Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

Okay. Good morning, everybody. Thanks for joining us. I'm Mike Phillips, I'm Morgan Stanley's property casualty insurance analyst joined here this morning by a colleague of mine, Mark Carlucci, who runs our ESG efforts here in research at Morgan Stanley. Before we get too far, let me read the regulatory statements and disclosures, and that is for important disclosures. Please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please do reach out to your Morgan Stanley sales representative. Okay. So with that, we're pleased to have representatives from Intact Financial again this morning. Intact is a property and casualty insurance company based in Canada, significant presence in personal and commercial lines in Canada, one of the companies I cover here at Morgan Stanley. They have a growing presence in the U.S. and other parts of the world. We're joined by Senior Vice President of Claims, Patrick Barbeau, to have a conversation about how they think about ESG issues. So Patrick, thanks a lot for joining us. I apologize. I'm audio only, no video, but thanks for the patience here. Thanks for joining us, Patrick.

I guess, just to kick it off, it might be good if you could just spend a second on just kind of Intact, more than what I said, if you don't mind, just kind of the business itself, operating strategies and the lines of business that you're in, more than a little bit that I gave there, I think we can kind of go from there.

Perfect. Yes. So Intact, as a very long and proud Canadian company, we're one of the -- actually the oldest companies of Canada. Intact Financial Corporation, or IFC, is the largest provider of P&C insurance here in Canada. We're also one of the leading provider of global specialty insurance solutions. And with the acquisition of RSA, we now have also a leading position in the U.K. and Ireland. We've grown from both organically and from acquisitions to a volume of a little more than $20 billion of annual premium at the moment. So we became a widely held Canadian company and changed our name from ING Canada to Intact Financial Corporation back in 2009. And if we look at our different sectors, in Canada, we distribute our insurance products through the Intact Insurance brand via a wide network of brokers, including the -- our wholly owned subsidiary, BrokerLink. We also do it directly to consumers through the belairdirect Intact brand and also provide affinity insurance solutions through the Johnson Affinity Groups. In the U.S., our Intact Insurance Specialty Solutions provides a wide range of specialty insurance solutions or products and services through independent agencies, regional and national brokers, wholesalers as well as general managing agencies. And outside of North America, we offer personal lines, commercial lines and specialty lines products across U.K., Ireland, Europe and Middle East, and that's through the RSA brands.

Perfect. Let's get into, I guess, a topic that's pretty well-known by insurance companies and talked about even more so in the past couple of years, and that is change in weather patterns and climate change. Certainly, what we've seen is incidence of severe weather has increased. You guys are not being immune to it, obviously. And so maybe can you talk a second about what the types of new risks this increased weather patterns have created for the industry that maybe we haven't seen before?

Yes. As you mentioned, the number of extreme weather events has increased by 5x over the past 30 years in Canada. And if you look at it in dollar figures, the amount of insured damage more than quadrupled over the same period. So for sure, climate change presents a growing risk pools for insurers. And as risk managers and investors, we have a role to play here to help protect society and improve resiliency, specifically to climate change. And I think this is a way as well to respond to changing needs of clients. With increased frequency and severity of these events, there are opportunities to improve the offering of products. We have a proven track record of doing so. Over the past decade or so, flood risks has overtook fire as the main peril. So we had to redesign our property product lines quite deeply over the past many years, and we introduced overland flood products back in 2015. Some of the new risks we're observing from a property perspective linked to weather is more snow in the winter in the eastern part of the country. We've seen at a higher -- much higher frequency of roof collapsing as one example. But we can also foresee that globally. We'll see in the coastal areas, more storm surge as well as coastal erosion because of the rising level of seas. More globally, I guess, not only climate changed itself, but the work done and the transition done to net-zero will change quite a bit the way that people move from point A to point B. And if we look at the transportation industry, we see 4 big trends that will shape this transition. One is more sharing economy, second is more electrical vehicles, and then vehicles themselves become more autonomous and more connected. So when we look at many of these trends, we think we are well positioned at Intact to capture some of the opportunities. Because of our multi-channel distribution, our investments in data and AI, our leading position in the sharing economy as well as a much more diversified portfolio that we have now than a few years back with both geographically and by lines of business with a strong presence in commercial lines and specialty lines.

Okay. Yes. You mentioned property and, obviously, that's a big piece of the equation here. Are there different types of property damage that we're seeing from higher incidents of these type of claims from climate change that are changing property damage claims that you're seeing because of this -- that's happening? And if so, how you think about that? And how might that grow over time?

