Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thanks for joining us today. For those of you who don't know me, my name is Mike Rizvanovic. I'm at Crédit Suisse, and I cover the Canadian financials, not Intact at the moment. Hopefully, we'll change that at some point in the near future. And I'd like to introduce Louis Marcotte, who's joining us today from Intact Financial. Just a very brief bio on Louis. He was appointed Senior Vice President and Chief Financial Officer in December of 2013. In his previous roles, Mr. Marcotte was SVP of Strategic Distribution, which oversaw Intact's investments in the broker network. And prior to that, he was the Treasurer of Intact, which had responsibilities for investor relations, financial planning and treasury functions. So thank you, Louis, for joining us today.

And maybe we'll just jump right into it here. And I thought I'd start off with a question on the RSA acquisition, which I think maybe for some investors, was a little bit surprising just given the non-Canadian exposure that was attached to it. Usually, people tend to think of the Canada business where you're clearly a dominant player in the market and the U.S. business where you're looking to continue to grow with the specialty lines as being sort of like the ultimate location -- or destination for your capital deployment. Maybe you can just briefly talk a little bit about the RSA acquisition and what that sort of means for your broader footprint in Canada now post-deal once it closes and then the non-Canadian part, which is the -- I guess, the more interesting -- the less clear part, which I think you can provide some insight on.

Sure, absolutely. Thanks for the question, and good afternoon, everyone. Happy to be with you virtually this year. So on the RSA acquisition, clearly, a long time, RSA has been in our sites in terms of a potential acquisition in Canada, a prime target on our path to consolidate our marketplace, our market share in the Canadian marketplace. So we've been looking at it for a number of years. And difficult to pull it apart from the rest of the RSA Group for different reasons. So as time passed, and we're clearly on the path of building our scale and our leadership position in Canada, we had looked for alternatives to be able to build a transaction to put our hands on this asset. And over this -- over time, I guess we started having discussions with our partner Tryg, where they had the similar goal on their side of the ocean, I guess. And they were looking for the Scandinavian assets, couldn't pull them apart. We had the Canadian assets on site. And so we've kept talking to each other. And I guess last year, the situation became clearer for both of us. We had both grown from acquisitions recently, us doing the OneBeacon acquisition, the GCNA. We had grown in size. Tryg had also grown in size through their Alka acquisition back home. Both were in good shape through the COVID crisis. And the RSA position was, I would say, maybe dragging a bit in the market and particularly after the COVID crisis started. So we were in touch with Tryg, and both felt that the time was opportune to have discussions with RSA. And the view was that if Tryg could take over the Scandinavian assets, we took on Canada, the remainder in the U.K. and what was left in Europe would be a more manageable piece of asset to -- for us to absorb essentially. And therefore decided that we could go along here on a transaction, build a transaction that would enable us to put our hands on the Canadian business and then, for a fairly reasonable price, also acquire the U.K. assets. And then we would deal with Tryg for the Scandinavian assets. So that's a bit how it came together. At this point, very happy with where we ended up. We think the price for the whole transaction is extremely attractive. The returns are attractive. The accretion is attractive. And it enables us, of course, to grow our position in Canada. It's a net add of 30% to our business, gives us leadership or increases our leadership position both in the broker channel and the direct channel. It really bolsters our position across the land in Canada. So I guess a bit of a no-brainer for the Canadian marketplace. And then when we look at the U.K., we're quite happy with the size that we entered the U.K. and I -- perimeter there and, at a price that makes it feasible for us to take the risk, try to improve the business and generate the returns that we have planned. So in Canada, clearly, it bolsters the position and takes us to about 22% market share. We still think that over time and maybe not immediately but over time, there will be more consolidation to be had. But at this point, we want to focus on the integration of the Canadian entity into our own business and make it as successful as we have in prior transactions. And then on the U.K. side, looking at the entire perimeter, which basically includes U.K., Ireland, there are some European assets, Middle Eastern and Denmark. We are co-owning Denmark after the transaction closes with Tryg. And this was meant to be structured in a way that would meet antitrust requirements for the transaction to go through there. So we will be looking at all the alternatives we have to operate in that marketplace. And then all the other assets, we're not in the build -- in the strategy of building a conglomerate with flags everywhere. So every marketplace or every country will be evaluated and, I would say, against 2 fundamental criterias, which basically are, does the business add to our specialty lines expertise, scale overall? Or can it outperform in the marketplace where it is operating? If the answer is no to those 2 questions, then we'll look at strategic alternatives for those businesses. If they do enhance our capabilities in specialty lines, then we'll continue operating or if again, we have the ability to outperform in the marketplace, we will continue with the business and grow it. But that's a bit the lens under which we're looking at the assets we've just acquired from RSA. So Canada is a no-brainer. Returns are very high. The bolstering of our specialty lines overall is also very fundamental and strategically aligned. And then the U.K. assets, given the fact that we're entering at scale at a very reasonable price, we think is worth taking the risk. And we think we have a good shot at improving the business and helping improve their returns.

