Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Tom MacKinnon with BMO Capital, covering insurance, diversified financials and asset managers. And we're delighted this afternoon to have Charles Brindamour, the CEO of Intact Financial, with us for a virtual fireside chat. Good afternoon, Charles.

Good afternoon, Tom.

I wanted to start with some questions with respect to the RSA acquisition. It's been 14 months since it's closed. I think you mentioned just last week on the call that accretion is tracking better than expected, and might be somewhere in the area of 15%. I think like 12 months, it was supposed to be maybe high single digits. The first part is why is it better? And the second part is the 36-month outlook is for high teens. Are you just tracking faster? Or do you think you'd be able to exceed your high-teens estimate, 36 months from close? And why?

Yes. I think, Tom, I want to keep some meat for the Investors Day, so I'm not going to talk about the next 36 months, but I would say a couple of things. First, the underlying performance of the business has been better than what we've modeled. That's helpful. Second, I think that we've been a little faster than anticipated in generating synergies. I think we've reported on the call last week that our run rate at this stage is $175 million out of the $250 million for expense synergies that we've -- that we -- or synergies that we've talked about, excluding loss ratio, so I think we're in very good shape. And come the Investor Day, we'll give you a fair bit of color on speed trajectory and ultimate destination.

Okay. Now what have you learned about the U.K. market? What can purchase there is largely commercial lines. Now if we look at North America, commercial lines has experienced some pretty good hard market conditions. Is the U.K. market any different with respect to commercial? And if so, why? Or is it experiencing basically the same kind of excellent fundamentals that you're seeing in North America?

Yes. We're seeing excellent fundamentals in the U.K., both in our regional mid-market business franchise, which is excellent in my mind. So you're seeing upper single-digit rate increases, very good momentum there. We're seeing the same thing in the London market, which is more akin to our specialty lines operation and in fact, is now part of our drillable specialty lines platform. And the conditions there, Tom, are excellent as well. And so I would say from a timing point of view for the acquisition, this is -- this contributes in fact, to the overall performance, and to your previous question, definitely very strong markets in CL and SL in the U.K.

Are they fundamentally any different like just I don't know, distribution-wise or product-wise? How have you been able to leverage that?

Yes. The main difference in commercial lines, Tom, is in the SME space or in the small and micro space. There are more intermediaries in distribution. Aggregators play a role at the very small end of commercial lines, brokered panels also to a greater extent. RSA is not that focused or substantial at the very small end of commercial lines. It has a very good mid-market franchise. Think of GBP 10,000 average premium and up. And there, it's the same sort of distribution channel you're seeing in Canada, a space we like, and it's a competitive set that we know the big international players are there. And so we really like that space. We think there's a great opportunity because it is underserved.

Great. And then if we go to U.K. in terms of personal lines, it might be about 10% of your total business. And I think probably the bulk of that is personal property. Is that -- and then the rest would be -- I think only 1% of your business might be U.K. personal auto, but it certainly gets more than 1% airplay. And you probably have more U.K. pet insurance than U.K. personal auto, but for some reason, people like to really talk about the U.K. personal auto. But talk about those businesses that in total, represent 10%. Are there some things that you would consider to be -- what have you learned about that business? Are some things kind of core and non-core? How are you assessing some of that stuff?

