Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

So hello, everyone. I'm Mike Phillips. Thanks for joining us on this last fireside chat of our conference. We appreciate your time. I'm here today this afternoon with Charles Brindamour, CEO of Intact. We will speak on all things Intact and COVID and everything else related here in just a second. Before we get started, let me just read off the quick disclosure. And that is for important disclosures, please do see the Morgan Stanley research website at www.morganstanley.com/disclosures. And if you have any questions, please do see -- reach out to your sales representative. So with that, thanks very much again for your time. We have about 25 minutes or so to kind of talk about some highlights for Intact. And I'm very pleased and honored to have Charles Brindamour, the CEO, joining us this afternoon. So Charles, thank you very much for joining us, and thanks for your time.

Mike, I'm glad to be here. I think communication is key in a period like this, so thanks for hosting.

Absolutely. I appreciate what you've done. We've had a couple of meetings here in the last couple of days. So I appreciate all your time. It's a good way to kind of wrap things up here in the next 25 minutes or so with the things that we've maybe uncovered and talked about here in the past couple of days. So I really appreciate it. I guess let's start with, I guess, kind of the obvious stuff on COVID and the impacts. And you talked in the quarter about your $83 million, and it really seems like of the bulk of that -- I think it was $50 million and 35 -- $33 million, Canada-U.S. The bulk of that seemed to be for you guys more on, I guess, what I would call kind of the shorter-tailed lines of business, event cancellation and things like that versus the longer-tailed lines. And that's true for -- indicative of your overall book of business. But I guess you also don't seem to be very concerned about the big headline with business interruption, so if we could talk about that a little bit. We did talk about a little bit on the call -- in the first quarter call but maybe some more clarification on that. And you guys talked about not having specific virus exclusions which sometimes makes things a little bit debatable. We've had a couple of companies be in the headlines here in the U.S. because of that. So anything at all on updates since the quarter and confidence on kind of the $83 million. I know it's kind of a high-level general question. I guess specific to the question, too, if you could, Charles, just to make sure that people are aware, when you posted $83 million, that was just for the first quarter. I know there was no claims -- very minimal claims activity. But just for the first quarter activity as compared to the ultimate loss projection for, say, all of COVID going forward. So that's one specific question as it relates to COVID. So I'll let you kind of go from there. Again, just highlights on expectations since the first quarter and maybe confidence that your exposure could be, it seems like, somewhat minimal.

Yes, yes. So thanks, Mike. Look, we have -- while COVID really kicked in or had an impact in the last couple of weeks of the first quarter, we have put our best foot forward in trying to assess the direct losses related to COVID, and that's what the $83 million was all about. It was not triggered or driven by how many claims were reported or even the activity we've seen but rather a bottom-up analysis of all the accounts where we felt there could be a direct exposure related to COVID. And so this is our best foot forward. We don't think that number will change meaningfully throughout the year. In other words, there's uncertainty, of course. You can see adjustments one side or the other. And sitting here today, that view has not changed, Mike. And I would say that the total actual incurred losses, which is really the activity you're talking about, is barely $10 million at this stage. So we feel quite confident about the provision. And I would say, Mike, that it's bottom-up where we think there is exposure. So we indeed talked about event cancellation, a bit of bodily injury -- not bodily injury, sorry, business interruption on 0.5% of our portfolio, where there was a potential BI exposure. There's also -- as part of that $83 million, where we feel there's exposure on the liability side of things, which at the end of the day, in my mind, is the most important part of the exposure here, we try to assess who would be exposed in this process. Think long-term care homes and both on the D&O and E&O side of things. So the $83 million, indeed $50 million in Canada, $33 million in the U.S., our best foot forward for the ultimate direct impact of COVID. Bottom-up exercise activity sitting here today is not leading me to think that number will change dramatically. 99.5% of our portfolio have no business interruption coverage for COVID because the language is very clear, and it's a language that is widely used and understood in the Canadian marketplace. You need a direct physical loss to trigger business interruption. In fact, business interruption is included in a property coverage. So that's the first point. And the case law in Canada is very strong and very supportive and has been tested in the past, and so we feel very confident about that. The other thing is, Mike, is that we have a couple of other defenses in the product should that physical damage defense fall, which we don't think it will. But if it does, we have other layers of exclusion that would relate to things like loss of use or occupancy contamination and things of that nature. So we feel very comfortable about the product and the language, and you know what, regulators understand that. I think it's pretty consistent across the land. Customers actually understand that. We see that in the claims coming in. 8 out of -- roughly 8 out of 10 customers know what is not covered, and therefore, our level of comfort has not diminished one bit. If anything, it's higher today than it was a month ago because there has been, in fact, recently, cases supporting direct physical damage as an important trigger and COVID is not that.