Yes. Thank you for that context. Wondering on the specialty lines and just having that broader -- not quite global but certainly multinational footprint and capabilities, is that something that could significantly help the specialty lines business? Like are you getting more multinational clients searching for different types of insurance that you could benefit from by now having this capability that you did not have prior to the deal?

Absolutely. So I think there's 2 angles to this. One is breadth of expertise that we are acquiring. So RSA was a very strong player in specialty lines with some very specific expertise, renewable energy, one example; in the marine space, one -- another example. And I'm talking about the marine -- overall marine insurance sector. And those are examples of where they've had expertise that we add to our own capabilities. And then the geographic footprint is also an advantage. And what we've noticed when we acquired OneBeacon is suddenly you end up for specialty lines in -- with customers that have much broader scale than perhaps some of them based only in Canada. The American customers generally have more scale, and we're asking for more capabilities around the world. And this is what we're getting with the RSA acquisition now. They have a very strong global network, and being able to access it now is certainly beneficial to our specialty lines customers. So on both expertise and breadth of range, we think we're going to be strengthening our specialty lines operations.

Okay, okay. That's very helpful. On the Canada business, so going from that 17-or-so percent range to 22% on direct written premiums, I'm curious if you have in mind, if you're thinking longer term, say, 3 to 5 years out -- because it seems like it's still a very fragmented market where we could see quite a bit of consolidation potentially at the industry level for a number of years and clearly Intact being the biggest fish in the pond and having a very strong business, a strong capital, access to capital. When you think about growing in Canada, do you see some sort of natural -- I don't want to call it a cap, but some sort of range where you start to maybe pique the interest of regulators from the perspective of just the competitiveness in the market? Because right now, I think you're considerably above -- the second place, I think, is less than half of your market share right now post the RSA deal. Does that become a problem maybe when 23% -- if 23% was to become -- or 22% was to become 30%? Or do you see some opportunity beyond that even?

Listen, our view today is that there's plenty of room to grow further in the Canadian market space. You're right, it's fragmented. So we do believe there's more consolidation to be had. And our nearest competitor has 9% or 10% market share, which is the largest, of course. And our view here is that the regulators, I think the hard line is more in the 35% where they get very, well, active, if I can say it that way. But below that, they'll analyze the file. And if you look at the lifecos, for example, the market shares are pretty much in the 30-ish range. So up until there, we don't see that there's a hard line to be -- that would be a cap, if you want. Maybe there are some specific markets or lines of business that have -- that would have to be dealt with. But we don't see it as a big barrier at this point in time. We -- still, we have plenty of room to grow organically and inorganically in Canada.

Okay. And are you seeing anything -- any interesting developments lately with respect to maybe the desire for some of these smaller companies to be consolidated into a larger corp? Or is this something -- like how does the interchange actually play out in terms of M&A going forward? Because I know I've been hearing for many years that consolidation is inevitable, and it has been there on and off but not to a significant degree. So still a lot of small players in the market. I think it's still north of 200 in total if you look at the number of entities. Is it just like these companies are -- they're okay with the sort of the industry-level profitability being where it is? It looks like it's pretty subpar outside of Intact and maybe a couple of others. What are your thoughts on that?