Yes. Well, the first thing I'll say, Tom -- and I'm spending a lot of time in the U.K. to make sure we understand well that space, and that our actions are geared to compete in that space. The first thing I would say is that we have the very strong position in home insurance where depending on how you cut it, we're either #2 or #3. And we have a very strong position in pet insurance, where, again, we're #2 in that market. And that forms the bulk of our personal lines business in the U.K. And so there is some scale there, and we can work with scale. And I'll tell you a little bit about the work we're doing on that front. Motor, you're right. Motor is 1% of the IFC business. It's not a growing segment. It's very small. And that's part of the challenge in that line. At the start of -- when we announced the deal, Tom -- or when we closed the deal, we said, we'll conclude within 24 months on these positions in terms of whether we can win, outperform, and then whether outperformance actually generates the sort of return we're looking for. What have we been doing in personal lines in the U.K. beyond studying our competitors very closely, beyond trying the customer experience of our competitors of aggregators and so on to really understand the data collection, the design the experience and so on. It is a tough market. It is quite competitive. What have we done so far to build on our position there? One, we have exited segments and relationships where the economics were stacked against us. And we're still in this process. Some of these relationships have long-dated contracts, but we're really rationalizing the footprint. And by the way, we've done that in commercial lines as well, where authority was delegated where pricing was not 100% in control of the company. We've exited in commercial lines, close to $140 million of business. And we're 80-ish percent done there. So we moved really quickly to streamline the footprint. And we've done that in personal lines, and we're still in the process of executing on that in personal lines. The second thing we've done in the U.K. is we've changed the targets, and we've changed the pricing philosophy. We're very much pricing for ROE. We're trying to be on top of trends, and we're bringing that sort of business philosophy and the governance that goes with that in the U.K. And I do think that it will make a difference. It will be a source of pressure on growth in the near term. There's absolutely no doubt about that. I think that growth in personal lines will be really, really hard to do. But for us, the fundamentals matter more than growth in a market, especially when we're trying to assess if we can outperform. The other thing we've done is we've worked with the team to bring pricing sophistication in the lines where we operate. We've got a few squads in the AI lab in Canada, working with our teams in the U.K. to up our game from a segmentation point of view. We've dropped some algorithmic changes earlier this fall. We've got some more changes coming in the coming weeks actually, and as such, working on segmentation. In claims, we really like the strategy that the claims team is pursuing over there, which is very much an in-sourcing type strategy, and we're making big investments in the claims system there. That will serve well PL, that will serve well CL as well. And as such, I think that we've got a good game plan. But clearly, there are question marks about whether we can win still in PL. And we're trying to make sure we go to the bottom of things to figure out how to win. But in the meantime, it's all hands on deck to improve performance there. And as you've seen so far, performance is not bad. It's not good enough for the long run. But in the near term, we can work with that.

It surprises me that it'd still be working to try to improve performance when you're #2 or 3, as you described in personal property. It's a business for size, and scale matters there. Is it a matter of -- do you have to really significantly change the strategy? Or is it changing some of the risk profile.

Well, Tom, I think that -- let me be very clear. It's not because you're big that you're good, right? And so outperformance is a mindset. It's an input. It's -- there are many big companies that have average performance. And I think that we're working really hard on making sure we have the right target, the right governance that we're playing in areas where the economics are in our favor. Many of the early moves we've done are along these lines. The point -- and this is where you're right, because there is scale, if you choose to use it well smartly, the odds of good performance are higher because you have scale. In motor, we don't have scale. And I think the odds there are stacked against us. So what's the angle you can take in motor to win, we're still looking for it. In the meantime, we're improving the performance there. But as you said, motor is a rounding error.

Are there any parallels you can draw with the U.K. personal prop with -- when you picked up OneBeacon, I think there you kind of shrunk it to grow its profitability. Is there any parallels you can draw to -- for investors to see that you're able to leverage something that you've done in the past?

Yes. I mean, look, one, we can that are known now as Intact insurance specialty lines in the U.S. performing really well, but it started with the team. I think Mike and team are an outstanding team in the U.S. And now Ken and team in the U.K., a very strong team. The Chief Underwriting Officer in the U.K. will be a lady called [ Nathalie Devin ], who come from my team here in Canada. She's starting in September 1. So bringing the philosophy the know-how. The bridge with the capabilities and pricing in Canada, certainly 1 thing. But what we've done in the U.S. with Mike has also put in place a different governance, a different set of target, a rapid high-frequency focus on trends and performance, and that's well in place in the U.K. at this stage. I think where we've -- we've been quite successful in the U.K. In the U.S. has been to exit quickly areas where we felt that our chances to win were small. Think of our exits in health care, our exits in architect and engineers almost upon closing. So we're leveraging some of that in the U.K. portfolio at this stage to see how much improvement we can bring in this environment. So a fair bit can be leveraged in terms of the playbook in the U.S., in the U.K., in my mind.

That's great. Now I guess, RSA is like 14 months behind. I mean there's still more work to be done, but what are your plans going forward in terms of capital deployment? Any more acquisitions? You seem to be good at it. So what are the thoughts there, and the geographies perhaps?