Yes. We -- flood itself represents now about 40% of our losses in property. So that's a big change. It's more than fire, as I was mentioning now. There were more severe hail events, so linked to more severe storms, especially in the western part of the country here in Canada. So that -- the severity of these events are increasing. I mentioned the amount of snow, and it's not only the amount but the presence of rain in the winter months with the amount of snow on roofs is causing more of these losses. And of course, there will be a lot of changes in the coastal areas with the rising levels of seas. I think that's where products, pricing, segmentation are key to address this, but also prevention. The example of the way the group of -- snow on the roof is one that is fairly easy to mitigate. We just -- and we are very active with our clients in specific areas where we see big amount of snow to help them remove the snow on the roofs with subsidies as an example.

Patrick, this is Mark, and thank you for doing this. Just wondering if you can elaborate on that a bit more. When investors think about insurance companies in North America, geographically, how should they think about risk and exposure?

Yes. Climate change is a global issue and different parts of the world are facing different trends and different risks. Take Canada, for example, for a second, the thesis we've been operating with is that in the coming decade, the western part of the country will see the summer months being 20% more dry. And the eastern part of the country will see the winter months being 20% more wet. So that creates a lot more flood, a lot more wildfires and extreme heat impacts. So I think the industry and, clearly, us at Intact, we're investing heavily in advanced risk modeling expertise to be able to read these brands more clearly and identify what might be coming up. Not only to see the global trends, but to be able to apply it in our segmentation and pricing approach. This is key for us to be able to offer more protection to Canadians and people in other parts of the world is to clearly understand where the risk is coming from, how it is evolving and data is the way to be able to do that.

Yes. And actually, on that point, I guess, sort of a 2-part question. But one, from an underwriting process standpoint, just curious how these impacts you've discussed have impacted that process. But then 2, just longer term, from a corporate strategy standpoint, how you think about navigating the business around some of these climate change themes?

Yes. So there's many different ways to address the risk we identify. I mentioned a few, but just in a bit to recap and add a bit of color. If I take the example of the big events of 2011, 2013, when we saw a very sharp increase in the events of hail and flood, our approach when I mentioned that we redesigned our property lines was based on many aspects. It included increased segmentation from the data, rate increases, product changes, but also a lot of investment and focus into the claims process and the supply chain, in particular, where we, as an example, invested to increase the capacity in the property repair with the acquisition of On Side, the largest renovation company in Canada and as well as a greater emphasis on prevention. There's a lot of easy ways that we can reduce the impact as individuals or business owners of climate and big weather events. And that has proven to be quite effective. If we look at the last 6 years, despite some elevated frequency of cats on many of these years, the results on our property lines have been in the 90% combined ratio or better even in years where elevated cats were present. And this is because the product is adapted. But more importantly, I think the pricing is reflective of the risks as well as our -- we eliminate some of the risks through our mitigation and prevention approach. So...

That's okay. Oh, just go ahead, sorry. Mark? No?

Well, there was, I guess, a bit of how we approach. So the strategy around that more globally also for us, the response when it happens, it's one thing to have the right product, segment it properly, have a good understanding and mapping the risks to reflect it in the price. But then when the events happen, the response and the speed of the response and the accuracy of the response from a claims perspective is key. And for us, the internalization strategy of all the claims process is a key element of the strategy. We can leverage our scale across the country to dedicate people in the areas. We've created a dedicated cat management team that focused on these -- on preparing for these events, and we can respond very quickly when it happens. Sorry, Mike.

Patrick. Yes. No. I just wanted to a quick follow-up on something you said there, Patrick. You mentioned price adequacy, clearly very important in your business. How do you get comfort in that being the case given such changing dynamics and climate change and everything else that's happening that your cat load and pricing for these risks is as adequate today?

Yes. Well, one big factor that helps, Mike, is that we renew our policies every 12 months. So we don't commit to a long-term pricing. We can adapt and reflect new trends on a yearly basis on our -- completely in the portfolio. So that's one key element. We have the largest database. We have a team of more than 200 data scientists on top of our hundreds of actuaries. So we go deep in the analysis of these trends. We learn from each big events. And we try to predict the return period for each of these events. So we understand in average the speed at which it evolves. And we have very specific mapping by types of risks. We have -- we understand quite well the areas of Canada that are more subject to forest fires, as an example, or to hailstorms and to flooding. And we have geocoding capacity, so we can get down to the very precise location of each of our risks and overlay that on the different risk maps. And I think these technologies and data expertise combined with high level of discipline to reflect that in the pricing and the ability to adjust our price on a yearly basis are all components of why we're confident about our ability to do that. And as I said, we've certainly been successful, both on the absolute results and outperformance in that line. It is actually one of the fastest-growing lines of Intact with very good profitability performance over the past many years.

