Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

Good morning, everybody. This is Brian Meredith, and welcome to the 2021 UBS Financial Services Conference. I am the North American insurance analyst here for UBS. And it is my great pleasure to kick off the insurance presentations here and fireside chats with Louis Marcotte, who is the Chief Financial Officer of Intact Financial. I'm going to go through and ask a bunch of questions. [Operator Instructions]

So with that, Louis, thanks for joining us. And where I'd like to start is, obviously, the big topical conversation we've had for the last couple of months, and that's RSA. So the first question here, the RSA transaction is closed now. Any positive or negative surprises that kind of have emerged here as you've kind of gotten in there? I know you've been in London a fair amount going through everything. And what do you think kind of the biggest risk to this transaction are? And maybe what are the biggest upside? Broad question there, but maybe you can start there.

Sure. Thanks, Brian. Good morning, everyone, and I'm happy to be with you today, much rather be in person. But in the meantime, we'll keep on doing some virtual meetings. So as you said, Brian, and we've been talking about this, in our case -- or your case, maybe a few months, we've been talking about it for a number of months now and doing quite a lot of work on preparing ourselves for this transaction. So it would be, I guess, surprising at this point in time to have no major surprises, to be fair, because we studied the file for a long time, did a good due diligence. We did spend time in June with the teams for the first time. Everything was done virtually up until June, and then we had a couple of us travel to London, meet the teams in person and explore further how we would work together. So at this point in time, I wouldn't say there is some huge surprises out there for us. A couple of noteworthy items, though, I would say. First, the successful sale of the Denmark business, I think that is certainly for us, positive, a good outcome, a good transaction. Very happy to have got the agreement with our partners in Scandinavia, so I would say that's a positive. It's positive to our model to the returns that we were initially expected. It's north of 1 point better on the IRR. So I would say that is certainly good news on the overall RSA transaction. From a -- if I was going to look at negative surprises, none found, but what we've done successfully now is acquired the adverse development cover. And this one is really meant to cover ourselves against any risk of adverse development, as the name implies. And we were able to successfully do this. It's after close, but quite happy with the -- with having settled the ADC after close. So I think that's good news. And then in terms of where the -- maybe where the risks are or the upside you were asking about, if any, so let's not forget the synergies. $250 million are not necessarily -- as much as they're visible, we still have to realize them, and we give ourselves 3 years to get there. I would say the place where we're most focused on is the loss ratio improvements. And those have not been quantified that or harder to quantify. But that's certainly, I think, the area where there is upside for us. And this is where we're trying to take our efforts now and add sophistication in the pricing and segmentation and get a bit of upside. We haven't given any figures on that yet, but I would say that's -- if there's one area that we could see some upside, I think that's where it will eventually come from.

Got you. Maybe we can dive into that a little bit more. I mean if I take a look at the U.K. business, it looked like by my calculations, about a 98% combined ratio in the first 6 months of '21, when you ex out the kind of COVID-related losses and some of the reserve true-ups that they took going into the transaction. So maybe you can discuss some of the steps that you're going to take to get that down to that low 90s combined ratio where I know you like to target your commercial lines combined ratios.

Sure. So the whole goal here is to create outperformance in the U.K. And I would say the approach is not dissimilar to what we've done in OneBeacon. When we acquired it, they were also in the upper 90s. You'll remember, we had a plan to get them to the low 90s. And we're going to sort of do it similarly, except in a different setting, of course. Firstly, the first topic was really securing the talent in the U.K., making sure we had the team to carry on the work. They have done good work already. The combined ratio was improving. There were some weather, I think, 2 or 3 years ago, but their track record was moving towards a mid-90s combined ratio. So that's largely been done. We are in the midst of reviewing the performance of each line of business. So it's important for us, if you want to build out performance in a market that all the lines of business are profitable, are providing returns that are commensurate to the risks we're taking and therefore, a bit like we did in OneBeacon, reviewing every single line of business to see if it is performing to our expectations and driving outperformance for the overall business. There will be efforts to really simplify the business, simplify the footprint as well. We think it -- there is maybe a bit more complexity than what we would like to when there's options to simplify. They have been on that path for some time, and we want to continue with them on the simplification road map, if I can say it this way. This will also imply some investment in technology. We think there's areas here where they can improve the technological pillars in the business. And so this will be part of the success as well as investing in technology, improving the technology available to them. And that would also enable a bit more sophistication in pricing and segmentation. And then finally, I will say, optimizing the geographical footprint. Our goal is to make sure that every country, every market they are operating in are either contributing to our specialty lines platform or outperforming in their marketplaces. And there's still work to be done there, but that's the other way for us to improve the combined ratio.

