Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

CIBC. And pleased to host this fireside conversation with Charles Brindamour, CEO of Intact. We're doing this chat 1 week following -- I think with pretty strong Q1 results, right? Strong organic premium growth, strong margins in most lines of business, increased guidance for investment income and now also seeing a nice build in capital margin following the RSA transaction. And of course, also, Charles, you laid out a pretty positive outlook for the next 12 months as well. So I think this should be a good conversation. And I will encourage anyone at any time that wants to ask a question, please do raise your hand in Teams. I think we all know how to do this now after a few years of using Teams extensively. So throw it up any time. You don't have to wait for the end of the presentation, and we will queue you up and get your question into Charles.

So with that, Charles, I think we really need to start with personal auto. It wasn't my original plan, but I think given the results we saw last week and also the results we saw out of the U.S., by the way, with Progressive, it's still sort of the topic that the market investors are focused on. So let's start there. And I guess the question I want to ask is you have visibility on the rate increases you've put in the system. So it's very much unknown in terms of the earned premiums and how they're trending to high single digits. I think the way I look at it at least is really the expectation -- or the risk you have is the expectation and the claims inflation. And that's kind of what you saw with Progressive, right? They admitted they got it a little bit wrong. Claims inflation is still coming in higher than they would have expected. So a few questions sort of along that line. What do you believe is different for Intact versus Progressive in terms of inflation trends -- or really Intact versus U.S.? Where can Intact have control over rate increases or claims inflation, I should say, sorry, or the ability to take offsetting actions to mitigate those inflationary pressures, i.e., what's within your control in terms of cost inflation? And then lastly, what are the primary drivers of claims inflation that are outside of Intact's control that may represent risk to your expectations? So a number of questions rolled in there, but I know Charles, you're good, so you probably can address them all.

I'll stick to your questions and to make notes, Paul, because it's a long question. But let me first start by reacting to your introductory comment, which was results were strong and that there be no doubt, that's my perspective on it. We're never satisfied. It's our culture here. We're always focused on the areas where we can create upside or where we have issues. But we felt this was a quarter that was strong in an environment where this environment plays to our strength. And there was not that much we were surprised by, frankly. And if you look at the outlook that we gave in the last year and where we are today, pretty much across all lines, things are largely playing according to what we expected. And as a result, we're not surprised, and the results are good because the actions we've taken, I think, are consistent with the environment in which we operate. I won't comment on specific names or competitors. But I would say, Paul, if you look at the environment and what happened in automobile insurance in the past 2, 3 years, I've said it all along, there's lots of moving pieces here. And so one's ability to read inflation in a world where speed of settlement is changing, you have labor issues in the field, et cetera, et cetera, has been an area where we've been really focused on to understand the difference between the claims coming in today and the claims we're actually settling today. And I can tell you, if you use traditional techniques, you'd miss out because there were so many moving pieces. And one of our strengths here is the fact that in claims only, we have close to 40 actuaries and all they're doing is to figure out speed changes, pattern changes by type of claims. And I feel like we've done 2 things: a, we were focused on speed changes and abnormal patterns to make sure we have a good read on inflation and then we were focused on pricing for it. So when I compare with the U.S., I think we're seeing from a pure inflation point of view, we're largely seeing the same thing on repairable losses and total losses. There seems to be in the U.S. -- I think speed for a number of players of patterns probably made their read more difficult. And some people might have missed the extent of the real inflation, which is what you observe when you actually settle the claim, not just when you build reserves for the claim. But I think the big difference in this environment seems to be inflation and labor and body shop capacity. These are not the only differences between Intact and the U.S. or Canada and the U.S. But right now, it seems to be a difference. And I think this is an area where our supply chain strategy, which we've been focused on for many years, is making a difference because there is capacity in the network. We're actually dropping our cycle time. It's getting shorter and shorter for our insureds to be back on track, which is the business we're in. We've opened up new service centers in the last year, created capacity with our preferred provider network where we send 65% of our claims during the pandemic actually. And as a result, I do think that this is helpful at our end. And so we're very -- just a stat, which I think is quite telling is that if you look at the number of claims per employees at Intact, what we call the pending, the load of our employees who are doing an awesome job, it's dropped in the last quarter by close to 10%. So the pending of our employees is what we're focused on at the moment because this drives the quality of the experience. We're now seeing the Net Promoter Score go up. By the way, the time to repairs come down, and our employees' workload is improving. It's still high, higher than it's been historically but moving in the right direction. And so speed and load and pressure in the network seems to be a big difference right now. The longer-term differences between the U.S. and Canada, of course, is that we've got 40% of the product, which is long tail where we're not seeing much inflation at this stage, where reforms have been quite supportive. And on the physical damage, I think we're seeing a stabilization of the cost of total losses, and the inflation in repairables is -- has actually dropped. It's still positive inflation, but it actually dropped. And if you look at the overall inflation, it's gone from 13% to 11% to 9% in Q1 and, I think, April looking decent. That's pretty much in line with what we anticipated and very much in line with what we're pricing for. What's playing in our favor, Paul, in this environment, and I've said it for 3 years, we're being very cautious because there's lots of pieces moving here. We don't want to miss a trend, and this showed up in the prior year development, which was really strong at 7%. We're building caution in the current year as well. That's why our view is you want to look at both these things together. But I think one point, I'm not sure we've made that point during the earnings call, which is important, is we've seen favorable prior year development for short tail for physical damage claims as well, which gives me a good sense that we're reserving quite effectively for physical damage inflation. What else is helping in this environment is the fact that the frequency is below what we're pricing for at this stage. It's increased. There's no doubt about that but not to prepandemic level at this stage. You put all that together, and you are in a sub-95% zone in a world where, I think, the balance sheet is pretty cautious. But I would say this -- we're on this one. This is really a key priority. With regards to rates, as we've explained, we think we'll be earning 9-ish in a couple of months from now. We're pricing in that zone. And if we need to do more, we'll do more, that's the upside of our business. We don't make long-term promises, and we can react pretty quickly. And we have a strong Quebec distribution, and Quebec is a province where you don't need regulatory approval. And therefore, our average flexibility in pricing is better than the rest of the industry.

