded in the management team. And I'm quite pleased with this. And frankly, John, if we could make this as big as our distribution operation, we will. And we like the economic profile, because it's inversely correlated to the performance of the property portfolio. And if we could juice up what I call our Monday morning ROE, which is the ROE that we have before we actually start doing the business of insurance, true distribution and home restoration, that would be a nice side benefit to it. Beyond those, clearly scaling up Canada is -- would rank at the very top of our priority. We protect 1 in 5 families, 1 in 4 SMEs. We have a good position, but our ambition in the next decade is to really extend our leadership on the home front. And I'm convinced there will be opportunities there and we're quite ready to seize those. Coming next, at the manufacturing level, clearly bolstering our position in specialty lines in the U.S., we're getting a fair bit of comfort now 3 years in that we can run this in the low 90%s, and that we can outperform. And as I've mentioned early on, that's what we need to see before we deploy capital. I think we're getting very close to that point. And you can see us deploy capital there as well.

Fantastic. Charles, that was a great conclusion to end it off. We really appreciate you sharing your time with us. And all the best to you and your family.

Thank you very much. Same to you, John. And stay safe. Stay well. And hopefully, we'll be live next time.

Absolutely. Thanks again, Charles.

All right.