Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

Thank you, everyone, for joining us today. I'm Mario Mendonca. I'm the bank and insurance analyst here at TD Securities. Today, very happy to have Charles Brindamour, President and CEO of Intact Financial. Charles, thanks very much for doing this. I appreciate you taking the time.

Well, thanks for inviting me.

Great. Before we get started, Charles, do you want to offer any opening comments on either the quarter? Or is there or any other topic before I get started?

Well, look, I think, first and foremost, it is about helping society navigate what's going on at the moment. And I think we've been really focused on that. Second, it is about the integration of RSA. And we will close on June 1. At this stage, our plans are ready to go. And third, I think you've seen that there's a lot of momentum in the business pretty much everywhere you look. And so it's a question of remaining focused on those 3 things. And I think we'll be in really good shape.

Appreciate that. Let's get started with RSA. And by the way, I think everyone -- you can ask questions. I've got my iPad here on the left, if I see any questions come up, I'll refer to those. So let's get started with RSA. I want to ask sort of a broad philosophical question. There's 2 ways I've been looking at it. One is, wow, you've got a great price. Depending on how you play with the math, play the numbers, you could argue that RSA U.K. and International was purchased at a discount to book value. Easy enough to come up with that math if you do it properly. Now that's one side of it. The second side of it is, you obviously like the asset or you wouldn't have bought it. I mean I know that it came along with the Canadian business. And you talked about how there's a lot of value creation opportunities outside of Canada. Help me square those 2 comments. On the one hand, you've got it at a really good price. On the second, there's all this value that comes from it. How do you reconcile those 2 things?

Well, value is often associated with price, but I don't need to tell you about that. I think that, look, strategically, it's a very good deal. 30% increase in scale in Canada; 30% increase in scale in specialty lines. And then we're entering in the U.K. pretty much at scale. A lot of work to do, but pretty much at scale. So how can it be strategic and be, say, 90% of book value? And therefore, an IRR north of 15%, and accretions hitting upper teens within 36 months. I mean there's a number of reasons. First, we're creating a lot of value in Canada. 75% of the game is Canadian driven. Very few people are able to bring that to the table. Second, this is a partnership deal, Mario. And the Scandinavian portion of the transaction is a unique historical opportunity in Scandinavia. It's not like there's lots of assets available for consolidation. And I think that the cost of the Scandinavian business or the valuation of the Scandinavian business was close to 5x book. So what is left is more complex, no doubt. There are risks associated with it. But that's why we paid 90-ish percent of book value. It happens to be really strategic. The price was good. There's a lot of value to be created here. But it came with complexity. And it came with an entry in the U.K., which was not in the strategic map to start with. Now I think we'll do well because the entry price was low. We have a very good game plan. But for all these reasons, Mario, we have a very good deal that is strategic, that's financially super attractive. But we've had to deal with complexity that few people would have been prepared to deal with. And we had a great partner in Scandinavia, with whom I have built relationship for many, many years, and that's why you end up with that. And I think, done on the backdrop of COVID and Brexit at the same time.

So you hit on where I was going to go next, which is, when you get something at an attractive price, sometimes, you are taking on, as you say, complexity and risk that perhaps others might not have wanted to do. So let's go through some of those areas of complexity and risk and talk about the nature of that risk and then what Intact can do to cope with it. So the first one that comes to mind is the pension. And I'm not going to spend the whole conversation about risks, but I do want to dispense with some of this. First, on the pension side. There's a bunch of risk that comes along with any unfunded or not fully funded pension. One in particular is longevity. When you think about that $700 million or so of expenses above the purchase price, does putting to bed the pension risk, specifically, the longevity, you got factored into your thinking?