So we've been the one saying there will be consolidation, continuing consolidation in the marketplace. We still believe that. Different angles to it: competitiveness, technology, the need for investments, heavy investments in technology, the capital, the COVID crisis, some will come out better than others through that. And the distribution as well is interesting, being able to keep your space, your shelf space with distributors. So for various reasons, we think players will come to market and want to trade assets. So -- and then put the reasons for motivating the sellers and then trying to get the right pricing environment is another variable that makes those transactions. When they're available, you got to take them essentially. They don't come when you think they'll come. They just come over time. And the reality is you don't get there by luck really because we've entertained relationships over time, whether it's at RSA, it was at GCNA. If you want to be in the game when the transaction happens, you've got to be talking to people all the time and sort of nurturing the environment so that when it happens, you're the player that's going to be able to get the fruit from it. So of course, right now, we're totally focused on closing the RSA transaction then integrating it. Now having said that, as soon as that's -- the big bump is over, we'll be -- our eyes will be wide open if there are transactions available. And at that point, we'll see how attractive they are and get ready to pound on it if it's available and attractive.

Got it. And just with respect to capital deployment more broadly, I guess you'll be busy closing this one. I think it's slated to close in Q2.

Right.

Does that sort of put the brakes on potential deals? I know you just made a comment about you have to be ready for them. Is it fair to say that you would be ready for potentially something else if the right circumstances and the right target came up, and you wouldn't shy away from it just because of the RSA transaction not having closed yet? How do you -- how should investors think about that?

Well, before closing would be maybe a bit ambitious. But once it's closed and we've got the financing behind us and that's -- the integration is rolling out -- when you look at the RSA project in itself, you've got the closing first, then we've got the transactions with the Scandies to execute, which will probably last a year, 6 months to a year. So there's going to be a lot of attention brought there. But in our minds, we can't miss a transaction that comes to market if it did. And therefore, we are believers that if there's a nice transaction, we'll be able to finance it. The financing structure might not be identical because we may not have room for debt financing. So we'll have to take that into account. But in our minds, we'll be ready at some point to take on more transactions in Canada.

Got it. Got it. And maybe we can just switch over to the pricing environment in Canada. I know in the auto market, it's improved quite a bit. And Intact has been very clear that -- yourself and the senior management team about taking action earlier than some of your competitors, and you started to see those results come in. I believe it's about 7 or 8 quarters ago. Just with respect to the environment today, what are you seeing today in the COVID world? I know there's been some pretty good movement in your favor on your ratios. How do you see the pricing versus like just the reopening of the economy, and maybe accidents start to spike up a little bit again and -- how do you think about that dynamic?

So looking back a bit, we've been fixing auto for a number of years. From the end of '16 up until last -- late last year, late 2019, we were on the path to fix the auto business, and it wasn't easy. We started seeing success in the latter half of 2019. First quarter of 2020, we were doing quite well because we had taken rates up quite a bit, and our peers were catching up, and we were -- we felt on top of the situation with good results. Then COVID hit, and we were at that point in a position where we were getting upper single-digit rate increases. We had pushed down frequency essentially. And then COVID hits, which took down frequency even further and put us in a situation where you're getting the rates coming in with frequency dropping. So that gave us obviously a nice impact on margins, but we also offered relief at the same time. So this is where we did the relief measures all the way to the beginning of the crisis when we saw this happening. And what has happened afterwards is the -- us and the industry have started moving rates down. And the regulators basically changed the rules a bit to allow insurers to reduce rates temporarily. So remember, we're in a regulated environment. You're fixing your rates. And the regulator says, "Well, I need an emergency measure here. You guys can reduce rates, and we'll allow you to bring them back up once the crisis is over," essentially. So that you're -- it's a temporary relief that they've allowed us to put in place, which we have and our peers have. The big difference, I think, was the profitability of our sales versus our peers, where when we sit -- when we look at the industry results, we were ahead because we had taken early action. We were giving relief. We were giving rate reductions. And our competitors did the same, but we were in advance of them. And that led to some unit movement coming our way. And you've seen that in Q3 -- Q4 to some extent where we were gaining units against our competitors because our market positioning was a bit better despite the fact that rates were being reduced or discounted. So now we're at the end of 2020 or early in 2021, clearly, the rate environment has softened in auto. And everybody is sort of waiting as to what will happen with frequency once the crisis normalizes. At this point, clearly, it's down. It was coming back up late last year. We could see clearly the numbers, and we measure through telematics the quantity of miles being driven. And that had risen up almost to pre-COVID levels. Frequency was not following at the same pace. It was actually still a bit below the actual mileage driven. Ratios, we were looking at. But we were getting closer to normalcy. And then we started having the second wave late last year, which tanked frequency again early into this year. So at this point, we're -- the rate environment is soft. We're waiting to see when we return to normalcy. That's a hard one to guess. And our expectation is once it does, then rates will go back up because the industry has struggled with profitability. The year-to-date combined ratio for the industry at the end of September last year was 100%. ROE is still under pressure. Yields are coming down. So our view is when that normalizes, the rates will come back up. But in the current short-term environment, our view is we're going to be in the low single-digit, at most mid-single-digit environment for personal auto in terms of rates.

