Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

Good morning, everyone. I'm Tom MacKinnon with BMO Capital. And this morning, we're pleased to have for a fireside chat the CEO of Intact Financial, Charles Brindamour. Good morning, Charles, and thanks for joining us.

Good morning. Tom, thanks for hosting. I'm glad to be here.

Yes. Just -- so let's get right into the chase. I understand that you're not in Canada right now. Maybe tell us where you are.

I'm in Zurich, actually, hosted by one of our reinsurers. So that's good. Very comfortable.

Great. So hey, it's been 5 months since RSA closed. The accretion is coming along better than anticipated. It seems like you're on track with the cost synergies. Let's talk about RSA in terms of its UK&I business in particular. What sort of surprised you here on the -- maybe on the upside and the downside in terms of your previous expectations for that business?

In terms of the upside, I would say, Tom, probably 3 things. The people. So the quality of the people is really good. They're engaged. They know the market really well. There's a lot of talent. And so we can definitely work and build on that team, first point. Second point, the global commercial lines capabilities is very strong. I -- my office in London is actually amongst this group of people, and I'm quite encouraged by what we'll be able to build on the global specialty lines front. And thirdly, I'm thrilled by the regional commercial lines business of RSA. And I think there's a lot of opportunities in the region, in the space that we're -- we know so well in Canada with a large number of brokers. And so I think there is a big opportunity to increase our presence in the mid-market space in the regions, extending our distribution relationships and grow. And I would say between those 3 elements, clear upside there. The other thing is broadly speaking, the market conditions are better than what we thought we would walk into when we started to work on this transaction in the spring of 2020. So that's good. I mean in terms of downside, it's a question of nuances because we had a good sense of where the downside was in this transaction. I would say motor insurance is tough. We knew that. We liked the RSA footprint because they're small in motor insurance. And so as I've mentioned on the earnings call, it is 1% of the premium based on Intact Financial Corporation. So it's not a big deal. But there's a question as to how do you win in motor in the U.K., especially when you start from a small base, and can you win. And then if you win, is this enough return to justify the capital backing the motor insurance platform? I can tell you that upon closing, we spent time with the team actually in the U.K. We've put in place an action plan focused on footprint, profitability, pricing and risk selection. And the team is executing really well on that. And we'll actually spend some time on that next week to review their progress. But the key element from a marketplace point of view is the pricing reforms that will take place in 2022, Tom, where there's, at the industry level, a big difference between new business pricing, which is lower than renewal pricing. And the regulator, rightly so, wants to level those 2 things. That will be a source of dislocation in the marketplace, and we're gearing up our risk segmentation strategy to take advantage of that, but it will be a dislocated environment. Good thing for us, we don't have big exposure. So I'm hoping there's upside. But we'll take it one day at a time when the reform starts. And I say that literally because the good thing, Tom, in the U.K. is the fact that you can change price anytime you want. And so for people like us who are focused on pricing and risk selection, that's a really good thing. It's a -- from a regulatory point of view, it's definitely better than Canada.

Well, that's great. You made mention that part of the strategy in purchasing RSA was to build out global capabilities in specialty and in commercial lines. So just like any acquisition, there might be parts of the things that don't necessarily fit in terms of that strategy. And I'm talking about U.K. personal lines. I mean you've got some personal property. You mentioned the U.K. motor. You've got some pet insurance as well. Can you update us on your thinking about these businesses? Is there opportunities to add value with these businesses? How much overall is it as well? And what's the strategy? And how can you win with this stuff that may not have been noncore, if I use that -- if I can use that term?