Yes. I think, Mario, I'm like you, I think about risk all the time, big and small. Keeps me awake at night from time to time, and pension was right up there on the list. We got much closer to the situation in the summer to understand, in fact, that, on an economic basis, this pension plan as far as I'm concerned is in a surplus position. It is also in a surplus position from an accounting point of view. From a regulatory point of view, there's a gap to be filled. But that's a gap that's based on a much lower interest rate than the assets we're investing in. The interest rate risk is largely hedged, okay, which, in my mind, was the #1 risk. Longevity risk is partly hedged at this stage. And we're working collaboratively with the trustees of the pension funds in the U.K. to further hedge the longevity risk. The other thing, Mario, that's important to understand is that it is a closed pension fund. And it has been closed for many years. And so what you see actually is the size of the liability over the next decade is dropping meaningfully. And therefore, the tail of the risk is quite manageable. And so that is #1. What are the other risks that my team and I have been debating before embarking on this transaction and establishing the price? I mean the second one is entering in the U.K. It is a tough market. It is a market though where RSA has strong brands. They're #5. They have scale in home. They have scale in commercial lines. And we're coming in at a fraction of book value. So I think creating value in the U.K. is highly likely as far as I'm concerned. And I'm just coming off a 2-hour session with the U.K. local team, where we were fine-tuning our outperformance game plan, where some of our expertise and risk selection, underwriting, technology will be put to work in the coming period. So I think in the U.K., we can work with scale, and they have scale. And then the price -- the entry price is good. So that is the number -- the second risk. And I think the third risk, Mario, is the integration risk. Where is that risk happening? It's happening here in Canada. 3/4 of the synergies are coming from Canada. And I think we've got a playbook there. So frankly, for most people, it's a big risk for us. We've got a game plan. And I think you'll see renewals come out of our system as early as July and August. So I feel confident about that risk, in part, because of our expertise and, in part, because I know the plan is ready, and we're ready to pull the trigger. So these are, I think, the 3 main risks. We've secured people. And at the end of the day, the IRR on this transaction is well north of 15%, which is our stated target. And the reason why we operate with IRRs of that nature is because you take risk when you do acquisitions.

If we could go to the U.K. now, and you highlighted home, commercial and specialty, and those are the 3 that I think we all think about when we think about RSA in the U.K. and the international business. Every acquisition that this company has done in Canada over the years, it's been relatively straightforward for me to see how Intact adds value, because you're larger, you've got data advantages, scale, all the obvious things we think about. But it's not clear to me how Intact necessarily creates value in home, commercial and specialty, having not been there. So what do you bring to the table that adds value in home, commercial and specialty to a business that presumably was well run to start? So what does Intact do that's different?

Yes. I think that the first thing I'd point out to, Mario, is our entry in the U.S., where you've seen that we've taken a business that has been operating at the upper 90s combined ratio. And I think it's now running in the low 90s. And we've created about 4 points of combined ratio outperformance against our peers in the specialty lines in the U.S. over 3 years. How did we do that? Having the right targets, having the right governance platform from a pricing and underwriting point of view, having a claims in-sourcing strategy. We're not using the Canadian scale, but we're using the Canadian strategy, with boots on the ground, and then expand synergies. And so that model, which worked in the U.S. is, in part, the model we'll use in the U.K. I think the difference walking in the U.K. is that our strength in home insurance and our strength in the SME space is greater than the strength we had in specialty lines when we entered in the U.S. The resources we have to lend to the U.K. team on risk selection and AI is quite significant, and that's part of the outperformance plan in the U.K. So I think, I would say, number one, it is about risk selection, because from a claims point of view, they're on a good path, as far as I'm concerned. From a risk selection point of view, there's a lot of upside to improve the degree of sophistication in both personal lines and commercial lines, and that's where we'll put boots on the ground. The other thing is, 20% of the expense synergy, Mario, is driven by the head office, which will benefit the U.K. and reduce the expense load in the U.K., which, by the way, in personal lines, they were at an expense disadvantage. And so we'll do some work on that front.