Got you. I mean on that topic, I guess the question is are there more smaller divestitures maybe to be made here, at least in the immediate term. I remember going through the whole process, and there were some -- I guess some acquisitions there -- I'm sorry, some operations in the Middle East, in certain areas that just didn't seem very strategic for you all.

So that was the first impression. I think we've pushed the message here along that having flags everywhere was not the goal. What we really want to do is either outperform in the markets we operate in or build a specialty lines platform. So those are the -- really the 2 sort of questions we ask for every market we operate in and based on the decision -- or the answers to those questions will define the future of those businesses. The first area of concentration was Denmark, and you saw the outcome there. And then a lot of focus right now is on the U.K. because that's really the most -- the largest business where we want to be to act fastest. And then the other markets will be looked at as are the other lines of business in our portfolio.

Got you. Got you. And one other one, and I think I've talked -- I asked you this before but since you've spent some time [Audio Gap] just understand maybe the culture of RSA versus Intact and how you kind of found the cultures kind of intermingle or are they very different? How are the employees of RSA kind of reacting as you come and bring Intact ways into the RSA organization?

Well, I will say we were extremely well received in the U.K. and very much, honestly, felt at home. I think there is a lot of talent at RSA, a sophisticated organization. They've been on the path to improve their performance as well. The market conditions are not the same. The U.K. market is different. But I would say people are passionate. They've been there for a long time. There's a lot of loyalty, driven by similar values to ours, to be very honest. I think we can help on the -- some of the actuarial sophistication. I think here, there are some areas that we're -- can certainly add value on the claims areas where we historically have performed extremely well in Canada that we can bring to the U.K. But to be fair, they were on the path of improvement on their own, and we want to make sure that, that's pursued. And then we add on top some additional expertise, but culturally, quite a similar fit. There's some adjustment. It's normal. It's -- they've been on their own for a long time, and now they're part of a Canadian-led group. So obviously, that makes a bit of change. But I would say my perception is it's quite well received. Most people have been very welcoming and willing to embark and they -- I think the perception of Intact, there's a lot of humility, I think, in the Intact culture. And there's room for them to build their business, be successful and take a bit of cues from us, but do it on their own and be successful at it. So I think it's going to be a very good fit.

Terrific. Another one that comes up a lot from people, and I know you've talked a little bit about, but curious your thoughts here. People look at the U.K. business of RSA and they wonder how real strategic this is for Intact? And is this something that [Technical Difficulty] down the road maybe looking to divest or do something with?

Yes. We do hear the question quite often. Listen, we've made the acquisition. It was strategic to get our hands on the RSA Canada business. But to get there, we needed to acquire the U.K. business. I think what's key here, the success of the transaction was not built on a divestiture hypothesis, not at all. To the contrary, it was built on outperforming in the U.K. market. And when you look at the economics and you sort of allocate the values that we've paid for the asset, you quickly realize that the price paid for the U.K. business was extremely low, gives us room to take risk, to take our time to build outperformance there. And I think that's really the key in this transaction. It opened the door for us to consolidate Canada, which was the key driver here. And then it has scale that we can build upon to build outperformance in that market as well. So the whole deal is built on us being successful in the U.K., building outperformance. If over time, there are some strategic alternatives that are more appealing, like everything else, we'll look at it. But that was not the basis of entry into the U.K. Really, we're focused on outperforming and building a successful business there.

I'm just curious, any areas within the RSA business, lines of business that you kind of look at and say, "Okay, maybe this is not going to make our profit targets." I mean, I think of the U.K. auto, personal auto insurance business is a really challenging business. Some really tough competitors in the U.K. Is that something that's strategic longer term for Intact?