Yes. Well, let me start with the first part of your question, which is global specialty lines. So what did RSA do for us from a global specialty lines point of view? First, it really strengthened our Canadian specialty lines platform. Great people, deep expertise, deep relationships with brokers, brought along a set of products and verticals which we didn't have. And so the North American specialty lines platforms getting close to $4 billion. Now keep in mind, we didn't have a specialty lines division in 2015. Now we've got this $4 billion specialty lines business. It's running in the low 90s, outperforming, and RSA clearly scaled that up. So that's the first part. The second part is RSA comes with a global network, which means that customers in North America can be covered in a coherent and cohesive fashion across the world with the global network, which we now run. And then RSA had a number of specialty lines in the U.K. and in Europe, which we're in the process of joining or integrating with the global specialty lines platform, which means that we'll be right up there in terms of the top specialty lines players with some global capabilities. Clearly, the upside is in North America. We're still very small in the U.S. But as you know, building out performance was the first order of business for us. We're largely there in the U.S. Now we have the global capabilities. We want to make sure that what's done on the other side of the Atlantic is -- and by that, I mean in the U.K. and Europe, is also outperforming. And we want to make sure that we're able to be the best in the world in these segments. And that's what Mike Miller and team are working on at the moment. I feel pretty good about that. Now the second part of your question was what is non-core. Well, Denmark was noncore. And we sold it in the first week after closing at 4x book value, if I can make that point on the side there, which really helped the economics of the deal. But the personal lines position in the U.K., #2 in home insurance, and this business has been running in the low 90s for a number of years. Pet insurance, also leader -- a very strong leadership position. So there is scale in both these lines. We can work with scale. Motor, I think, is a more challenging position from a strategic point of view, and we're going through an exercise at the moment where we say, "Can we win? And if we can, does it generate the sort of return we're looking for to leave the capital in?" And we're going through a strategy exercise with our colleagues in the U.K. to make sure that our footprint leads to outperformance. That's our single-minded focus at this stage, and stay tuned.

So I think with the motor around 1% of like the DPW, what is...

So personal lines...

And what about personal lines in the U.K. Intact? Is that less than 4 or 5?

Overall, U.K. personal lines, motor, home and pet is 7% of Intact Financial's revenue base. And motor is 1%.

Okay. Great. Okay. So -- now let's go move into personal auto in North America here. You're certainly getting a lot of chatter on that. Now to put it in context of personal auto, I think it used to be like 37% of your business, and that was probably diluted after you bought OneBeacon as well. So -- but now with the RSA acquisition, personal auto in Canada is about maybe 28% of your total business. So you certainly have less of this. But let's talk about the rate environment. From what we can see in Ontario, which is a substantial portion of your Canadian auto business, we had some rate approvals that were pretty strong just overall for the industry. Approval hikes of 9%, I believe, in 2018, close to 9% in 2019. But these were down about 2% in 2020. And so far in 2021, we're seeing these things flat to down, although anecdotally, I heard of one player that just got approved for a rate hike. So what is driving this? What's the outlook for this? And what do you tell investors that say, hey, this may not be a good trend here, especially with frequency increasing and inflation creeping into the system as well? Will this be an impediment to you being able to achieve your goal of mid-90s combined ratio with respect to personal auto?

No. So I think your read with regards to how the size of personal automobile in Canada has evolved for us in relative terms is good. And I will take you back to an Investor Day 4 or 5 years ago where we basically laid out 20 years' worth of growth in automobile insurance as a result of changes in transportation, right? Data, sharing, self-driving, electrification of the car pool, that thesis is sort of playing out. And at that time, we had laid out everything we're doing to make sure we grow in motor insurance, but we said there might be less growth going forward than there was in the past 30 years. And as a result, we've over-indexed the areas where we think there'll be plenty of growth. Like home insurance with changes in weather pattern will be a big growth business, and we're thrilled that we're able to run it sub-90%. Commercial lines, specialty lines as well, massive growth opportunities there. It's all about making sure that you can outperform. Now if I come back to personal automobile Canada rate situation in the past 4 years, which is what you're referring to, you know that at the end -- in the summer of 2016, Tom, and at the earnings call in November for Q3 2016, you'll remember that we said we don't like what we're seeing here. As a result, we're strengthening our position, increasing caution, and we're moving on rates aggressively. And we did that for a number of years. We were well ahead of the industry. You'll remember we lost market share as we did that and brought a number of changes to the product. And I think that the root cause at the time, Tom, was inflation in accident benefit. You'll remember, there was inflation in terms of the number of chats in accident benefit, which created inflation. And then there was physical damage inflation, which started to pick up in 2018, early 2019. And those trends are still there. The industry started to react probably 2 years after we started. And that's why you're seeing different sort of rate movements between Intact and the rest of the industry because we've been on it since late '16, early '17. The fact that those trends are there, and you're starting to hear about those interestingly enough in the U.S. around technology, then nothing is new there. And I feel like our product, how we index, how we price for different make and model, some of the changes we've made in the supply chain to curb the cost inflation are putting us in a position where I think we'll operate at the lower end of the mid-90s for the next couple of years, would be my perspective because we've been on these trends for a long time. Clearly, in 2020 and 2021, you're not seeing much rates because the loss cost has reduced. The reason why the loss cost has reduced is because driving has reduced. Now the industry has largely dealt with that true rates. At Intact, because you price 12 months out, our thought process was to give onetime relief, which we've done to the tune of north of $600 million in 2020 and 2021. And as such, our rate position is, in my mind, much closer to adequacy. In fact, it is adequate. There's absolutely no doubt in my mind. And I'm convinced that we'll be running at the lower end of the mid-90s for at least a couple of years. So I'm not concerned about automobile's performance, quite frankly. We've been on inflation for a number of years. But that's what drives our outlook, Tom, which says when driving patterns return to normal, I do expect the rate environment to pick up again because the inflation trends that we've been talking about since 2017 are still very much to be dealt with by the industry. I feel we have an edge there.