That exactly offer of the success the company had in OneBeacon in the U.S. is an important one for me. Risk selection in specialty, essentially, the way I understood it is there are certain lines you don't like. You just stop writing. You get out of that line because it wasn't any good. And that was, in fact, what impact did in the U.K. -- sorry, in the U.S. That doesn't seem like an option in the U.K. It's not like you can say, we don't like commercial. We're out. We don't like home. We're out. The only way you would be out is if you actually did something like sold it. So I know it's not appropriate at this time to give you a name like U.K. at home, and for you to tell me whether that was on the shopping block. I know we should never do stuff like that. Not before the deal was closed, and frankly, not after the deal was closed, because there are people involved. There are real people that work in these businesses. So I know never to do that. What I would like to do though is talk about timing. In yesterday's call, you talked a little bit about, hey, there are some businesses improved. There are some businesses, we'll look for strategic alternatives. Could you talk about timing? Will it be 3 years before you see any real strategic moves? Or could this be more like a 12-month thing? Can you talk to that at all?

Yes. Let me first take your question from the start because it's an astute observation, and you tend to do that. In this case, in specialty lines, when we walked in the U.S., there were glaring areas we could indeed shut down. When we did that early on with Mike upon closing 3 lines of business, we shut then down because we felt hope was the only strategy, that couldn't work. But then in the remaining lines, Mario, we brought in predictive analytics. We established different targets. We brought in claims expertise. And so we've worked on both levers. In the U.K., you're right. You cannot just shut down lines of business. And therefore, your decisions are a little more strategic. I will say, though, that beyond bringing risk selection expertise, leveraging their scale, which is easier for us to do than leveraging risk selection expertise in specialty, you should not assume that the personal lines business, for instance, in the U.K. or the commercial lines business is one product, one country. There is a fair bit of diversity in its distribution footprint and its relationship. My own view, and I think Scott who runs the UK&I business has been busy doing that in the past 2 years. There's a fair bit of upside in rationalizing the footprint as well within a product, given the diversity of the distribution relationship. So I think the lever is available as well because their distribution strategy is so diverse. Now your -- the second part of your question, which is, how do you rationalize, call this, the macro footprint? They're in a number of countries, a number of big lines of business. I would say that we've been explicit that, in the very near term, we would explore strategic options in Denmark. And we said, we're exploring strategic options there. And I think that is a near-term issue. We're assessing a couple of places. But overall, we're trying to build out performance in the markets where RSA is today. At the end of the year, we'll look back and see how much traction we've had. How much had we -- or how much more progress we need to make and reassess on a yearly basis. But to be very clear, and I can clear with everyone at RSA, we're playing to win. If we don't see a path to outperformance or if there's not an important element to add to our specialty lines global platform, unlikely to be a long-term position. But right now, other than in a few areas, we're trying to build out performance in the current footprint in the UK&I business, reassess at year-end, see if more is needed. And I think over 24 months, we'll be very clear as to success in the ultimate footprint.

So that's clarified a lot for me. We've been focusing on sort of details for a moment. I want to take now a step back and look at it from the top-down. I really like when a company that I cover offers clear ROE guidance. That really means a lot to me. I've always cared about that. I think it's very important that Intact does that. And any question about ROE can't be asked without first acknowledging the success. 680 basis points of ROE, outperformance over the industry over the last decade is not an accident. You can certainly say in one given year, it's an accident, but certainly not an accident. So where I want to go with this now is, post RSA, generating the 500 basis point advantage that you often articulate doesn't seem doable, at least in the very near term. Now you can clearly do it in Canada. If not -- how will you measure the 500 basis point gap? Are you going to say, excluding something? Or how do you think you're going to talk about the 500 basis point event?

This is such a great question. And there's been debate about that objective. And at the end of the day, that's the business we're in. I mean we view ourselves as outperformers. And if we can't outperform outside our own country, we shouldn't play outside of our own country. And that's why we've put so much emphasis on improving the business in the U.S., and that's what we'll try to achieve in those other markets. The ROE profile of the industry in the U.S., in the U.K. and in Canada is comparable: upper single to 10-ish percent ROE over the cycle. As you said, we've outperformed by 670 basis points in the last decade. The objective is 500 basis points. Many people will translate that in mid-teens. Our view has not changed. And we'll want to achieve the outperformance in the U.K. as well. It's important for us. Now what's the headwind? Well, the headwind is that the book value per share upon closing will be up 25%. And NOIPS will be up upper single digit in year 1 and upper teens, comfortable with that, within 3 years. But we've got a road map to get back to the full ROE trajectory we've shown in the past. And that is a midterm trajectory. And this includes outperforming in the U.K. No doubt about that. But there's a road map to get back to the level of earnings generation and relationship with the capital base that we've delivered in the past. I would say, Mario, we had risk debates, we had strategic debates before doing the RSA transaction. But the big debate we had was, our ability to generate mid-teens ROE and to outperform. We've built a moat. And where we play, we want to create an advantage. And that's why I'm saying, if we can't, that will be a big strategic question 1, 2, 3 years down the road.

