Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

I think I understand the math you're going with there.

Because Mario, you put yourself in our shoes, one is, first of all, we don't need to finance at that level, but that's quite secondary in the mix. We have massive synergies in distribution, and we have synergies in manufacturing. And so getting -- we've got a number of levers to get to 15, but it's a long game for us. We have deep relationships with thousands of brokers across the country, and we're trying to build the best distribution business we can.

Okay. I want to pull together a few concepts that we've talked about. We've talked about how NI net investment income, how it evolves and there's some potential upside there. There's clearly some potential here on the distribution front. And the observation that was made was that net operating income per share growth was Sub-10% this year. And there were a number of reasons for those CATS. And there's a lot of good reasons for why it would have been sub, but can I take it from everything we've talked about so far that the 10% net operating income per share growth is still very achievable for this company.

Yes. I think, Mario, the reason why we chose 2 financial metrics to focus on, ROE outperformance. I think we've talked about that. NOIPS growth, we love as a metric because you've got 3 levers. One is grow your customer count. That's good. Two, grow your margins; three, you've got a denominator to work with. In other words, deploy your capital in accretive fashions and that contributes to earnings growth. So that's why this metric is powerful, and it's multidimensional, and it's a great metric because it's all about earnings power. I agree we haven't grown the NOIPS last year by 10%. That's why the objective we realize that our industry is -- has cycles to it and some volatility. The objective is CAGR of 10% over time, where the ROE outperformance, 500 bps minimum every year. So there's a -- we frame the objective distinctly to take that into account. And so I look back 3 years, I see a CAGR of 24%. I look back 5 years, I see a CAGR of 16-ish. And I look back a decade, I see not 10%, between 9% and 10%. And we've grown the dividend on that basis. I look forward and look at where we were 10 years ago, we do have huge growth engine in the organization. I think there's an untapped opportunity to expand margins in particular in specialty lines, which is an increasingly important part of our business. And our sandbox is much bigger than it used to be in terms of the opportunity set to deploy capital. So I put all that together and yes, I feel that this business is poised to grow at that clip over time, not every year.

There are a couple of questions coming through, but I want to go to one in particular because they caught my attention when you talked about specialty lines and you talked about sandbox being bigger. I was reminded of how exceptionally strong the U.S. business is now. Do you think that, that business is now been rightsized? You've removed yourself from underperforming lines. Is it about the right size now? Do you -- would you expect to have to exit any more lines? Or are you done with that in the U.S.?

The beauty of specialty lines is that we have 23 verticals across the platform at the moment. Canada, U.S., U.K., Europe. You can pick your spots in terms of where you grow all the time. That's why I think you can navigate cycles. Well, you can also get out of areas that don't make sense anymore. And I don't want to say we're done. I'm comfortable with the businesses we're in at the moment, but if the world changes, which it will, some segments might not make as much sense going forward as others. And as such, with what we know today, job is done. But, yes. And the big focus from a bottom line point of view is, first, take advantage of the hard market. But second, and I think more importantly, I think we could be much better in risk selection, Mario. The governance is good. The information is good. We have increasingly good systems in specialty lines. I don't think we're using the science as much as we can in the field. The way we use it in commercial lines in Canada, for instance. And so, big area that I'm focused on with the global specialty lines team is to bring science in the field. And I think that's how you can run that business Sub-90% and grow throughout the cycle.

Does the U.S. -- I'll be frank, when you did the OneBeacon acquisition in the U.S., I really thought that was a precursor to a few more, but there's been a period here where you really improved the business. I think in your press release, you referred to it as -- you said something like we could see exceptional performance here. I forgot the adjective, but it was something like that. It was -- I pay attention when companies that I think are generally quite conservative use words like that. I pay a little more attention. So with that as the backdrop, does the U.S. provide one of those opportunities to grow through acquisitions?

100%. You know, Mario, Mike, at the Investors Day said our GSL business is maybe $5 billion now. It's running in the mid-80s. We think we can make it $10 billion by 2030. We can do that organically. So -- and there's upside to improve how smart we are in the field. So maybe that's why I've used the word exceptional. It is a good place to be. And even if you are average in specialty lines, you outperform the market, if you know what I'm saying. You outperform the industry's performance. That's why in 2016, we realized we were trying to figure out how we could expand our outperformance in Canada, and we realized that we had $600 million of business in specialty lines that nobody was really focused on. And that's when my colleagues and I said, "you know what, we need to create a division of that, make sure people wake up in the morning thinking about that, go to bed at night thinking about specialty lines." And that's why we went hard in that space. The reason why we didn't deploy capital in the U.S. is, first and foremost, we wanted to prove ourselves. I'll be very transparent, Mario. In the U.S., we said, first of all, we're not going to go in personal lines because we'll get smoked out, and we were quite nervous about getting into commercial lines. And the first order of business was make sure you can prove to yourself, that is to us, that we can outperform in that market. I think we have proven that to ourselves now. And we've doubled the business in size. Even though we've shut down a number of lines, it's now $2.5 billion. And this was maybe not doubled completely, but increased it dramatically in segments where combined ratios start with an 8.