So given the fact -- sorry, in order to get a rate increase, you have to get to sort of apply for a rate increase pretty -- and then you may not even earn that out for a while. Given these trends, why are you not trying to get increases now? You seem to actually be below the industry in terms of -- in 2021, not in terms of combined ratios, just in terms of your -- you were ahead of the industry in terms of rate approvals in the past, but now your rate approvals are actually for declines versus the industry may be flat to decline. Are you seeing something different here? And just given that backdrop, why would you not want to try to get more increases now in the new system?

So Tom, if you look at our performance in personal automobile, you'll notice that there's no way our price is lower than that of the industry. We're not growing much in personal automobile. In fact, the numbers you're looking at, which are yearly increases, they're interesting only to the extent you understand the starting point. And because we've been moving on rates since 2016 aggressively, our rates are adequate today. And if we feel we need more, then we'll go for more. But at this stage, we feel that our rates are adequate. Our performance is good. We've made changes in the supply chain. We've made changes in how we classify new cars taking into account technology. And as a result, I'm very comfortable with our pricing position in personal -- in all lines of business, to be clear, but certainly in automobile insurance at this stage. And where we've provided relief true rates as opposed to through our $650 million program, it is clear that if inflation picks up and if our expectation of driving is different from what we've assumed, we can correct without going through a burdensome approval process. That's pretty much the position we've taken with regulators at this stage.

How do you feel that regulators are in terms of accepting rate increases? And what provinces are the most important that you look at? Is it still just Ontario and Alberta? And what is the receptivity in terms of being able to accept potential rate increases, assuming driving patterns return back to normal?

Well, I mean, regulators, of course, want to make sure that the consumers have the best deal possible. And at the same time, they want to make sure that the rate positions that the industry has taken are based on loss cost and are based on data and are being objective. So if there is a trend, the regulators see the trend the way we do. That's my experience. I've been involved in pricing automobile insurance since the early '90s. And sometimes you debate for a little longer than in other times, especially when everybody is reacting to rate increases. But if you're early at identifying trends, which is one of our modus operandi, if I can say, then in general, the regulators are constructive. And they want to understand what you're seeing. And so I'm not concerned. I think what's been problematic in personal automobile over time is more when automobile insurance is used as a political tool. There, of course, logic gets out of the window. You'll remember when the NDP tried to push the rates down by 15%, Tom, that was, I don't know, 10 years ago, something like that. That was very odd moment in the market. We haven't gone through that many times because we have good regulators across the board, and it's a highly competitive industry. Keep that in mind. Like in every product, every province, you have at least 20 competitors who are actively competing to grow. Regulators get that. And as a result, they know that the industry competes enough on its own to keep margins in check, and consumers win as a result.

Yes. Just another question with respect to that. It's -- I find it odd sometimes that rates have to be approved. I mean...

I agree.

The argument is it's a compulsory product, but I think banking is a compulsory product, and banks can charge whatever they want. So in terms of the -- some provinces are filed and approved, and some are filed and used. What -- do you see any of this changing potentially? That -- is it always going to have to be approved? Can you elaborate on that?