Do you think getting back to that mid-teen, which I think Louise in his opening comments yesterday said, hey, we think we can get back there over time, 2 to 3 years, let's call it. Do you think it would require any meaningful capital initiatives, like buybacks or anything to get there? Or do you get there through the synergies and business optimization?

I think the latter.

So you don't need to do anything special to get there?

No. I think, Mario, if you look at the levers of earnings growth -- and the reason why we've framed the objective around net operating income per share growth by 10% over time is because there's many levers here. One is organic growth. The other one is margin expansion. The other one is capital deployment. There's a denominator in how well you use your capital. And the trajectory to get to 15% includes using all these levers. And so what's the capital lever? Well, we'll continue to invest in distribution, for instance. Small checks, but very effective. And so that's part of our thought process. When we say we're getting back to mid-teens, we need to deliver the goods on the acquisition. We need to create outperformance in the U.K. And we need to keep doing what we're doing here, and that includes capital deployment. But there's nothing special that we haven't done in the past few years that we need to do to get back in the zone.

You mentioned distribution, and you can make me immediately think of BrokerLink. BrokerLink has doubled in size since 2015. That is something clearly impressive, organic and inorganic getting there. Now the law of large numbers tells me you can't double again in the next 5 years. It just seems implausible. Help me think through that. Do you think through consolidation and organic growth, you can double the double?

I don't want to throw new objectives out there. I prefer to do that on Investor Day, Mario. But there's a lot of momentum there. Honestly, there's plenty of room left for consolidation. We might look at bigger transactions, other consolidators in the marketplace. And we're doubling down on the efforts to build an organic growth muscle in BrokerLink. And so the objectives we're giving to these guys over the next 5 years is pretty steep. Yes. That's the first point. The second point I'd like to make, Mario, is that, we said we would expand our footprint in specialty lines through MGAs. Well, that's part of distribution income as well. And the third thing I would say is that, when we made the call over a decade ago to build a distribution business. The debate we had at the time was, our strengths are in the risk selection and claims management and distribution to a certain extent. Can we build a big business on top of doing that well? And at the time, I said, well, we'll try, but we'll try only one thing, and that's building distribution. I feel like sitting here today, heading towards a $300 million sort of earnings of distribution in 2021, good margins growth, I feel we've done that. So that's why we -- now I've said last year, maybe we can replicate, adding a core competency in the home restoration business. And that's where the acquisition of On Side comes in. It's accretive already meaningfully. We've generated 20% growth in year 1 in that business by using the Intact volume. We've improved cycle time, that is the time of the claims, by 15% in year 1. We want to improve by 50% over time. We've put some of our folks in that business. And I think the next quasi distribution called this service unrelated to underwriting is home restoration. So you've got BrokerLink and the investments we've made in that space. We have a portfolio of investments in partners. You have the MGA stream, which is important. And then you've got the home restoration business. These are all great businesses, strong performance, all have consolidation opportunities. And all of them are reinforcing the core strategy of the organization, whether it is adding a closer relationship with customers on the distribution front, whether it is expanding the specialty lines footprint or adding to our claims advantage in the case of On Side. So all around, their strategy, I think, is solid, but you have a real distribution/service earnings muscle that we're building.

Yes. As you were running through that discussion, you reminded me so much of the way Royal Bank talks about their business. Royal has this separate business. Hear me out. Royal has this other business called Ventures. And Ventures is all of the stuff they do on the side that's ultimately to drive better business for the bank. When you talked about these other ventures -- actually, do you have a name for that as well? Do you also call it ventures or no?