Okay. So the U.S. is a possible place to grow this business then, okay. Because we haven't seen anything in some time like OneBeacon was how long ago?

Yes. But you've seen a few distribution deals and you'll see more of that. And I like the idea in the U.S. to deepen our position without putting the balance sheet at risk too much and expand in segments where we might have less depth through distribution first and then put manufacturing capital at risk, which is what we're doing in the U.S. So you've seen some distribution deals. And if we can do manufacturing deals, we will. At the moment, we find at it's either too expensive or the appetite from a risk point of view is not right. And therefore, we're on the sideline, but I would love to deploy capital in the U.S.

Okay. Let me go to some questions that are coming through now. I forgot to look over my shoulder here. So one is how have competitors behaved in different lines of business in Canada? Are you seeing any interesting differences like pricing changes, marketing? Anything recent in Canada that you would highlight for us?

I think that, I mean, this is a big question, and the beauty of Canada is that it's different every province where you operate. But we've seen -- that was interesting to us. We watch that with some interest. In a world where consumers were not shopping, we've seen our competitors invest dramatically in marketing. And our own thesis was -- and by the way, we've got the 2 best known brands in the country. Our thesis was if you invest a lot in marketing and people are just not shopping, that's expensive for every sale you make. So that is changing now, but this was the behavior last year, and that's why in PL, you've seen nothing in terms of growth at our end. We're focused on retention. That is changing now. And it will be interesting to see what people do from a marketing point of view. But I was really surprised to see how much spending there was in the last year or 2. That's one thing. I think that you are seeing rates move in personal automobile rates where flat in the past and even down during the pandemic. So now you're seeing rate momentum and you're seeing companies not wanting to grow necessarily in the broker channel, in particular in Alberta, obviously, at the moment. So rates moving up in personal auto is a change. Personal prop, not a ton of change and commercial lines still a very, very healthy market. Are there new disruptive plays in personal lines in Canada? You know, Mario, we've been talking together about the future of the industry for years, we've been preparing for disruption for years. Our thesis has always been, it will happen at the distribution level. I cannot say we've seen very successful disruptor in our space. We haven't seen major traction gained by aggregators in the space. The big trend, I think, has been consolidation of brokers, of distributors, and we've been I think, a, if not the leading actor on this front. But we remain ready for disruption in the space, and we've invested accordingly.

I don't want to put words in your mouth, but the impression I'm getting from you now is that while personal lines have not grown in the last few years, top line has not been there. We're at an inflection point possibly like Intact can now grow the top line a little?

Yes.

And what's a reasonable number for me to earmark here where -- like low single digits in the sort of 3, 4 range now. I don't want to go more than that because this is an enormous company, growing is hard when you're this big, so...

Growing is hard when you're this big, you're right, and we're risk takers. Keep that in mind. If we were a manufacturer, we want to grow as fast as you can to reduce your cost per unit. That's how it works in our business. Fortunately, not everybody understands that. That's why we can outperform. I don't want to quote a number, Mario, because we're pricing for adequacy, we're investing increasingly in marketing now, and we'll try to grab as many opportunities as we can. I'm hoping for more organic growth. But at the end of the day, pricing adequacy is what's most important to us.

But I shouldn't be surprised if I see the top line improve a little bit. That's...

In fact, you should be disappointed if you don't, would be my perspective. And there are as we've made big investments in the digital front, there are inefficiencies that we're trying to grind away at the moment in the funnel, so to speak, big focus on improving the funnel. And just there, in my mind, there's a fair bit of upside. So we're really, the teams are focused on that at the moment. And if I judge by the last -- the end of the fourth quarter and what I'm seeing at the start of the year, I think that this work is paying off.

I got it. I want to go to -- before we get into the M&A because I think M&A is coming up in some, just looking at the questions that are coming through, clearly, I'm going to have to get there at some point. But here's another one that came up on the call. I'm sure I think I was part of the group asking questions. The question is, what is the long-term vision for the U.K. business? And would you consider entering new markets? So this question is flipping it is on its head, expanding even further. Would you address that?