Yes. No, very dangerous when you start thinking you're good at making acquisitions. I'll just say that, Tom. So help me sending the message that we need to stay on our toes, at least inside. Let me just come back on 14 months, because 14 months -- lots has happened in those 14 months, and we're not finished. But -- and priority #1 is to nail the RSA integration. And so 85% of the Canadian portfolio, which is where the synergy is coming from, is on our system and our product. And by that, I mean personal lines broker distribution as well as small to midsized commercial lines. We have some work left for specialty lines conversion in Canada, and some of the conversion in the direct channel. But that is in very good shape. I'm very happy with the integration. Retention is better than I thought. And of course, we're doing all that in a market that is very, very supportive. The other thing that's in place from a synergy point of view, and that was in place very quickly, is the shared services of the organization and the defensive lines. And by that I mean finance, governance, legal, risk, et cetera, the investment side of the house. All that has been integrated very quickly, and is working really well. That includes reinsurance as well. Then you've seen rationalization of the footprint a quick exit from Denmark. Great gain there, by the way. And exit from the Middle East, fairly quick. 1 year in cash in our pockets in the Middle East, I think, is testament to the team who's executed on that. And then I think very good progress in the U.K. and you've seen the performance there. So that's the first 14 months. We're not done. And I think before -- I feel that we've got this behind us, you'll see a certain reluctance on our part to deploy more capital. Focus, very important to win. And certainly, part of our playbook here at Intact. So in terms of capital deployment, with all this being said, the first point I would make is that if I think about the next decade, I think we have all the tools in our toolbox today to meet our objective of outperformance and growing the earnings per share at the speed we've grown it in the last decade or at least above 10% per year on average. So you are highly unlikely to see us deploy capital outside of the sandboxes in which we operate today, which is Canada, specialty lines in North America, and now with global capabilities or U.K. and Ireland [ mainstream ] retail and commercial lines business. We have all the tools and we should see the growth in the markets where we operate. Our first priority today, Tom, is Canada. I think the Canadian business can get meaningfully bigger. We have a relationship with 1 in 4 Canadians and 1 in 4 businesses. Hard for me to think that we cannot take this to 1 in 3. And as a result, that is #1 in my mind. We'll see when opportunities present themselves, but that's what we want to capitalize on. Having a very strong base at home, maintaining a big portion of our business here in Canada, I think, is very important strategically to be successful abroad. Number two, U.S., I think in the coming decade, specialty lines in the U.S. will be a big area of growth. I told investors in 2017, the first order of business in the U.S. is to show outperformance and show solid performance. I feel we're in that zone now. You've seen us invest in Q2 in MGA in the U.S., something I told investors would be doing, and you're seeing capital being deployed there. That's no risk capital, but really increases our expertise. Number three, and that's ongoing, you'll see us deploying capital in distribution, both in Canada and in the U.S. And I think a very strong first half for the BrokerLink team who's built 1 big distribution machine that's highly performing. And I would say these are the 3 big capital deployment priorities, Tom. With regards to the U.K. and Ireland, we're really focused on improving performance there. We really like the Irish platform. We think it's performing really well. Its market positioning is good. If there were opportunities, we'd certainly consider them. But big capital deployment, I would say will be North American in nature in my mind in the next few years.

I mean if you want to go from touching -- or products touching 1 in 4 Canadians to 1 in 3. Can you do that organically? Or is the -- or that have to be inorganic?

I think it will be a combination of both as it was in the past. The only difference, I would say, Tom, is that the organic growth muscle of the organization today is much stronger than what it's been in the last decade. It's a question of how much we want to use it, depending on the market conditions in which you operate. But our investments in brands have been solid. We have the 2 best recognized brands in the P&C space in Canada. Those brands are differentiated. We've invested massively in digital. If you look at our digital experience, you just look at the Google score on our apps, you'll see that they're the best, appreciated and recognized digital value proposition in the country. And then we've really built up distribution. You add to that our product capability in specialty lines, which is -- at this stage, I think underutilized in the context of the Canadian marketplace. You put all that together, and you've got a great organic growth muscle in my mind to grow our position in Canada. But acquisitions are an accelerator for us. We have a playbook. We've done that many times. Obviously, if opportunities present themselves that we think are on strategy you'll see us try to act within our own economic parameters. So it will be a combination of both, I think, but I'm pretty bullish about our organic growth capability.

That's great. I want to then turn to Canada here. And obviously, personal auto gets a lot of airplay, might be 25% to 30% of your total business. You seem to be a little bit more cautious in tone on the call last week. I think you're suggesting below mid-90s. Let's talk about inflation and how can you beat it. And then I got some follow-up questions with respect to that.

