Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

Well, good afternoon, ladies and gentlemen. Carrying on with our Canadian content. We have Intact Financial Corporation, Louis Marcotte, CFO. Louis, thank you very much for joining us today.

Thank you, John. Appreciate the invitation.

Before I start grilling you, I want to make one administrative note. If you have any questions for Louis, please email me, john.aiken, A-I-K-E-N, @barclays.com, and we will try to fit your questions in at the back end of the presentation.

Louis, wanted to start off, we've actually seen a strong performance by Intact in the first half of the year but wanted to go into some detail in terms of how COVID-19 has actually impacted your business and its operations for the first part.

Sure. Thanks, John. So listen, COVID started end of March roughly and impacted most of Q2. I would suggest here, we started -- we came into the crisis in the positioning of strength. You had seen us line up a couple of good quarters, and Q1 was looking quite good at the time the crisis started. And we were fortunate, able to send our employees home safely and get them to work and get the connectivity working quite quickly. And that enabled us to maintain very good service levels throughout the crisis. But from a financial point of view, how did it impact us? I would put it in a few buckets. The first one is top line, really, and it had to do with providing relief measures. As you know, the frequency came down because people were locked down, couldn't drive, and we had to provide relief to customers. And we've disclosed in Q2 $350 million of relief offered to customers. That's a very significant number, very significant in the Canadian marketplace. I would say it includes 2 parts: the financial part, which is really helping customers with payment flexibility, and roughly $80 million of the $350 million was financial relief; and then the rest was premium relief in one form or the other. So -- and then -- so this was a $350 million that broken down into these 2 paying buckets. And then part of this was written in Q2, and there are some leftovers that will be written in future quarters, most of which in Q3 and then Q4. So it's important here to understand that although we have a total number of $350 million, parts of it were recognized in the written premiums in Q2, and then most will be in Q3 and then Q4. And then the earning process is also longer because they earn over time. A chunk was earned in Q2, but then the rest will be earned in Q3 and future quarters over essentially a 4-quarter period. So that's the top line impact. We've guided to an impact in the low double-digit for personal auto in Q3 and then, overall, for the business between mid and upper single digits for the overall business for the rest of the year as an impact of the relief measures on expected growth. So that's how we try to frame and give a bit of guidance over the impact on our top line. So that was the top line. Then you go into the results themselves, the underwriting results. And the first, it was an $83 million provision we took in Q1, you might remember. $50 million of it was taken in Canada and $33 million, in fact, was taken in the U.S., essentially all commercial lines in Canada and the U.S. And this was really a bottom-up approach to building a reserve, and we really looked at every single risk we had in the portfolio and tried to estimate what would be impacted by COVID. Of course, when it was Q1, when we took the reserve, we had little exposure yet. So we were prudent, build a reserve, bottom-up, try to really pick up everything we could from the crisis and booked it in Q1. Fortunately, in Q2, the situation has remained the same essentially from a reserving point of view, we did not need to add any reserving -- any reserves to what we had booked in Q1, which is good news. And I would say up until now, of the $83 million, we've essentially incurred or paid up to $30 million of that, which means that we're still on a very safe zone in terms of potential losses from COVID after having taken that provision. So we feel really good. The second element is bad debt. And as you know, we've offered a lot of payment flexibility, and the government was providing subsidies for businesses or for individuals to get through the crisis. That has basically ended up to now. And so we're monitoring very carefully where payments are going. We were prudent in Q2 taking a $34 million provision -- or increasing our provision by $34 million and to make sure that we would be safe should we incur some nonpayment losses in the future. So we're monitoring this closely. It's still early in the game. But I would say that was what we recorded in Q2 for bad debt, plus the $83 million. I would say, I think that summarizes really the impact on the underwriting. Going the other way, frequency, of course, decline in frequency, you might remember, we were seeing -- witnessing frequency declines already before the crisis, really driven by the profitability actions we've been taking for the time mostly in auto. There was a bit of milder weather in Q1 as well. And then the COVID crisis hit, and that even pushed frequency down lower. So that went the other way in Q2. Our view here is most of the benefit of frequency or most of the frequency declines are an item of Q2, while relief measures, as I mentioned earlier, will pan out between Q2, 3 and 4 and perhaps a bit into next year. So one has to be very careful in interpreting our results to understand the mismatch between the written and earning patterns versus the actual frequency benefit that we gained from the crisis. So this is -- that's important element in understanding our results. We did have very good results in Q2 partly driven by the actions we've taken, partly driven by the frequency or the COVID-driven frequency, but one has to be careful looking forward. And that's why we've tried to give guidance here in terms of top line impact, when it would earn and as well we're saying to investors, overall, we're expecting the underwriting performance to stay on track. So that -- which means essentially that the relief and the frequency measures -- the relief measures and the frequency benefits will sort of offset each other, and we should not see margin erosion from the COVID crisis going forward. So I think that would summarize what was the impact of COVID so far.