Yes. I'll take you back to your question on the U.S., Mario, and that's the mindset I'm in, in the U.K. at the moment. First, prove outperformance, then think about capital deployment. And I think, today I would deploy capital in commercial lines in the regions in the U.K., if there was an opportunity. I would not deploy capital in personal lines in the U.K. at the moment. Then the other part that is quite valuable, which came to us for very little, but that's worth a lot, is the global capabilities we've acquired based in the U.K. The specialty lines business in the U.K., the global network in Ireland and some strengths in Europe, not ready to deploy capital just yet, but these businesses are performing really well. I would like to see some growth in the next 2 years there. And I would like to see our North American customer base take advantage of that value proposition, where we now have global capabilities. But I'd say on the other side of the pond, it is about proving outperformance. And in personal lines, outperformance is not enough. That's my conclusion. If, in some segments of personal lines, even if you outperform, you're not making enough money to justify leaving the capital there. And so that's what we're working on at the moment.

This next question, I read it a couple of times. It's a bit tricky. Let me ask it anyway and take it as you like it.

It sounded like you, Mario. It'll be uncomfortable to you.

Very few things make me uncomfortable, as you know. So this person is saying that historically, if you buy an institution with a 15%, 16% ROE and you pay a price to book of 2x or more, it's not led to a good investment return. And the question is something like this, Intact wouldn't buy a company for over 2x book, generating a 15% ROE. Why should investors make that trade? And I think what the person is referring to is Intact, itself, company trades at over 2x book, has a 15%, 16% ROE.

Yes.

Do you see where he's going with this? It's a tricky question.

Yes. So first of all, we would buy ourselves. And we do. I'm just -- put that out there. But let me start from how we look at the world and why for us, it's a no-brainer. And then I'll try to translate that into this person's perspective, maybe as an investor. So first of all, we aim to generate 15% return on the capital we deployed, okay? Not on the book, on the capital we deploy in acquisitions. Why? Because there are risks when you acquire. And if you look at our track record of, say, the last decade's worth of deal, that 15 is actually 21-ish percent, I think. So how can you achieve that? Well, you can achieve that if you outperform. Because even if you buy a business, you have 500 basis points, say, of ROE outperformance, you can bring on the platform when you buy it. That's why our #1 priority is Canada. And that's why when we went in the U.S., we wanted to prove to ourselves outperformance. It's precisely because of that. It's because if you want to generate 15% return and above in a deal, you need to bring something to the table. And that's how we have -- that's how we deploy capital ourselves. And yes, we have paid 2x book at times for companies, good companies which we were able to improve. Now if you're an investor, so there's price to book is really correlated to the ROE of the business, right? And price earnings is really a perpetuity of earnings divided by cost of capital minus growth. And this is just a rule of 3 essentially, at least in your world. We use DCF, but the world clicks differently. I think part of the answer is that there is investing in a company that is generating 15-ish at a price to book above 2. But I think if you grow your earnings base at a clip that is at or above your cost of capital, you get in a different zone, in my mind. And I think that's the Intact financial story. And that's why I think many investors have been telling us that they didn't get in because it was too expensive every year for the last 15 years. But your question on NOIPS is really important. That's how it all works in my mind.

The way I've addressed that question because I've received that question myself about Intact and others because occasionally, like a Royal Bank will trade above 2, not right now, but they have in the past. Part of the way I address it, and I'm interested in your view on this is if you build a machine, as you described it, that is skillful at extracting value from other machines, then the machine you build is worth a lot more because if that machine can extract value from something that other people will only pay 1x book for, and you can buy it for 1x book and make it worth something that was worth a lot more than what 1x book. That's what earns you the privilege of trading at a big multiple. So then the question always comes back, I always ask the question, and Louis and I have had this conversation in the past. The biggest mistake, I can see a company like yours making would be to mess up that equation because if you ever do a deal, that's a mess then you ruin that thesis I have, that the machine is able to add value, and I guess that really goes to the point why you can never get too far out of your lane because if you screw up, you lose that privilege.

I think there's something else up river in that thought process, Mario. And it is that you can only do that if you can beat your peers day in, day out in the market. Because if you don't have outperformance, it's hard to take a onetime book machine and turn it into a 2.5x book machine because yes, scale is interesting, but you need to be very deliberate about using scale and turning it into an advantage. And it's not just about expenses. So -- but bottom line, don't screw up the deals you're making. That's why I get that. And that's why the bar is high.

Yes. Louis and I have had this conversation on a few occasions. And in a very simple way, that's essentially the thing I always remind them, you just cannot screw up a deal or you lose the privilege of doing big deals and raising a bunch of equity. On that topic, and this is a question that comes up all the time. We haven't seen any big deals in Canada in a couple of years. I mean the last one was the one you did. Why has it been light? Why have there not been much on the horizon? Is it because the market is firm and companies are making money, they don't need to [indiscernible]? Is it as simple as that?