It's an important question. And I'll tell you what my message to regulators has been and still is. is first, the industry is competitive, as I just said. And so in theory and in practice, the industry doesn't need to be supervised for the risk of overcharging. The industry ROE is single digit, and the automobile ROE of the industry is, in fact, lower than the average performance of all lines of business. I think the reason why you've got different regulatory regimes and some pretty heavy handed, I will say, is because there have been bursts of inflation. You take automobile Ontario in the late '80s. Now let's say I was in high school. But if you go back in history, what you'll find out is massive bodily injury inflation, a little bit like what we've seen in Alberta and in the Maritimes in the early 2000. Inflation is going through the roof. Insurers are saying, "I can't make money anymore. I'm not interested in growing." What do you have? You have an affordability issue. You have a capacity issue. What is the political response? Not curb inflation, but try to regulate pricing. That's history. And that's how those regimes came in. They came in as a response to inflation. And so my message to regulators is and has been focus on inflation, make sure the product keeps inflation in check, make sure that the supply chain can't take advantage of a product that is improperly balanced or overly generous, as we've seen in Ontario. And if you have inflation in check, then the competitive forces in our business will take care of the rest. Quebec gets that. If you look at the Quebec marketplace, it is super competitive. There's very little pricing regulation. You can change your rates many times a day, if you want, which allows for better deals for customers. And when you don't have to negotiate with the regulator, guess what, you can be far more aggressive upfront because you know that if you're wrong, you can self-correct quickly. So I think the problem is inflation. If regulators keep inflation in check, everybody is happy. Unfortunately, there's been an overemphasis on the rate level themselves regardless of inflation. I think the world is changing from that point of view. There's more focus on inflation, and that makes me hopeful about our regulatory regime.

Okay. So Intact has become a proportionately larger commercial lines player. If you look back after you acquired OneBeacon, which I think you guys may have started off -- like I'm looking back in 2005 when you came out like ING Canada. I think you may have been maybe 30% commercial. And then you got OneBeacon, more and more commercial. And now by my calculations, I think you're like 45% of your business is commercial, so substantially higher than it was years ago. So what do you like about this business? Is it important to be global in this business? And what really makes you win in terms of commercial and specialty business?

Yes. I mean, Tom, we love commercial lines to be clear. And our first love in commercial lines is the SME space. We probably have 25% of that market in Canada, at least. We've been focused. My team and I have been focused on that space since, indeed, the early 2000. And what have we done? Well, we've developed a service model that is any set of products that is totally focused on what SMEs look like and need. And we've exported in pricing and risk selection the sort of skill set we've developed in personal lines in the '90s and in the early 2000. And what I personally love about that space is pricing is much less sophisticated at the industry level. And therefore, your ability to outperform through pricing, I think, is greater. And that's why we're so focused on the SME space. And so Tom, this is our first love when it comes to commercial lines. Then indeed, over time, we realized that there were elements of specialty lines in our organization that ran in the low 90s. The AXA acquisition in 2012 brought more of that business. And if you look at it in aggregate, commercial lines is more profitable than personal lines at the industry level, and specialty lines is more profitable than commercial lines. So we're very simple people. We thought, yes, we need more specialty lines. And by the way, we need to outperform in specialty lines. And if we do, that will be a great earnings growth engine over time. We did that in Canada, built a good franchise, figured out that there were unfortunate fees in the U.S. in that space, did OneBeacon. Mike, who is blue chip when it comes to specialty lines and a great leader, oversees the North American and now the global platform. And we focused on the lines of business where we're good, where we have an edge, where we have leadership. And we brought some pricing and risk selection expertise to it, brought a bit of science to it. What I like about specialty lines is the fact that there's way more room to bring science in specialty lines and create a greater performance gap with our peers than what we've created to date. And we're totally focused on figuring out how best to leverage our science in specialty lines. That's important because there's 2 big growth opportunities for us in specialty lines. One, leverage the global capabilities of RSA. And your first question talked about that a bit. We have a $400 billion sandbox now that we can grow in, build earnings momentum and add to our outperformance. And so that is the first. Leveraging our global capabilities is clearly the first place. And the second place is that in the U.S., we're still small. Yet we've built outperformance. So when I look out the next decade, I want us to be really focused on deepening our outperformance advantage in specialty lines, scaling up our distribution in the U.S. and taking advantage of our global capabilities in that segment. And I think we'll build the best specialty lines insurer in the world.