So it's strategic to outperform in all lines of business. So you've hit the one where they are probably the smallest. They have a small market share there. They have a pretty good brand, MORE THAN. And what's really interesting in personal motor right now is this FCA regulatory change that's coming up. So this is the one where they are, I guess, eliminating the concept of price walking, where people are subsidizing the new business to the detriment of loyal customers. So the pricing is extremely aggressive on new business and higher on loyal customers, and the FCA is actually requiring insurers to level out. And I have to say the gap in the U.K. was fairly high in terms of the difference between new business and loyalty to auto customers, probably driven by the nature of the market, which is aggregator-driven. And it forces everybody to fight really hard to get new business, and then it's compensated on returning customers. So the FCA has put that -- those rules into play. They are beginning in January next year. And that's going to create some change in the marketplace. And we see that, to be fair, as an opportunity because if you're able to price your customers well, do the right segmentation, the right risk analysis, you can maybe improve the position of RSA in that marketplace and take advantage of the change. So that's really where -- in fact, in personal motor, we're all focused right now is the price walking changes and making sure that we get the best out of the personal motor business and then protect the book on the personal property. In personal property, where they are one of the largest players, it's doing very well. And you don't want to have collateral damage from fixing the personal motor driven to the personal property. So it's -- personal lines, given the price walking environment, is a critical area of focus right now and I would say where we're hopeful that we can pull the right strings in personal motor and improve the position there.

Got you. Great. And then let's flip over to the Canadian side of the RSA acquisition. So one of the questions I often get is, "Well, how big can Intact get in Canada, right?" I mean this is going to get you into the [Audio Gap] kind of low to mid-20s market share range. Are you kind of tapping yourself out right now as far as what you can do from a market share perspective?

So the P&C market remains very fragmented in Canada despite us having a fairly high market share, I would say, but we don't see that as being an impediment in the short term for further growth in the Canadian marketplace. The rules are such that the market shares are evaluated by product line, by geography, and it's pretty granular. And our view, when you look at the overall position, there are some areas that we're more concentrated in than others. But overall, our view is this is not a break or any kind of tempering of our opportunity in the Canadian marketplace. There's still room to consolidate, and we intend to take advantage of it if the opportunities come up.

Got you. Curious also, what has been the reaction of your distribution so far by combining RSA with Intact? Is there any 2 concentration issues that they're concerned about? Or are there just diverse enough platforms within Canada, it's really not an issue for them?

Listen, I would say, generally speaking, the reaction is very good. There are always a few pockets of resistance here and there, but they're not very significant. Brokers are trying to do the right thing for their customers and making sure they have the best product, the best prices. And fortunately, the best partner to do that is Intact. So hard for brokers to completely step away from Intact, to be fair, and not just because of size because I think we provide good quality service to our brokers and to our customers. So we don't see a lot of dislocation in terms of distribution. It's fairly minimal to the overall book of business we're acquiring from RSA. And for those who are challenging a bit, they're continuing business with us, we have good discussions and make sure that they're convinced that we're still the right place to do business with. So I don't expect any visible impact from any distribution challenges.

Brilliant. Great. All right. So let's pivot now over to personal lines. So sitting down south of the border, a bunch of personal auto insurance companies this quarter have had some challenging, challenging results. We've seen big increases in claims frequency. Claim severity is running higher than I think companies have anticipated, and there's actually talk about trying to push for some rate increases. Just curious, can you give us kind of what the kind of landscape looks like right now in the Canadian market? Are you seeing that type of frequency? What's happening with severity? A little overview of what's going on there?

Sure. So we are obviously monitoring what's going on in the U.S. So you're referring to the auto market, I guess, essentially.

Yes.