I think that when I look at deal making, you know you look at the industry in Canada, you have big international players who own a portion of the space. You have other financial institutions who own a portion of the space, you have smaller domestic public or private companies who are in the space and then you've got mutuals. And I think the trigger for a trade is different for each of those players. And that's why it's tricky to think about M&A in Canada, the macro -- with the sort of macro elements you would normally use. And I would say a number of the deals we've done, Mario, were either leadership-driven or strategy-driven regardless of the performance or the state of the cycle. And I would say those two factors maybe are more important than the state of the cycle itself. And therefore, it is a long game. And you were talking about the -- my tenure, I'm not too sure what to do with that, but I can see it in my face when I look on the screen. The length and the quality of the relationships you build with the stakeholders in the marketplace is beyond the ROE outperformance, a key M&A weapon. And you need longevity for that. And in fact, we do. And by that, I mean 5 successors ready within 5 years for the top 250. There's that -- there is continuity and you're exposed to a number of these people either on the earnings call or at the Investors Day, et cetera, and that's a big portion of what I do as well.

I've always felt that in a transaction, you have to bring a lot more than just the wallet. And what do you think Intact brings? And let's just say, maybe the next 2 years, the next 3 years will be more active. It's entirely possible. Conditions could evolve that way. What does Intact bring beyond obviously a big valuation and a lot of excess capital.

Mario, the valuation, just to take that part of your point is not a big element of our decision-making process in M&A. Accretion is interesting, but it's a secondary or third derivative. What we're looking for is the economic value we can create with the dollar of capital, and that is IRR based. And that's why we define that, and it so happens that when you use your currency, it makes it even better. Case in point, the RSA deal with the NOIPS accretion close to 20% over 3 years. What we really bring to the table, though, for, it depends on the deal, but I would say because of the point I've made about succession, we can put boots on the ground really quickly. And we have boots on the ground in the U.K. top talent. We have now our GSL team is very strong and well blended in the rest of the organization. There's horsepower at Intact, that makes a big difference. Second, it's simple, but just discipline. People say that, we breed that. And just the governance and how we run businesses from a philosophy, call it, ROE point of view, is a big differentiator, and I say that with the experience of seeing how some of the businesses we bought were run before we showed up. Performance goes up just because the metrics you use to run the business change. Then you get into the hard stuff. In domestic deals, it's not so hard because you move everything to your platforms, risk selection, knowledge and AI, claims and supply chain management. And I have to say we don't talk about these guys often enough, but finance, treasury, investment, capital management, a big portion of the ROE advantage over time has been generated by these guys. And when we acquire, you end up buying a pool of opportunities to optimize your performance. And I'll just use that question to bring you back to the onetime $58 million tax benefit in Q4. We call this one time, but it's not an accounting entry. It's us tapping in a pool of operating losses that could not be used in a business we bought. So we're trying to use every stone -- turn every stone to create value, but it really starts with the ROE outperformance and the people.

We only have a minute left, but I do want to ask this one question that came up. It's an interesting question. It says, Intact's done very well in Canada. Does the structure of competition and the regulatory environment limit the degree of improvement left in Canada, the degree to which you could drive a better ROE in Canada for example? Is the structure such that you've kind of tapped out your growth and profitability here and that we really do need to look outside Canada going forward?

I think there are great growth opportunities outside Canada, where we have outperformance, but Canada is where we would deploy our next dollar of capital if we could, and I can -- there's clearly M&A. From an organic growth point of view, there's a fair bit of upside just to be better at our game and flex the muscles we've built over time, lots of room to grow our distribution business. And by the way, it's a big distribution business we've built now in the last decade. I was, Friday night, with our guy who runs On Side. This is growing like there's no tomorrow. It's starting to contribute to the bottom line of the organization. It's only 40% of our customers, so I see customer experience upside, bottom line upside, and they're now starting to gain market share outside our own customer base at a pretty good clip as well. And so I just look at all these elements, Mario, and I would say plenty of room left to grow in Canada.

So we're going to end it here, but just a couple of things I want to paraphrase then. So the level of outperformance from an ROE and a top line perspective could improve. Personal lines top line is improving. Earnings -- sorry, top line momentum, Sub-95 combined ratio. You sound optimistic about 2023. Am I overstating it? Or does that -- is that fair? You feel pretty good about 2023?

I feel good about the toolbox. The tools we have in the toolbox to generate good performance in 2023. I think we want to be optimistic in the environment in which we operate, but yes.

Any other closing remarks?

No, I think that the strategy is very much on track. There are headwinds in this environment. And I think we've zoomed in, Mario, on many of the strengths of Intact. There are headwinds in this environment, but we're trying to be on it as much as we can, where we have opportunities to de-risk our position, we are using that environment as well, but I think the team is pretty energized about 2023.

Appreciate taking time again, Charles, and thank you to everyone who joined us. Have a good afternoon.

Thank you. Buh-bye.