I'm interested how you talk about bringing more science into specialty lines. Sometimes I think of specialty lines being an underwriting team that really knows a certain business and knows how to do that. So you have a series of good underwriters. Now you could lose those underwriters to somebody else, and suddenly a competitor now has that great team. And so help me walk through or help us understand how you can win in specialty. Is it through attracting great people that understand how to underwrite those risks? Or to what extent are you -- can you win in it by bringing more science into this? I don't see it being in danger monetized product, but maybe just talk about some of those points I brought up.

Yes. I think the point you're making is an important one, and that's how people think about specialty lines. Teams move, and all of a sudden, you're out of a certain line of business. Look, people expertise is fundamental. And we're blessed with some of the best talent in specialty lines in the industry. That's the starting point. No doubt about it. Accountability in the field is really important as well. That's how we built our specialty lines business. But you know what, pricing matters. And there's this belief that it's all about underwriting. Yes, well, underwriting is really important, but not at any price. And so we've put a lot of emphasis on pricing and risk selection, not only in the Canadian platform, but in the U.S. We have a very strong group of actuaries in the U.S. and in Canada working on enhancing our risk segmentation capabilities, and we'll do the same thing in the U.K. Now the challenge is you don't have as much data as you do in, say, SME or in personal lines. And there's more heterogeneity in risk. So bringing more science here means leveraging all the data we have, leveraging external data but also leveraging the computation techniques that we've developed as a firm. Unlike, say, personal lines or SME, you can leverage that not only in pricing, but you can leverage that in underwriting decision-making. And so one of the areas where we're focused on in terms of bringing machine learning in commercial and specialty lines is in decision-making support, using some of the AI techniques that we've used. We're also leveraging external data way more than what you would think to inform these decisions. It's one of our key strategic priority in commercial lines and one that I'm personally focused on. And I think this is how you can bring science in specialty lines. I do think there's a big opportunity on the prevention side of things as well, Tom. And there, it's not so much the data of science but rather deep industry expertise beyond underwriting in terms of prevention, and this is an area where we want to double down in.

I mean that's interesting, but just in terms of the prevention story, if you look at not just even personal lines. If you go away from your home and you have all these monitors in the home to sort of -- if it gets too hot, you get notified. If it gets to damp, you get notified. I mean these were -- it essentially had insurance products to cover that. So how can you play in this prevention side story here? Because it essentially just means that if everything is in your home to prevent it from actually having a fire or having a flood, then why do you need insurance? And then how can the insurers kind of capitalize on that prevention side, if you get what I mean?

Yes. No, I guess what you mean, but we're really far in terms of Internet of Things to prevent natural disasters, to prevent human errors and so on. So I'm not overly concerned by that. I see that risk in property is booming and risk is our business. So I'm thrilled by the growth opportunities that exist in property. And I think that using data is also a strength of ours. So in commercial lines and more so in specialty lines, the opportunity is actually with people on the ground. It's helping businesses protect themselves by bringing expertise about specific industries. And I think that we have a very strong loss control group who is in the pre-underwriting risk prevention or loss prevention business. And I think this is an area in specialty lines where we need to double down to create a real difference both from a service as well as from a quality of risk point of view, more so than what the Internet of Things can do, I think.

Great. So let's talk about the commercial lines pricing environment. Certainly been favorable. Everybody asked how long that's going to last, and that's always a magical question. I look for you to see what you can put on that. And you've got other social inflation risks associated with that. So I'm not sure to what extent the environment is becoming more litigious or less litigious, but if you can get on -- if you would describe some of those trends, too.