Yes. I think that we were pretty factual, I think, on the call. We said, look, inflation in Q1 was 5%, and it's jumped to 8% in Q2. That is not a small jump. It's physical damage driven. If you look at the 3-point delta, Tom, you the point of parts really repairs, drove 1 point of the delta. And then total losses and theft drove the remaining 2 points. And so there's more inflation in the system. We are pretty clear that we'll run that business sub-95, and there's a number of reasons why we're comfortable with that game plan. The first one is that the sources of inflation are not new to us. We've been tackling inflation on many fronts, including technology in cars, physical damage, theft and injuries for at least 3 years. And our outlook was very clear coming in the pandemic. We said, look, frequency and driving is dropping. But when we come out of this, you'll see inflation picking up again. And Tom, not only have we priced for that historically, but the approach we've taken during the pandemic was inspired by that view, by that outlook. We're not putting that out there just for entertainment purposes. We're actually running the business with that. And as a result, our price point, and how we provided relief during the pandemic, and we've provided us a lot of relief but a big portion of that relief was onetime in nature because we said, how do we drop rates now for products that will be consumed over 12 to, say, 18 months once you throw the average accident date in the mix, if we don't know where driving is going. That's why we chose to do relief. The other thing we've done is that we took a fairly cautious stance in terms of reserving, in particular for long-tail lines in light of the drop in frequency because we thought we don't know where severity is going. So we should take a very cautious approach. There, we've really distanced ourselves from the industry. And I've talked about that before, but we have a very strong balance sheet. And you've seen that done in Q2 with close to 5 points of PYD, both on short and on long-tail lines. That strength on the balance sheet is still very much there. Now with the jump in frequency, we've cranked up some of the rate actions that we intend to do. What's baked in the system now is 4 points between rate and what we call drift, or that's the increase in some insured. Going to 9% towards the end of the year, largely approved, largely in the system. We're renewing business for September and October today so we know what's coming in terms of written rates, and you'll see a meaningful increase from that point of view. What else gives us comfort? Well, 40% of claims in dollar terms are related to liability and injuries. And there, we're not seeing much inflation. And as I said, for both the current accident year and the prior accident year, we're taking a fairly cautious stance from a reserving point of view, and our reforms that are keeping stability in that segment of the portfolio. So that's important. It's important that we keep an eye on that, though. But that, in my view, is very good. And then there's a supply chain. And the supply chain is not new, obviously, for us, the fact that we have a salvage operation is a big offset to the inflationary pressure that other players globally would see. The fact that we're sending an increasing amount of our customers at their choice in our preferred provider network makes a big difference. A, because we have established pricing in advance. B, they have -- they're providing the rental car, which tends to be used longer because of the fact that parts are backordered. C, we're actually purchasing parts on their behalf. That's also helpful because we have a fair bit of leverage from that point of view. So the whole supply chain part of this equation is very significant. In claims today's time, Tom, we've introduced in the past couple of months, 25 additional very concrete actions that are being taken to tighten the impact of inflation. And so when you put all that together, we're saying, look, we think we can run that business sub-95 in the next 12 months. there is a fair bit of pricing power to a certain extent here. And as a result, we'll leverage that. And what the market does, we think the market will catch up with our position. But frankly, it's kind of secondary to us in the near term because we know from a business philosophy point of view, that if you miss the trend, it's a problem. And as a result, bottom line should be your focus in the near term.

What do you do to like massage investors' fears as to how personal auto might have been playing out in the U.S. I think there's differences in the product. that has probably brought in more inflation there. But are there any kind of other structural differences that you see, that people shouldn't necessarily bring over to Canada, some of the personal auto issues they may be seeing in the U.S.?

So I don't know if you said manage investors' fears or massage investor fears but...

Yes. Massage.

Either case, I'm trying to be open and honest. And if I'm fearful about something, I want the investors to be fearful. When I'm not, I hope they are not. But there are big differences, Tom. I think I've touched on a few of them. One is the percentage of liability in the product in Canada is bigger than it is in the U.S. As a result, it makes a difference on inflation. And I think we've got a big chunk of that covered both from a pricing and reserving point of view. The second point is my read is that the U.S. players have been more aggressive from a pricing point of view during the pandemic. And sure enough when driving comes back, and it comes back with inflation, if you haven't priced for that, it will come and hit you a little harder than it otherwise would. Third, there's the whole supply chain management part, which I think is different. Salvage in particular. I understand is a big difference. And as a result, I would say, Tom, that these are 3 big differences with the U.S. marketplace. And the last point I would make is you've heard in the last year, people talk about technology embedded in cars and so on. We've been talking about that since 2018. So it's not to say that inflation cannot get worse, I think, in Canada, but we're on it as much as we can, and we're pricing for it. We're managing the supply chain for it. And the balance sheet anticipates some inflation. And for all these reasons, I think we can navigate this environment differently than what you've seen in other jurisdictions.