Okay. Thanks, Charles. You guys, like a lot of companies here in the U.S. on the auto side, have done the rebate thing like many have. And I think you've done 3 months. You've also done something somewhat unique, I thought, and that was the premium reduction if cars are sitting still or garaged or -- I believe what the exact wording was. So I guess curious on -- and that's somewhat unique. I haven't seen that too much down here. Can you talk about maybe what portion of your customers have taken you up on that, aren't driving at all and keep their cars garaged and how that's changed since COVID started? That's a pretty nice give-back, I guess, the 75%, as long as they keep it garaged. That was correct? And maybe the uptake on that so far?

Yes. So the program we've put in place -- first of all, we put our program in place in March. So we came out very early. We looked at the world and we said, some people's behavior will change meaningfully here. They'll be driving less. Some people will stop driving altogether. Same thing on the commercial lines side of things. And we said, in an environment like this, we definitely should try to find a way to help people. So what we've done is we've announced that in March. And we said if your conditions changed, call us, send us an email, call your broker. And then we've done a lot of publicity to make sure people knew about that. And to date, we've helped close to 900,000 Canadians for close to $280 million of premium relief. Now that amount includes changes in risk profile, as you've just described. It also includes financing relief, which does not necessarily impact the top line or the bottom line, provided people pay back. So the actual amount of premium relief per se, relief financing aside, is a little closer to $240 million, $250 million and given that to a large number of Canadians. But people had to call us if their conditions changed. We have indeed put that in place until the end of June, starting in March until the end of June. And people get a break for 3 months. The average discount is 22%, 23%. And depending on the -- how driving is picking up here in Canada in the coming weeks, we'll assess whether we extend our offer for another month or not. But the pickup has been really good. With regards to people parking their vehicle and getting a 75% discount and similar offers on the commercial automobile and fleet side of things, the pickup has been good, but it is a small fraction of the close to 900,000 Canadians that I was just talking about that have taken advantage of it because most people actually keep driving. And if you look at driving in itself, at the bottom of the lockdown, make it early April, driving was down about 50%. But then throughout April, it increased by a factor of 10% to 15% every week. And it's now down 10%, 20% below what it was before COVID-19 started. So the pickup has been really good but our program is flexible. It's based on need. It's based on risk. And obviously, we can extend it if the environment remains much slower than what's anticipated in pricing.

Okay. The rebates are one thing and your 75% reduction is another. I guess another then is kind of more longer-term post COVID and staying with personal auto for a second. Big debate here down here is what happens. So we started to see a bit of an uptick in pricing before COVID happened in personal lines, personal auto, and then COVID got here. So now it's kind of what's going to happen afterwards. And we got the rebates, but we've also got some pretty formidable companies here in the U.S. The, in fact, largest non-public mutual company has said they're going to put a pretty big rate reduction out there. And that's kind of thrown a wrench into the equation for pricing, I guess, post COVID. So what do you think about, in your market there, how pricing will change, if at all, for personal auto once we get back to any state of normalcy?

So Mike, I think you ought to look at the marketplace, and that's true in both personal and commercial lines at the macro level. First, we entered into this crisis with an ROE at the industry level, make it 5%, okay, 4%, 5% ROE. Our perspective is COVID might temper rate action in both lines of business, personal and commercial lines, but it will be only temporary. And we expect that rates will pick up and the market will be hard for a good 24 months. We don't [ really see a 9-month ] pause as we navigate the worst of the COVID-19 crisis. With regards to personal automobile per se, I think the question -- I mean the various programs that have been put in place, in my mind, were very much geared towards April and May. But the question is how much driving -- how much less driving will there be in the coming 9 to 12 months? And I think a number of people probably will make the assumption that there will be less driving as economies reopen slowly, as work from home is encouraged. And I think that you're likely to see a lower frequency for a good 9 to 12 months. Now at the same time, our perspective is that as the profile of claims change because frequency drops, you ought to keep an eye on severity. And what we've seen during the lockdown in the past few weeks is frequency is dropping a fair bit. No doubt about that. Frequency was up above 10% because the profile of the claims is actually changing. So I think that the frequency needs to drop by more than 10% in my mind to justify a lower rate environment, but it's clear that the cost equation will be more benign in the coming 12 months, and this should have an impact on rates. But keep in mind, it's not just rates not having the momentum they had before. It's also losses not having the same momentum as they had before. And I think in balance, the overall performance in automobile insurance should be in really good shape. That's my perspective. And that's why I think it's tricky to just look at rates in this environment. It's really important to understand where frequency and severity is going. And my perspective is that it will be a benign frequency and severity environment for 9 to 12 months.