Yes. So just keep in mind, Tom, that in Canada, the commercial lines industry was losing money at the start of the year still. And that's assuming reserves are adequate at the industry level there. So that's the first point I would make. There's 3 big headwinds, I think, in commercial lines. One is indeed casualty inflation, some liability inflation. Some people call that social inflation, but I think there's liability inflation across the board. Second, the cost of changes in weather patterns and natural disasters is also a source of pressure in commercial lines. And keep in mind, the coverage in commercial lines is probably more -- probably broader than it actually is in personal lines. And the third element is there's no investment to -- that are part of the equation. And so if you think about your business in terms of ROE, you go back 9 months, the industry was losing money in commercial lines. When you triangulate that a bit, our perspective is you probably have 12, 18 months, definitely, of firm market conditions for sure. And for us, the SME space is not overly -- it never swings as much as it does in large commercial lines. So we're pretty optimistic about pricing conditions in commercial lines. And I think it's true across all the markets -- all the markets where we operate. In specialty lines, not all lines of business behave the same. Some lines are -- you're seeing low single-digit rate increases to no rate increases. Some lines, you're in the teens. Some lines, you're in the 20s. And we have a good sense of where our rate position is. And we're really trying to grow as fast as we can in the lines where the margins are the healthiest. And you've seen that the U.S. business, to take an example, grew by 21%, I think, in Q3 or somewhere in that zone. And if you look at our portfolio, there are 2 lines shrinking. And there's a number of lines growing above 20% because the market is dislocated. We have a good sense of where the margins are, and we're focused on growing these lines. The lines that are most subjected to social inflation, we've either exited, health care being a good example in the U.S., or we've been curtailing for 3 years. Public entity, law enforcement are areas where we've been shrinking dramatically in the past 2, 3 years. Tough work. But we don't want to be open when it comes to inflation.

In terms of commercial lines, they might be running in the low 90s now for you. But having covered Intact for a long time, I remember 2013, 2014, 2015, I think you guys were running like combined ratios that were -- I think you were 101 in commercial lines in 2013. It was a bit of a sore spot for you. So you've been able to improve that. Like -- so what have you learned about commercial lines that -- over those 8 years? Or is it just strictly the markets have improved? How have you been able to -- what can you tell us about the fact that you were well above 100 -- you were above 100 in commercial lines before?

Yes. Yes. You go back to -- first of all, you need to go back in time to figure out what happened. And in 2013, '14, there's a number of things that were present at that point: one, large losses; two, natural disasters; three, the AXA acquisition, which we closed in the fall of 2012, which was integrated in the 18 months to 24 months that followed. And that came with 2 things. And the AXA portfolio was great to be clear. But there were 2 elements that were part of this integration that we need to remember. The first one is that because we wanted to protect the portfolio, we capped rate increases. And so there was a period of transition to our portfolio, which meant that rates were not necessarily at the Intact levels of rates on a portion of that portfolio. The second thing is that this portfolio came with some lines of business we were not in, and we wanted to give those lines of business a chance and just to see whether we could add competencies or add additional segments. And there's a couple of these lines of business which didn't do as well as we were hoping, and we curtailed those ever since. But I feel very good about our ability for not only outperformance but very strong performance in commercial lines.

Did you bring any of the capping stuff on rates in commercial lines with the RSA acquisition?

Yes. But we're in a different state of the market, Tom.

Yes. Okay.

But yes, I mean, we love the book we bought, and we want to reduce the amount of dislocation because our rating algorithms are quite different. And if you go back to your question on commercial lines, the degree of segmentation we have in commercial lines compares with personal lines, just to put things in perspective. So if you let the machine do its work, you'll see a lot of dislocation when you acquire a company. So if you're operating in a hard market, off the book of business you buy that has a good track record, you want to keep the book and the margins will be just fine.

Let's go into personal lines a little bit here. What are you seeing in terms of pricing there? Lumber costs, I don't know, any other materials costs seem to be -- have gone -- have increased. So that probably would increase some of the loss cost. And just how you can get price increases through in personal lines when if anybody had a claim that's probably taken 3x as long for them to get their basement fixed up with supply chain issues, and then you got to -- then you -- and by the way, here's a 20% rate hike as well. I mean how are -- just the consumer appetite for it as well. So a bit of a mouthful there, but maybe you can help us understand that.