Fantastic, Louis. One of the -- I think one of the key concerns for investors with Intact was the business interruption insurance. And as you pointed out and you answered the last question, you've already provided against that, and we actually didn't see any additional provision be taken in the second quarter against that. In terms of the -- what you've seen or experienced to date, is there anything that might actually change your viewpoint on this positively or negatively? Or is it still the steady state in terms of what we saw in the second quarter?

I would say steady state. I think we were very confident when we reported our numbers that our exposure was extremely limited, and whatever we had was already provided for. I think what has changed now is a few court cases in the U.S. came out, and I think [ they're supporting ] a few of the insurers. Keep in mind that the exposure for us remains very limited at less than 1% overall of our book. But when we look and monitor what's going on here, on the Canadian front, not really worried because we think there's very strong precedent in terms of confirming that physical damage is required. In U.S., we feel the same way. There is more legal activity going on there at this point, but the results we're seeing so far seem to confirm the view of the insurers that you need physical damage to actually make a BI claim. So I think it's going in the right direction, monitoring it carefully, but no change to our view at this point.

And Louis, in your response, you talked about the drop in frequency. And in personal auto, in Canada, a lot of that related to the fact that there were fewer miles driven. As we're seeing the economy reopen, albeit slowly on a measured pace, are you seeing those miles driven increasing at a commensurate pace? And then more importantly, the outlook going forward, is that actually expected to accelerate as we're starting to see more students going back to school and presumably parents driving their kids? Will that have a material impact in terms of what you expect for frequency?

Good question, John. And I'm really happy that we have our UBI tools or telematics available to us because that actually enables us to monitor this on a daily basis and get life data. And what we see so far is actually the miles driven have come back to levels that are comparable to the same period last year. So there is activity, and it's been ramping up since, I guess, the end of the lockdowns. Up until now, would have a bit of an acceleration right now, as you say, as the activity is picking up. People are going back to school. So we're seeing some more activity and at this point, getting close to even miles driven. What's interesting, though, is the frequency of claims intake has not caught up as much as the miles driven. So there's a bit of a lag here between the fact that the miles themselves are similar to last year, but the frequency levels have not yet caught up entirely. So we're looking into this and trying to understand what might drive that gap. One element of response is probably what we refer to as density on the road. And you might see for yourself, if you come back to the office, there are less people on the roads themselves, and I think that drives a bit of a different pattern. We're not getting the big traffic jams, although they're starting to come back, it seems. But we're not getting the same patterns as we had a year ago. And there's multiple causes. People are working more from home. Maybe they're starting to drive but not driving to the same place. Some people are not using public transit anymore, so they're using their own car. We're trying to understand what are the root causes for this. But clearly, the facts show miles driven are up to levels closer to last year with a lag in the frequency of claims at this point in time.

Louis, I'm glad you brought up the telemetrics because it was one of my questions for later on, but I'm going to rise it up to the top now, is it seems like there's been less discussion around your UBI program. Is it still in full force? Do you view this still as a competitive advantage to attract customers? And are you still able to utilize it as an advantage because of the data you accumulate and how you manage the data?

Absolutely, John. We are all in to our UBI tools, trying to improve the interface. We've got mobile now, much easier to access. We're actually promoting it more to customers. So no, no, we're very big believers in the tool and the benefit it brings. So we're pushing it forward. We're seeing -- I think we're increasing progressively the intake in the overall portfolio and certainly looking forward to deploy it even further going forward. The benefits, as you know, the predictability that it provides is much stronger than what we had in the past. And we are using the opportunity now [indiscernible] we had in the past.

I wanted to touch on a couple of headline events that have happened. There's a lot going on in the world, but a couple of things that may have escaped notice for investors in Intact. Most notably, you actually announced an acquisition late last week -- sorry, International Marine Brokerage -- sorry, International Bond & Marine Brokerage, my apologies. Can you talk to what the strategic benefits of this acquisition is even if it wasn't material enough to have any disclosure on financing or the amount that was paid?