Got it. Curious about -- I'm not sure if this is a figure that's disclosed, but do you have anything that you can provide any color on retention rates in the auto business? I'm just trying to sort of think about how the banks have, in Canada, a pretty good retention rate on their mortgage book. Like what would a normal level be sort of through the cycle, like a normal kind of retention on auto policies or property policies or commercial? Like is it very different in different parts of the business? Or is it -- do people sort of jump from one insurer to the other depending on the year?

So what we know, the retention levels actually diverge by channel, by distribution channel. They tend to be higher on the broker channel and higher being you're in the 90s, 90% retention. They would be lower in the direct channel. And I would say here, probably upper 70s or low 80s in the direct channel. So people may shop a bit more on the direct side. We know there's probably 1/3 of customers that shop, but not everyone leaves every year. And so retention levels, I would say, are quite stable and quite high. What we've noticed, though, in the past, let's say, 6 to 9 months is retention levels have improved a bit in our -- both channels for ourselves, and I'm hearing a bit the same on the industry side. So it seems perhaps the fact that people have reduced rates or capped rates for their auto customers because of COVID has led to maybe less shopping, but retention levels are better than they were a year ago.

Got it. Got it. Interesting, okay. And then maybe jumping over to OneBeacon, and that was an interesting transaction at the time. I believe it was 2017, you guys got your beachhead into the U.S. and in a very specific part of the market, which was conducive to good margins and adding your expertise and building scale over time. And I'm just wondering, how has your experience been? If you could just sort of -- high level with OneBeacon, has it met your expectations? Is there something that you want to do differently? Or is it sort of humming along and as expected?

Listen, I think it was a -- the experience is very positive. I think we feel very good where we stand right now with OneBeacon. We were successful at driving synergies, improving loss ratios. I would say, integrating with our Canadian expertise, where there was expertise to export into the U.S., we have. I think putting our forces together has been quite beneficial. We're in the 3 years now, so closed in December 2017. We're at the $3 billion mark, which was the target we had set ourselves for specialty lines in North America. You might remember that initially, we were trying to grow Canada up to $1 billion in specialty lines before having OneBeacon on board. Now we're at $3 billion, and the next target is $6 billion, as you know. So we've reached our $3 billion target and aiming for a low 90s combined ratio. I will say we were a bit shy of that last year and a bit due to COVID and a bit of weather last year that drove the combined a bit higher than we would have liked to. But the reality is when we look at it going forward, where the business stands, the fact that we've exited lines that are -- that had been struggling is -- clearly has been the right decision to take. And so when we look at our portfolio going forward, as it stands now, I think we're in very good shape to deliver low 90s, grow our business both organically and inorganically and deliver good results. So my sense is we're in -- we feel very good about our acquisition in the U.S., and we're very open to growing it further.

And do you feel you need more scale for that business? Like just thinking about the Canada business where you're very, very dominant versus in the specialty lines, I don't have a number off the top of my head. I wouldn't know what your market share would be, but is it fair to say that it's a much smaller market share? And then do you get the same benefit from scale in your U.S. business as you potentially -- would you get that potentially as you do clearly in the Canadian business?