No. We have something called ventures. These are businesses we own and operate. And they're not adventures. Like they're real business making real money that reinforce the strategy today. We have a venture business which is doing better than I thought it would, which invests in disruptors in our space, where we take stakes. Maybe eventually, it gets closer to our core operations, but that's not how we see it. So we have a venture business as well, but I don't see it as a core element of our operation. I see it as creating optionality for Intact in the mid to long run.

Okay. It did sound a little like Royal Bank, but it may be slightly different, because in Royal's case, the ventures they're generating are truly trying to contribute today to the part to the bank. It sounds similar, but maybe a little bit. Let's flip gears a little now and talk about some of the individual businesses. 2020 -- I've made this point too on the calls and other discussions we had. I thought 2020 was a very, very special year. The sort of -- when I compare the growth in net earned premium in auto to what happened to claims -- and I know everybody likes to think of things as ratios, so I would do. But every once in a while, I want to take a step back and look at it a little different. And one of the things that I've been tracking more and more is your growth in earned premium relative to the growth or decline in underlying claims in personal auto. And I think there's no denying that 2020 was an exceptional year. Q1 for 2021, underwriting income in personal auto was [ higher ] than Q1 2020, but it seems almost impossible for the next 3 quarters of 2021 to come anywhere near what we saw in 2020. Am I being be too negative? Or am I on to something here, that personal auto can't track -- can't match what we saw last year?

Yes. So your absolute dollar question yesterday caught me off guard a little bit because we don't look at the world like this necessarily, but it's a good angle to take. And 2020 was special. And I think you noticed that the claims didn't drop as much as what we were talking about from a driving point of view, right? And you were zooming in on automobile insurance. And I think the answer I gave, if I am more specific, today, I would say, yes. The claims incurred was probably down 10-ish. The driving was probably down 20-ish. Where is the difference coming from? And I think you had a couple of points of growth. You have to keep in mind that loss adjustment expenses. We don't fire our claims people in a year like 2020. We actually created jobs in 2020. But that wouldn't drop with the accidents. And as I mentioned, Mario, there's a bit of severity in the system that keeps upsetting the drop in frequency. But more importantly, the long tail lines are reserved with a long-term perspective in mind. And as such, the reduction in driving, you don't really see the long tail lines. And so for all these reasons, there is a gap between driving as well as incurred losses. Now when I look at 2021, Q1 was a strong Q1. And we'll talk about Q2 in July and August. 2020 was extraordinary. No doubt about it. But keep in mind, we entered 2020 with a lot of momentum. Frequency in Q1 2020 was down 15%, nothing to do with COVID. Much to do with the actions we have been taking the 3 years before that and a bit of benign weather. And I still think that there is a tailwind from all the actions we've taken as well.

Part of where I was going with that question is your efforts on relief, premium relief. We saw $75 million in the quarter. Did a little bit of math that works out to maybe a take-up rate of 25% of your customers in personal auto. And the way I get there is, I took 2021 -- sorry, 2020 Q1 premiums, divide it by 3, so I could get what a month was. And I kind of came up with 25% take-up from your customers. Am I in the ballpark there?

You're on the low side.

On the low side.

Yes.

Okay.

Our -- we started those relief programs in March 2020, by the way, before people were talking about relief and discounts were given. And the programs we put in place were needs-based and risk-based. And we told people to call us and we'll help you, whether it was financing or just discounts and rebate. And a big proportion of our customers reached us when in need or when their profiles changed. And that's kind of how we've given in all lines of business close to $600 million of relief. The latest program we've put in place -- a number of people's profile was changed already. But I would say the take-up is above what you've stated. So low side is how I would qualify your math.

That's fair. Now the $75 million is purely an estimate. Is it over? Can folks still call Intact and request relief?

Yes, yes. Absolutely. So first thing, the $75 million hit the top and the bottom line, 100%, written, earned, in the 93% combined ratio.

Right.

And so judging by the flows, calls and then clicks in the last few weeks, there will be a bit more, but not in the range of what you've seen in Q1. We're at the tail end of this.