You mean property, right? Property lines, I guess, certainly growing?

Yes.

Yes. Okay. I guess, how does this whole evolving change affects the way you think about staffing and hiring people? Are you looking to do more on people that have expertise in climate change and cat modeling? Or are you okay with what you currently have? Are there any implications there?

Yes, many areas that I think it affects our people strategy, I mentioned claims being one because we want to internalize the process, not only from a claims adjusting perspective, but we made the acquisition of On Side. This is so we handle the repairs of a big portion of our property claims ourselves. We have a team of -- in commercial lines, in particular, the largest loss prevention team in Canada, it's 70 individuals that is made up of engineers, fire protection experts, even sprinkler designers and these kinds of expertise to help us on the prevention side. And yes, data, as I said, in the data lab, we have a lot of -- we have grown a lot that team from a data science perspective. And then the other part I would mention is in the applied research area. We're investing in the Intact center on climate adaptation and want to make sure we leverage the very good concrete output that initiative is producing internally.

Okay. That makes sense. Any -- this is a bit out of your domain as the Head of Claims, but just curious your thoughts on what it means for Intact, impacts on the portfolio on the investment side. Any changes that this might bring as you think about investments in your portfolio?

Yes. Climate and ESG, overall, is integrated into our IIM investment policies and procedures. Each of our portfolio manager is responsible for assessing all the material risks and opportunities within the portfolio. And at a high level, we do that in 3, I guess, main ways. We do it first through the engagement with the management of the companies we're invested in. This is centered a lot about climate adaptation, looking at their plans as well as on diversity. So we have enhanced our proxy voting policy with a focus on onboard diversity and what it means generally do not support the Board without women representation, and we support the election of directors with diversity and skills, expertise and background that include both gender diversity as well as representation from physical minorities. So that's the one big part of engagement. We focus a lot also on energy transition. We've established a new position recently on coal. So that means that any companies that generate more than 25% of their revenue from thermal coal mining is -- we analyze their transition plan, which includes public disclosure, their targets and any initiatives in emission reduction through our investment decision. So the energy transition is a big part. And then sustainable investments themselves. So we have today, about 1% of our IIM's total invested assets into sustainable assets. And it includes green and social bonds as well as investments in renewal energy and sustain -- new sustainable projects like education, hospitals and affordable housing projects.

Thanks, Patrick. If we take -- so we talked a lot about Intact. If we sort of take a step back more of a high-level question, but just curious about any trends you're watching in the industry as it relates to climate. And along with that, do you think the industry as a whole is doing enough to address this risk?

Well, probably not yet doing enough. I think as the transition focus continues to increase overall for the society, I think more will need to be done. But we've certainly seen some momentum and traction at the industry level over the recent past. The industry has been moving on a number of issues. It's largely focused on climate risk disclosure and, in fact, the task force on climate-related financial disclosure. This is aiming at building the capacity to do scenario analysis on the impacts to financial institutions. And as the governments now are committed into net-zero, that includes Canada, U.S. and the U.K. in the place where we do business, there's -- we see that there will be more opportunities for us to collaborate with industries, government regulators and how we can be even better prepared. One of the avenue locally that we're working through, also as an industry, it's through the Insurance Bureau of Canada, and it's particularly focused on the role of natural infrastructure. We've talked a lot about how natural assets should be included as a critical infrastructure with governments. This is key in our research at the Intact Centre on Climate Adaptation has showed that wetlands, as an example, can reduce the severity and damage of floods by up to 40%. So we're, as an industry, focused in exchanges with government since they, at the federal budget control level are also focusing on improving or investing in infrastructure that this should be made. One thought that I think is getting a bit of traction is trying to create financial mechanisms to make nature-based solutions investable. Because that's a way to both improve our position on adaptation and mitigation.

Yes. That makes a lot of sense. I want to switch gears a little bit and talk a bit about more of the operational ESG side. So first, I was just hoping you can maybe discuss from an organizational perspective, how you approach ESG? And how you structure the governance within the organization so you incentivize those values throughout the company?