And so we're seeing the same frequency trend. There's no surprise here. Frequency is up massively from last year, but last year was quite low. So no one should be surprised that frequency is going back up. Where the risk comes is if you priced for last year's frequency and now you're getting surprised by the level of increase that could be hurtful. I assume that's not very much the case, but the frequency on its own going up is not really a surprise. Where we stand right now, in our view, frequency is still 20%, 25% below what it was pre-pandemic. So even if it's gone up significantly from last year's summer lows, it's still well below pre-pandemic levels. And then we are seeing miles driven or miles activities, if you want, that's resuming, and it's probably within 5% of pre-pandemic levels. So we got the -- the driving activity is up to close to pre-pandemic levels. Does that qualify as normalcy? I'm not sure, but that's where it is. But the frequency is still lagging, which is interesting. So what we -- what the result of that is everybody in the marketplace is very cautious with rate movements. And so we're seeing a very muted rate environment right now. Insurers, our competitors in Canada are using different ways to sort of give back some of the frequency benefits to consumers. We've given back in Q1, essentially, a total of $105 million. We did it through a cash rebate, essentially. Some are doing it through rate decreases. So it's creating a bit of a change in the rate structure. What's key here is people are cautious, and the regulators have been good at allowing insurers to reduce rates after their filed rates with the ability to raise them quickly, should frequency spike up faster than expected. So essentially, you've got filed rates and then this, I would say, temporary re-reduction to reflect the lower frequency, but you can immediately get rid of that reduction and go back to your filed rates if you see frequency firming back up. So there's a bit of protection. It's not like you have to wait 6 months to move your rates again if frequency spikes back up. You have the ability to do it quickly. So I think that's a good mechanism. But it creates an environment where the rate movement is bigger than it is usually. As a result, retention levels are higher than before. They're at the highest levels we've seen in a long time. We're in the mid-90s retention levels. This means new business is tougher to get because it is competitive and people are giving these discounts. But most importantly, I would say, from a margin point of view, margins are in very, very good shape. And if frequency comes back higher to closer to past levels, I think people are going to get out of those emergency rate reductions, go back to filed rates, which normally would have been sufficient. In our case, pre-pandemic, our rate position was good. I think our competitors still have a bit of pressure there. And this is why our thesis is when we get back to normalcy, we'll still see rate pressure going on for the future. So you'll probably ask me when will that happen. That would be a really, really good question.

Yes.

But it's a hard one to answer. I mean what we're seeing is clearly a trend up in the driving activity. The frequency is following but with a drag. Will we have wave 4? Who knows. But it's probably likely that within 6 months or so, we're probably back into an environment where there's a bit more rate momentum. But it's a hard one to...

What about on the severity side? I mean one of the issues that some of the U.S. personal auto insurers talk about is that they've effectively had this elevated claim severity. Now granted, we've got the inflation this year. But also even if you look into -- in 2020, severity coming in wasn't great because as you guys have pointed out, new technology in cars, all sorts of things that were somewhat problematic. And it was very difficult to raise -- you couldn't raise rates in 2020. You're cutting price. You're giving discounts, right? So you've effectively got 2 years of severity that you haven't been able to price for. Is that something that you are facing, you're seeing? How do you address that?

So the inflation factors that are -- that we're hearing about have to do with technology. Our view -- and you'll remember a few years back, we were facing this technology crunch when we saw the acceleration of technology in the cars, and it was moving from this, a couple of cars have the technology to then the whole fleet of technology. And at that point, we put in place the pricing on a make and model and year. And right now, what we're seeing is the change to those makes and models every year actually tracks the value of the car and the amount of technology in it. So it actually prices sort of automatically for the technology in the car, such that you don't get caught with surprise inflation. And I would say in this sense here, we do acknowledge there is more technology and it does drive inflation. It's sort of being automatically priced for it because of the value of the car that's being insured. So we're not seeing it as a sort of pressure on the margins right now because it's being absorbed to some extent through the values insured of the cars.

Got you. I'm curious, do you all see -- as we were talking about, right, everybody has been getting these discounts in Canada, right? And you've got really relatively inexpensive car insurance, right? And all of a sudden, then things come back to normal and the discounts go away. And as you said, the retentions were really, really high right now. Do you think that you'll see a lot of new kind of shopping new business opportunities as we kind of come out of the pandemic and miles driven picks up?

Well, we think there will be opportunity because at some point, I guess not everybody is equal facing the frequency and severity that's going to settle down once the pandemic is over with. If you're in a good position, I think it's going to give us a nice opportunity to get more market share. And I think everybody is very cautious now in terms of getting -- going after more market share. But the margins are strong. We look -- our position in auto is really strong. So as soon as it settles down a bit, clearly, there's an opportunity to get a bit of market share out of it. We're currently probably getting -- picking up 2 or 3 points of units right now. There's a bit of noise because of the -- our BC auto exit. But when you start removing the noise here, we're in the low single-digit unit growth. And I think once it settles down, I think there's opportunities for us to build a bit faster in terms of units.

Got you, got you. Just quickly on that one, as a sidebar, BC auto, any chance you'll get back into BC auto?

I wouldn't say so. No, I don't see us...

Okay. Didn't know if really changes or something that could potentially happen that would make it worthwhile for you to get back into it?

Oh, sorry. I was assuming no change in the environment. If the environment completely changes, then that's another game, but in the current environment, no.