And what is -- can you give us any sort of impression on how frequency is evolving in Q2? Is it very much like Q1? Or are we seeing people like myself become totally frustrated with these lockdowns and just getting out and about again?

Yes. Mario, I won't necessarily talk about frequency. I'll talk about driving. Driving has been down 13% to 15% compared to pre-COVID pretty much since the summer of 2020. And it hasn't moved much in the first part of 2021. Meaning, I looked at the stats a few days ago, and through telematics, we get an update once a week on how people drive. And I think pre-COVID, same time period, we were down 15-ish percent at this stage. I expect to see a gradual pickup towards the end of the summer, but we're in that zone. And felt like relief was the right thing to do for customers given the third wave.

Okay. And you said something about personal auto, I think you and Louis both offered the same comment, which is, there will come a time when the world is normal again or somewhat normal. And there's enough -- there are challenged companies in this industry that will need to go back to more disciplined pricing -- pricing increases. Do you think however -- and this is just a theory I've been floating around for myself mostly is, that something's changed? Because of COVID, there will not be an immediate return to more pricing action, pricing increases, that the industry will go through a much more -- like a prolonged period of price reductions or no increases. What gives you the confidence to say that the industry will get back on track shortly after we get some normalization? What sort of gives you that confidence?

In the first half of 2020, the industry had adverse development in automobile insurance, right? We've done a lot of heavy lifting since 2016. You remember very well, it was a painful period for everybody, when we picked up on the fact that there was more inflation and liability than most people thought, including ourselves. But we moved very quickly on it. It took us really 2-plus years to fix that. And the area where the inflation was coming from was so hard to identify, you needed to have super responsive reserving systems. And my perspective is that if you don't have a sophisticated reserving system, people are starting to find out about those claims that have been lagging. In particular, basic claims, not small claims, basic claims that have a potential of becoming catastrophic. When they become catastrophic, it's a 10:1 ratio from a reserving point of view. And so unless you put a well-informed probability on those, I think the industry is probably under-reserving that segment and is starting to find out. And that's, in part, why in the first half of the year, you had adverse development in automobile insurance. So driving reduced, frequency reduced, rates accordingly were tamed, but there's a fair bit of digestion left in the system, my observation at this stage. Now if driving stays the same, price will reflect that somehow. And I think that the market is not headed for an ongoing rate reduction environment. I don't think. In fact, I wouldn't call this a soft market by any stretch. Rates are tamed because the cost equation is tamed for now. But it's a tight market. It's not like everybody wants to grow aggressively. Not at all. I think people are reflecting in rates what they think driving looks like. There's a bit of regulatory pressure in the exercise. And that's why rates are, I think, more stable in this environment. I do think there's a lot of digestion. And I think people are cautious in the field, is my read. So it feels different.

Okay. I want to tackle the development as well. Prior year development was special this quarter. It was good. A lot higher than I think we were focusing on, we were expecting. And whenever I think of prior year development, it's got a bit of a black box feeling, so you never really understand it that well. Is there -- are there any themes that you could refer to that played out in Q1 that sort of drove the very good prior year development? Is there any kind of -- is there some -- maybe some context you could provide or examples you could provide that help us understand why it was better this quarter?

Yes. So first, in the first quarter, Mario, you tend to have somewhat higher PYD, favorable PYD, because the prior year started the month before -- or finished the month before, and therefore, some of the activity from the previous months actually play out in Q1. So you tend to see a bit of seasonality there. And if weather is benign in Q4, you'll see more favorable development in Q1. And I think you had some of that. I think in lines like commercial lines, where we've had the very healthy track record of prior year development, mid- to upper single digit, it slowed down a bit in the past few years. It picked up again in Q1. But PYD, while elevated, is not way beyond what it's been historically, if you take a longer-term perspective in commercial lines. So I think we had a couple of points above historical average in commercial lines. So that would be a second thing I would offer. And then automobile insurance, I think we have reflected the caution we took on the long-tail lines on accident 2020. We've reflected some of the benefits of that in Q1. I would say if you stack those 3 things up, that's kind of the story on PYD. And that's why I think you're likely to see somewhere at the upper end of our range, which is 1% to 3% in the foreseeable future.