Yes. Maybe a few high-level points. I guess our approach has not been to create an ESG stand-alone strategy. We see ESG -- since we're a purpose-driven business and industry, ESG is naturally integrated in our strategic road map. And as such, the Board and all layers of management play a very significant role into following that. If I start at the Board level, the Board obviously assumes responsibility for the oversight of the overall business strategy of the company with some clear areas of focus on ESG. It includes, of course, the monitoring of the risks coming from climate and these examples, but also a high level of focus on social impact. It overseas, as another example, the general approach on human capital management, new succession plan, a big focus on diversity and inclusion. So one key area of Intact, and we talked a lot about that, but it's our values. It's -- all employees are expected to live our values of integrity, respect, customer-driven excellence and generosity. And in fact, all employees from frontline to the CEO are evaluated on how they live the values as part of their annual performance reviews. So that's another example of how we do that.

Patrick, it's Mike again. On the issue specifically of carbon neutrality, can you talk about plans to reach that? And maybe if you have any kind of time frame on when that can happen?

Yes, definitely. So far, we've largely focused our efforts and investment on adaptation. That's where our expertise is best positioned to help both our business and society. We will certainly continue to build on our leadership in that space. But it's just not enough. So as a society, if we don't modify the way we consume good services that we will live and move, we're headed to a scenario of an increase in average temperatures of 3 to 4 degrees Celsius over the next 3 decades. What that mean is a lot more storms, extreme heat, draught, forest fires and a wide range of consequences in the coastal areas, in biodiversity, health, prosperity and even eventually security. So many countries, including Canada, U.S., have committed to achieve net-zero in the next 30 years or so. So our plan is rooted in 4 big areas: double down on adaptation; leverage our technology and products to help shape customer behaviors; the third is to enable the transformation of industries that are key to the transition to net-zero as well as help new ones to be created; and fourth, we want to become ourselves carbon neutral by 2025. We're just finalizing our plans on that. But first, that's largely service-based business, our level of emission is not very high. Our Scope 1 and 2 emissions are mainly related to an energy use from our buildings and fleets. And our Scope 3 emissions are linked to business travels. So obviously, with the last 1.5 years or so with COVID, we've seen reductions in a lot of these places due to work from home and, of course, much less travels. But that has allowed us to develop new collaboration tools that we will leverage and continue on our trend to reduce and be carbon neutral by 2025. It might include looking at carbon removal options as well.

Okay. And kind of similar to that question. As you said, as a service company, some of these things are a little bit different for you. But you've done pretty good efforts recently in reducing overall emissions. I don't have exact numbers, but I know you've made some good efforts there. Can you talk about what you've done there to bring down emissions?

Yes. It's just short of 10% in reduction emissions in 2020. A little more than half of that was due to -- was helped by COVID and the lockdowns. And yes, business travel was a big portion of that. But we're looking at a few areas. Obviously, there will be more work from home that will reduce at some point, the footprint of our offices, but also all the investment in digital solutions that are reducing quite a bit of the traveling, not only for meetings and things like that but to meet clients to solve their claims and so forth. There's a lot of -- a big portion of the solution that can be done from remote with our digital solutions now that we'll continue to focus on going forward.

Thanks, Patrick. And I think we have time for one more question. So I know this was a climate-focused discussion, but just want to give you time to speak about any other ESG focuses you have as a company beyond just climate? And I know you've touched on a few of these.

Yes. Yes, quickly, I could name 2 other big areas. They are not the only ones, but that are important to us. One is the pandemic recovery. There was a lot done so far with helping -- making sure that our employees would be able to go through the pandemic. There was a ton of support. We had results of surveys from late 2020 that have shown that our teams are -- have shown the highest level of engagement so far with 81%. They said at 90% that they were very pleased with the support of their manager. We've provided a lot of relief to our customers through the different programs of, I think, CAD 1.2 million with more than $600 million of relief. So a lot is done on the pandemic recovery, not only what we've done so far but as we start move back to normalcy, this is a key area of focus. The other one is diversity and inclusion. I've talked about a few areas there, but we're really -- the pandemic has put the spotlight on what needs to change in our society to be just an inclusive and we've certainly acted over the past year to push forward a lot of our diversity and infusion strategies. We've seen that when we focus on that and put it as central to our strategy that we can move the needle. We've done it on the gender diversity over the past few years and now focusing on all the other aspects of diversity. We have established an internal D&I console that make recommendations to senior management and the Board and had quite a few initiatives. We became a founding signatory of the BlackNorth Initiative, and there's a lot more on our plan for the coming months. So I would say these 2 are very high on our priority list there.

Wonderful. Well, I think we'll wrap it here, but thanks so much, Patrick. It's a very insightful discussion. And thanks very much to our investors for joining us. If you have any follow-ups, please don't hesitate to reach out to Mike or myself.