So and staying with personal auto for a second, you guys have -- you've been ahead of the industry with underwriting activity and pricing before COVID and gotten your margins to quite respectable levels now in your personal auto book. Once we get into this back to whatever normalcy is maybe next year, and you just said kind of expect 24 months of pure hard market because of where the industry ROE is, what does that mean for your margins in personal auto as we get into 2021 and 2022 given you're already coming off of a really strong base for margins? Should we expect more of -- if the industry is going to take more pricing because of the terrible ROE, that's going to be impacting you more on your top line as people shop and come to you? Or do you think it's more of top line and even continued bottom line improvement in personal lines -- personal auto over the next 1.5 years or so?

Yes. In aggregate, all lines combined, we're getting close to a mid-teen operating ROE. I think you've seen 14-plus in Q1. If I look at the tailwind of the organization, given the work we've done in the past 3 years, I'm very comfortable we'll be well in the mid-teens in the next 12 to 24 months. I do expect that the work we've done in home and in commercial lines will lead to really strong performance in these segments given we have reserved for COVID in Q1. And I think in personal automobile, in the context of Canada anyways, it is the only regulated line of business. And I think that our perspective is that the rate -- the rate activity will largely be a reflection of the cost equation. And I'm very comfortable we'll be operating in the zone that we entered 2020, in the zone that says we should be in the mid-90s combined ratio in the mid to long term in personal automobile insurance. I don't see this environment detracting us from there. And I do think that we'll be looking for top line growth sub or at the mid-90s combined ratio performance. We don't want to take any chance that inflation will run out on us, but we'll -- and therefore, we will be very careful to run that business sub-95 or in that zone and try to grab share as we go along. In the other lines of business, I think we'll try to run these businesses low 90s, in the case of personal truck, sub-95 in good and in bad times. Our track record shows we can do that and grab market share in the exercise. And I think there's a fair bit of momentum to make sure that we operate at our long-term operating ROE of mid-teens or more.

Okay. Maybe we switch over for a second over to the other segments out here in your OneBeacon book, where you've done a great job of getting the margin improvement, like you -- what you've talked about, the low 90s. I guess, A, how much more work is to be done there? And B, maybe as a backdrop, that book competes against or plays in a space where there's been lots of talk of U.S. commercial lines casualty trends being not good with social inflation, everything else you want to throw in the mix. So we're seeing a really tough time in the U.S. for margin improvement despite rates moving up. And so against that backdrop, you guys have done a good job of getting those margins to improve. I guess does the industry, U.S. casualty industry, give you any cause for concern of your ability to keep those margins where they are, if not continue to improve them? Or do you feel somewhat insulated from these social inflation and other trends that are happening here in the United States?

So Mike, we don't feel insulated from the trends that people experience in the U.S. Let's just be clear about that. But social inflation and how much we started to hear about that in the last year is kind of late news as far as we're concerned. When we came in the market, casualty inflation was our #1 concern back in 2000. When we started to look at assets in '16 and '17, this was our #1 concern. And when we looked at our U.S. acquisition, we identified a number of lines of business where we knew that casualty inflation was a problem, liability inflation was a problem. We're talking about the architect and engineer line of business. We're talking about the programs that we were in. We're talking about commercial automobile, which saw in itself a lot of inflation, which was liability triggered and the health care business. And so we have -- early on, I mean, the team, Mike Miller has been doing a great job with his team. We've actually exited lines where we felt that there was no way to catch the trend and that only hope was the strategy to get there. We exited those lines. Then there are a number of lines of business where we've seen a fair bit of inflation starting on accident year '14, '15, '16. And I've put those lines in rehabilitation, meaning strong rate action, strong underwriting action, curtailing our appetite. And we're seeing the performance of these lines of business improving meaningfully. Think of management liability, government risk and so on. And I'm very pleased with the work that the leaders of those business units have done. And then the remaining lines are not overly sensitive to liability. And when I look at the portfolio today, when I look at the momentum in rates in the U.S. and I look at our performance coming in 2020, we closed '19 with a low 90s combined ratio. I feel quite strongly about our ability to maintain that sort of performance or outperformance, in fact, in the context of commercial lines. In the U.S., we feel like our timing is very good to start building the business in that environment. But keep in mind, we shut down lines of business upfront. What is there left to be done? There's -- lots have been done. We've grown lines of business with the profiles we like. We shut down a number of lines of business. We've then increased rates in line and above market, and in certain segments, we've introduced governance. In pricing, we've introduced additional segmentation. In pricing, rolled out a big action plan in claims and then drew synergies as a result of the acquisitions. I think when you put all these things together, we feel really good about our ability to outperform and run in the low 90s in the U.S. What is left, I think, is the work -- is refining our work on pricing governance, on pricing, segmentation and in claims. We've got a fair bit done, but this is the sort of stuff where you create an advantage, and it takes years before you get the full benefits of that. But the team is doing a great job.