Yes. Well, I think that with regards to consumer appetite, if you look at our portfolio, home insurance has grown fast. It's upper single-digit CAGR over the past 5 years. Why? Because I think people understand that being protected -- that protecting your home is increasingly important. And it's increasingly important because there's an increased number of natural disasters. And so there's a fair bit of demand for that product, no doubt about it. Our track record from a combined ratio point of view is in the upper 80s in the past 6 years. And you've seen with all the CATs we've had in Q3, I think we clocked in a 93.5 or something for the quarter in that line of business. And there's 3 main ways to deal with inflation in home insurance. The first easy, no-brainer way is to make sure that the amounts you ensure, which are driven by your reconstruction costs, are adequate. And so either the new business that we write, the sum insured has got to be adequate, and then the renewals are indexed every year, and the indexation process is up to take into account higher reconstruction costs. That's the first lever. The second lever is pricing. And so in pricing, you've seen, Tom, that our rate levels in home insurance have been up for years in the single-digit range. But our rates are adequate and take into account inflation. The third lever, which is really important for us, which I think is a source of competitive advantage, is claims. You cannot price your way out of an inflation trend only. You have to manage the cost base. And this is where our in-sourcing strategy in claims is very impactful. And this is where our relationship with suppliers across the land where we have special deals also make a difference. And in home insurance, building on site makes us win on both sides of the equation. And we're growing that business, but it helps us improve the service, and it helps keep inflation in check. Not that we don't have the same issues as other suppliers, but it's good to be on both sides of a trade.

That's good. Let's flip into digitization, which is like [ where the current asset ] is used more and more in the industry. So if you look at belairdirect, it's probably had -- it might be, I don't know, 15% of your Canadian business. And it's probably been growing twice the rate of the personal lines business. So it seems to be well adopted -- well -- and people do like purchasing insurance through digital means. But we still lag other countries in terms of the take-up of digital in terms of personal auto or personal -- or your home insurance or whatnot. I mean it's hard to have a completely digital for commercial. But what do you see -- what do you see in terms of digital going down the road? How much of the business would be digital in terms of personal auto or personal property? And then how do you manage that potential channel conflict with given the fact that 85% of the business would be coming in from brokers, and they want to kind of protect the fact that they can get a commission? So there's 2 questions involved in that, and I appreciate to hear what you have to say.

Yes. So Tom, you know that we've been focused on having the best digital offer out there for many years, right? I mean we've had a design lab specifically focused on that since 2014. We were the first -- belairdirect was the first company to sell automobile insurance online in the late '90s. And when I look at the value prop online or our digital value prop and I stack that against the best players in the world, we're right up there. And Belair definitely is a big player in that space. Belair also has a massive cost advantage compared to our competitors in the direct channel. There's almost 9 points of advantage now. So that's quite a tool. But the 85-15, just to put things in perspective, you include commercial lines in there, right? So there is a bigger portion of personal lines that is in the direct channel than the 85-15. And what we've done, Tom, is we brought the tools that belairdirect has, Intact Insurance. And we're telling brokers, look, guys, this is table stake. Intact Insurance is the best recognized [indiscernible]. You have the same tools. Your customers probably want that. It's available. And that's our thought process. And then the single-most important source of growth of our broker called BrokerLink, which hit $3 billion of premium this year, is digital. It's leveraging the Intact Insurance digital offer actually. So I'm hopeful about our positioning in relative terms. But the bigger question I find, which is maybe the latter part, is why is that [ AB ] adoption not higher? And our objective is that 3 out of 4 customers in personal lines is actively digitally engaged with us. We're not there. belairdirect is at about 50% right now. We want to see 3 out of 4 across the whole platform, including BrokerLink. That's the objective we've given ourselves a number of years ago. We might have put it out there in Investors' Days before, but our thought process is we need to make sure our tools drive 3 out of 4 engagement at least. And I would say, if I look at customers' interactions with insurers today, there is a gap. And I think there is a gap not just in Canada, but this notion of trust is important and is missing in the digital interaction. And quite frankly, this is an area we're focused on in the digital lab. And as we look out for the next 12 to 24 months portion of our thought process and investment in digital [indiscernible] our skill sets in machine learning, in behavioral economics, to change the game when it comes to digital experience because we're not going to get the 3 out of 4 by just leveraging the tools that we have now. [ I think we ] need to move in a different zone. I feel we're going to continue to be the leader in that space.

All right. Charles, I'm just getting a couple of questions coming in on the phone here or on the line. One is used car prices have skyrocketed. Do you expect these to come back? When a car is totaled, how impactful is that versus parts inflation?