Okay. Sort of a related question, but I appreciate there's a distinction. Can you update us on where the reserves stand today for COVID-19? Like there were some reserves that were established in the past. I know that RSA has had to set up some reserves as well for bodily injury or -- no, sorry, business interruption abroad or in the U.K. Is there anything you can give us, just some comfort level on where the reserves stand for your company and for RSA in business interruption insurance?

Yes. So I'll talk about Intact first. And it's harder for me to talk about RSA until we actually own it. But in the case of Intact, as you know, we did a bottom-up analysis in March 2020 to figure out where we'd have to put up reserves for entertainment, for liability/class action on a number of businesses and then for business interruption on the 0.5% of the portfolio where there was coverage. We put up in Q1, I think, it was $83 million. Then I think it was in Q4, Mario, I'm talking out of memory here, because the second wave was so intense and there was a second wave of event cancellations, we've added, I think, it's $25 million in Q4. So we're in the 105-ish, $106 million range in terms of reserves. The incurred is a fraction of that at this stage. And that should give us comfort that we're quite prudently reserved for COVID. I don't really see an issue there. In fact, we're really quite comfortable with the position we've taken in Canada. With regards to RSA, we have scrutinized obviously in the due diligence their position. We've -- we anticipated a number of outcomes in the courts actually when we assessed their product and baked in our valuation of the deal where we thought the court judgments in the U.K. would land. Now we think they're prudently reserved. The reinsurance in their case will kick in. And we feel comfortable about that. But even what is reinsured is not massive in terms of exposure, Mario, and the vast majority of their commercial lines contract require physical damage, and the courts have said COVID is not physical damage. And so we feel comfortable about their positioning on COVID-19 reserving.

Okay. I want to flip over just for a moment now. Let me just check to see if there's any questions. No. We're good. Very often when I just talk about insurance with investors and companies, we spend so much of our time focused on the liability side. But if you look at history, if you look in life insurance, when things have gone terribly wrong, that often goes wrong on the asset side. So I want to spend a little bit of time now on the asset side of Intact and RSA, to the extent that you're comfortable talking about it. And I want to phrase the question this way. We are going through an odd period in history here, with all this government support and deferrals and what have you. And in periods like this, we do tend to see excesses build up in the system. When you think about Intact's asset side and RSA's asset side of the business, do you see any excesses that are being built up in the system that could cause a little bit of heartache down the road? Or are you really content with the way the asset side of the balance sheet is built for you and for RSA? Do you see any risks here that we should be worried?

So let me first say that RSA's asset mix is very conservative, okay? So that's the first point. It's largely fixed income, high-quality products. And I would say there is less, in relative terms, risk on the asset side at RSA than there is here at Intact. You haven't seen our asset mix change in any meaningful way in 2021, Mario. In fact, if anything, we've taken a slightly more cautious stance, knowing we had a big deal coming in 2020, seeing the gyrations in the marketplace. In fact, we've protected the asset side to a greater extent than we otherwise would. The asset mix is not meaningfully different. So we have in this business model 2 key elements. The first one is that the assets and the liabilities don't move exactly in tandem. But both sides move in the same direction, at least from an interest rate point of view. And the second key point is that we make short-term promises. We hold our promises, but they're short term in nature, and we can reprice. And therefore, we don't feel compelled to increase risk to offset pressure on yield or interest rate. We haven't really done that in the past, and we haven't done that this year. If anything, the risk profile dropped compared to the start of 2021. There is a bigger element to your question though in light of RSA. And it is the fact that the assets now -- we're doubling the assets under management. We're increasing the number of tax regimes, capital regimes that we operated under before, right? We had Canada and the U.S. And now we've got the U.K. in the mix. And the exercise that my team on the asset side has been doing and been involved with them is optimizing the asset side of the house, taking into account our unique profile as an organization, the capital regimes in which we operate and the tax regimes in which we operate. My own view is there is an opportunity to improve the asset side without increasing the risk envelope, given the mosaic of environments that we now have which we didn't have before the transaction. But you should not expect an increase in the risk profile of the asset at Intact. We're comfortable with where we were. We think we'll bring RSA in our environment, taking into account the starting point and our appetite for risk. And we'll try to optimize for capital and tax.