So you've talked about -- recently, I think in your Investor Day, last Investor Day, you talked about on your specialty business doubling by 2025. Can you talk about how -- I think that takes you from $3 billion to $6 billion, how that incremental $3 billion of size by 2025, how do you split that between organic and acquisitions?

So to be clear, Mike, when we created our specialty lines division in 2016, the objective was to get to $1 billion. And then we acquired OneBeacon. We said, all right, guys, we create a North American division. And we then established a $3 billion objective. And we've reached that in a short period of time because of pricing, organic growth, hiring people, which drove the organic growth, and then the acquisition of The Guarantee Company of North America, which is well on track of being integrated. So how do we go from here, which is about $3 billion to $6 billion? So the first and nonnegotiable element of that growth is it's easy to express a top line number, but if you ask anyone in the specialty lines organization across North America, objective #1 is low 90s performance. And so I don't think about that objective in top line terms. I think about that objective as low 90s times $6 billion because ultimately, our objective is operating income per share growth. And I think it's hard -- it's really hard, Mike, to figure out what portion will be what, but I would argue that at least half of that growth will be driven by acquisitions. Now acquisitions though, because we've built a massive distribution business in Canada and because we have MGAs in the organization, we're hoping to use the distribution lever to build that business. We find that it is a great way to expand in a market where you want to build more scale. It is a great way to gain expertise without putting your balance sheet at risk too much. And so this is an angle we've used, I think, effectively in Canada. We want to do the same thing in the U.S. because just in terms of deploying capital and through acquisition of insurance companies per se, it's not that straightforward actually because organizations are made up of many parts, not all parts we like. And so distribution will be a big area of focus in 2020 and 2021 to build the U.S. platform. But we're getting increasingly comfortable with Mike's and his team's ability to turn the business. We're now concentrated on integrating The Guarantee Company of North America. We got a lot of room to grow that business, but I think acquisitions will be an important portion of our growth there.

Okay. Unfortunately, we are close to our time. It seems like it went way too fast. So I've got to wrap it up here maybe with one more. And I guess just lastly, since you mentioned The Guarantee, you mentioned Frank Cowan and you've done a couple of other since, maybe just a quick word on those others that you've done and kind of how they're rolling off and just how they played out since you bought them. I'm thinking more of Frank Cowan and some of the other recent ones you've done. Just a quick update on those acquisitions.

Yes. Maybe high level, Mike. First of all, we entered the crisis in a position of strength with a number of acquisitions being integrated. And that's good. But we feel like we are in an environment where we want to deploy more capital. And our priorities would be expanding our leadership position in Canada by buying manufacturing and distribution and then bulking up our specialty lines operation through distribution and maybe manufacturing as well. Now one of the areas that we have been investing beyond The Guarantee Company and Frank Cowan is the supply chain with a home restoration -- a national home restoration company called On Side. And these guys are in the business of after emergency claims repair or home repairs following emergency. And it's clear to us that there's a massive opportunity there in part because of the increased frequency of natural disaster, in part because there's big capacity issues there, and this is a big portion of the customer experience. And our view is this business is countercyclical to our underwriting business. And if we use the skills we've leveraged to build a company like BrokerLink, we think we can build a really big business out of On Side. We're working with them. We've got some of our folks in the business already. The penetration of On Side's business on our customer base is going up, and we'll try to consolidate that space some more so as to build a real meaningful business. But so far, so good and keen to do more.

Perfect. And that's a good place to a good summary. And thank you. We do -- we have at our time limit so I apologize. But I want to thank you very much for spending time with us today, Charles. And we will definitely be speaking soon. So all the best to you until we do so. Thanks, Charles.

Thank you very much, Mike. I appreciate it, and we'll talk soon.

Thank you. Okay. Guys, thanks.

Bye.