So new cars have increased in value, and we think we're pricing for that and then used cars as well. And as you know, it was, I think earlier this year, 46% inflation for used cars. This was the single most needle mover in the U.S. CPI. So yes, it's much talked about. But as Patrick said on the call earlier this week, a couple of days ago, the fact that we're selling salvage means that net-net, we're not seeing much inflation actually from a loss cost and from a claims point of view. We've been very active on the salvage front. This is an area that we're managing. We've got a team that's totally on top. We have analytics that are geared towards optimizing our salvage operation, and that's been a big offset from an inflation point of view. In fact, the inflation we're seeing in auto from a severity point of view is, first and foremost, explained by the fact that the profile of claims -- because there are less claims, the profile of claims has changed. You have more, in relative terms, high-impact claims than you did pre-pandemic. And -- but that -- so when people look at their inflation, they're seeing meaningful inflation, yes, but you cannot look at severity on its own. You need to strip those mix changes away, look at loss cost and then see the risk through all inflation. And this is where we're seeing the residual inflation is not overly problematic as far as we're concerned at this stage in part because the value of the car pool is going up, and we're pricing for that, and in part because our salvage operation offsets a big portion of the inflation on used cars.

That's great. And another question is, how do you expect commercial rate to increase this trend over the next 12 to 18 months? And how long do you expect rate increases to remain above loss cost trends?

Repeat that last part.

How long do you expect rate increases to remain above loss cost trends?

Yes. So to answer the first question, I don't want to generalize for all markets. But directionally speaking, my observation would be rate change, so the first derivative for those who are math inclined, would be upper single digit, low double digit, okay? So 8, 9, 10, 11-ish type percent as well, we're seeing across most markets. Second derivative, 0, meaning we see those rate increases stay in that zone. There's no progression of rate increases or positive second derivative anymore. It's been the case for, I think, 6 months. But we think we'll be in the upper single-digit, low double-digit range for, as I said at the start of the call, 12 to 18 months. And I think I've mentioned a number of factors that are headwinds in commercial lines, which I think will justify that. We're not seeing much new capacity coming in the market. And as a result, we expect a firm rate environment. So then there's the question of rate increases versus inflation. And the way we look at that is not so much rate increases versus inflation, but it's rather if you want to understand margin trajectory, you need to look at are your rates adequate for the current inflationary environment. How adequate are they? And how much do you add to your margins when rates are increasing? And we are operating in an environment where rates are above the adequacy threshold that we've used historically. Why? Because there's a capacity shrinkage in the marketplace. And we want to grow our portfolio as much as we can while expanding our margins. And I think that will be in this environment or easily 24 months. I think rates will be up. Market will be firm 12, 18 months, no doubt. But rate level versus inflation or rate level versus adequate rates, I see easily 2-plus years to be in what I would call, yes, a very comfortable rate adequacy position.

Well, we're coming close to the end of our time, Charles. Is there anything else that you think you would want to add here that we may not have covered in this discussion?

No. I would say, Tom, that, I mean, you've seen the results. These results were solid. There's no white noise much in these results. And so I would say from a strategic point of view, the organization is making really good progress. We are acting on what we said we would act with intensity, and I'm very pleased with the long-term positioning that I see emerging with Intact. The second thing is the RSA integration is on track. I think Louis Marcotte said on the call a couple of days ago, we're ahead of what we thought from a synergy point of view. We're still focused on finding loss ratio improvement. The retention is a bit better than what we thought. And clearly, the sale of Denmark at 4x book was really good, and that's why our perspective is the IRR of that transaction will be closer to 20% than 15%, which is our threshold. We thought we'd give a bit of color there to express our confidence in the transaction. So strategy is good. RSA acquisition, on track. The environment in which we operate, I think, is supportive of our strategy and our position in the marketplace. Engagement -- people engagement is strong. We benefit from great talent and loyalty. And we feel that we're in a really good position to continue to outperform, to grow our earnings along the lines of the objectives that we've been communicating for the past decade. And we're looking forward to 2022.

That's great, Charles. Thank you so much for joining us. That was very informative. And thanks, everyone, who listened in on this fireside chat. And best of luck, Charles, to you and Intact going forward. And thanks once again. Bye-bye.

Thanks, Tom. Thank you. Bye-bye.