This next question is going to be a bit of a strange one. So just bear with me for a moment. Whenever a deal is first announced, I notionally make -- I have in the back of my mind an idea of what their goodwill that a company is going to put on their balance sheet as a result. And you might think, well, who cares? It's goodwill. Doesn't affect your capital. Why are you still pressed by it? The reason why I do it is, I have the idea of what I think goodwill should be on the deal. And then I pay a lot of attention to what the goodwill actually is when the deal is closed and brought on the book. And any major change in that goodwill relative to what I thought it should be always piques my curiosity, because it tells me what the company thought when they started digging in and looking at the assets and liabilities. So let me ask you. The goodwill -- the notion of goodwill when you first started that deal and the goodwill that will actually be booked when the deal is closed, do you think there could be any meaningful difference from what one would have thought when the deal was announced to what it will actually be? I know it's a strange question, but I think about these things a lot.

Yes. No. Well, I think there's -- look, the reason why it's important to think about these things a lot is because a change in goodwill is driven by your reassessment of the balance sheet. And as you get closer to closing, and you think about your purchase price equation and the entries you'll make on the opening balance sheet, you reassess assets, liabilities and so on. And that's why you can have differences between what you thought at the start and what you end up with. So I think it's a very healthy exercise. And you can expect, Mario, that we'll make sure that the balance sheet has the degree of caution that Intact operates with. So that's the first point. Nothing major, but that would be an area of difference between a theoretical calculation that you would do with whatever is available and what you might see at the end. The second point in that assessment, Mario, is the fact that you might have assets that you place a different value on. And these might be hard assets, but these also might be things like software and so on. And I think between caution on the balance sheet and evaluation of non-publicly traded assets, that's where you get a difference between how you can come up with goodwill and what the purchase price equation would be. So you can expect some differences, but I don't think you'll fall off your chair. I'll see something though when I should not venture in accounting. The biggest difference, Mario, between what I thought at the start of the deal and what is likely to happen is that there is a concept called -- now if my CFO is listening, he's probably shaking, there's a concept called bargain purchase price accounting, in which if you don't pay above book value, there's no negative goodwill. It's actually accounted for in the P&L when you close your acquisition. I did not expect that. I thought that there would be negative goodwill offsetting some of the goodwill. Apparently, that's the case. So that's the biggest difference for me. Otherwise, it's all within the plan.

For those following, I'll tell you what I'd like to see. I always like to see that the goodwill that's actually booked is a little bit greater than what I thought it would be, but not dramatically greater. A little greater tells me that, oh, that's good, the company has probably booked a little bit of something for future profits. That's going to flow into profit in the future. I don't like to see it too much because then it looks like they just started gaining it and just folding profits in the future. So there's -- like there's a fine line for me of seeing higher than well, but not too much higher than well. We've got 3 minutes left, and I want to have a hard stop at 3 p.m. So I want to go to a question that you probably don't get much because you're still very young man. But occasionally, as you hear it, Charles has been around a very, very long time. He's had a great career, but he's still a young guy. Maybe you can give me some perspective on your future. You've just done a massive deal. So you probably can't go anywhere for a good long time. Maybe just confirm that for us and talk about how you think about your future.

Right. I mean, obviously, you don't do a deal like this if you think that you'll move on to something else in the near term. I think that's clear. And I have a simple life, Mario, and most of my friends work here. So -- and I think you derive a fair bit of pleasure from building at one point in time in your life. And I would say, for now, this is what motivates me, I would say. Yes. And yes, thanks for saying I am a young man.

Yes. I just figured I've seen you with your young kids on vacations, so I know that you're still a young guy. Charles, I appreciate you guys -- you doing this. It was really a pleasure. And good luck over the next 12 to 24 months. It's going to be a lot of work for you and your team, and I figure you guys referenced that.

Thank you very much, Mario. It was a pleasure.

Thanks, everyone, for joining us. Have a good afternoon.