Sure. So I think this really speaks to our appetite to grow our business in the U.S. We've been saying, we'd like to get a few tuck-ins. We were open to adding tuck-ins into our business, and so this opportunity came up. It's a nice addition to our surety business. It is one area of the surety world that we have not access to. This company brings a lot of expertise, and I think they're one of the most established players in that field where we couldn't play before. And so the opportunity came up. It's a nice addition to the surety line of business. And we're -- I think it's one that we're seeing like this, but I think there's more to come in the tuck-in area as we try to expand our business in the U.S. So I think it should not come really as a surprise because we knew [ we were ] interested in such types of acquisitions. So these are coming through. And I think it's really a matter of us investing more into the -- obviously, the M&A sector in the U.S., meaning we're devoting resources, [ funding ] these opportunities. So we're confident in our performance in the U.S. and our ability to manage the business. And so if there are opportunities, we'll capture those, and this is really proof in the pudding that we can put some capital at work in the U.S., small one, but it's -- for the business line, it's a fairly sizable acquisition. And then it just expands our expertise in another sector, in the specialty area in the U.S.

Fantastic. And then, Louis, if you could talk to the experience that you've had with your more recent domestic acquisitions, The Guarantee and Frank Cowan, obviously, the results were in partially in the second quarter. How has the integration gone so far?

So this is a transaction. I need to remind people that we closed on December 2, so it's still fairly recent, with a fairly broad book of business between personal lines -- high-end personal lines in Canada. It has the government risk in Canada, and then it had surety on both sides of the border. So a lot [ are ] underway with the integration. The IT systems are being integrated. We actually took over the high-end product lines and now have converted that into a new, I will say, Intact high-end product called Prestige. And John [ would be one of those persons that approached ] for the Prestige product. But Prestige is a brand we've launched under -- with a revamped high-end offer to customers in Canada. And as you know, our goal is to quadruple this business within a couple of years, so a lot of opportunity, we think, in that space. But these are examples of integration that are going on. The people are integrated. We're doing the systems right now, migrating some of the lines of business across Canada and the U.S. Surety in the U.S. is well integrated now. It's a new sector for us, contract surety in the U.S., but that integration is going on. So I would say [ speaking ], it's moving as we would expect for an integration. And it's, to me, on track at this point in time, both from an integration point of view as it is for -- from a financial point of view.

Well, I'll reach out to one of your brokers and see if my 10-year-old Honda Civic actually counts for the Prestige product. But Louis, one of the things that surprised me a little bit more recently was one of your domestic competitors announced that they had actually won a contract with Uber, something that you had brought to the marketplace a couple of years back. And I was wondering, you can give us some sense in terms of was this a pricing decision, was this something that you just couldn't see eye to eye with Uber in terms of the policy going forward in terms of what happened. Why did you not maintain the contract?

Sure. So we've had this relationship with Uber in Canada for, what, 4 or 5 years now, a very good relationship, brought it to Canada, changed the regulatory framework for sharing economy, very proud of that record. But over time, as these commercial relationships do evolve, I think we came to a point where we didn't agree on price with them and they chose to move the book to somewhere else. And we're still in a very good relationship. We just couldn't agree on the pricing levels. And they have freedom to go, and they took that opportunity. So we still have a very good relationship with them. We have a relationship in the U.S., believers in the sharing economy. But we each have our financial objectives and manage accordingly.

It's good to see that you're still being strict on those in that regard. Louis, in terms of -- one of the things that has benefited Intact for the last little while and being very conscious is the -- on the hardening prices and the very, I guess, strict nature that you put in terms of the business, you've been underwriting, particularly on the commercial side. And I don't know if Uber is example of that or not. But can you talk to how long you expect the cycle of hardening prices to last within the commercial segment and I guess, how long you stand to benefit from this?

Sure. So we've seen a very solid hardening of the market probably over 12 to 18 months now in commercial lines. Of course, the crisis has abated it a bit, I would say, more in Canada than in the U.S. U.S., we haven't seen much abatement from the COVID crisis on commercial lines, very robust market in U.S. We saw a bit more in Canada, but I would say our expectation is that will disappear and go back to the conditions we saw prior to the crisis. You'll remember, John, up until March, we were basically hard market conditions across all lines of business, and commercial was the strongest one. We were talking about low double digits at the time. So our view here is that this will come back as [ probably ] as fast and probably faster in commercial lines. And I looked at the H1 industry results, and we're showing 103 combined ratio for the industry with 5% ROE. So you take that into consideration, the loss ratio was like 80% for the top 20 players in commercial P&C. You take investment yields that are declining, reinsurance rates going up, I think those conditions are going to keep the rate environment very strong for a little while here. How long is the cycle? It's hard for me to predict, but I can't believe that we would be out of it before 12 to 24 months going forward in commercial lines.

Good. And then on the personal lines, obviously, as you alluded to, was also a hardening market, maybe nowhere near as robust on the commercial side. But of course, with the impact of COVID-19 and part of the premium relief that you've given up to customers, we're seeing a bit of a, I guess, I'd say, softness, but I don't think you should really be characterized as that. What is the outlook for the personal lines? And are you actually seeing a greater degree of potential intervention from the regulator in terms of pricing, both in the Ontario market but also potentially in Alberta?