One -- I do want to ask a follow-up on a part of your answer and a very important part of the answer, which is the control over which you have over the claims, including the physical damage aspect I'm looking at specifically. If you think about investments in that supply chain or that network, that collision network, does it make sense to increasingly put more of the claims into your own collision centers? Is there an opportunity there to make those investments and have even greater control over those costs over time?

Yes. I think it does make sense. We've built the preferred provider network or what we call the Rely Network over 20 years. That's why we've got 65-ish percent of claims there. Then we have our own service centers. And then we have Intact-branded service centers where we're in partnership with entrepreneurs. And that's how we create capacity in the system. This is where we have deals that are predictable. We provide guarantee to these guys that we will send them business based on quality and service and capacity. Our strategy allows us to be much closer to the experience. We manage 100% of our automobile claims or 99%. Our customers choose to use the network 65% of the time. We cannot force consumers, right? I mean you choose where you repair your car. But our value prop is you're ahead of the queue. There is capacity. We provide a guarantee on repairs for as long as you own the car. And it's a much better value proposition. But the way for us to steer more customers this way is to have a better offer for them. And because at the end of the day, customers are totally free to choose how they get their cars repairs. But we think we've got a pretty good value proposition. Same thing on the home restoration side of things, Paul, where you know there, we actually are intent in putting a fair bit of capital. We put a fair bit of capital, nice profit-generating business, and customer experience is awesome. So you don't want the claim in the first place. But if you do, it's good to be with On Side.

Got it. Okay. So if I can look at the personal auto market over time, it's had lots ups and downs. And I know there were some conversations recently kind of around prepandemic-type combined ratios, but I mean that's just taking a very short period of time. I guess the way I look at it is just being a volatile market with a lot of political involvement, regulatory missteps, but the way you think about -- you're talking about the medium-term outlook with a sub-95% combined ratio. I just -- I can't help but get the impression you're more confident in profitability in this product than in the past. Like, am I correct on that? And if I am, like what's driving that confidence?

I think it's correct. Now in typical Intact confidence, if you look back over a long period of time, you'll see that this line has run at 95%. So when I say I think we'll run sub-95% in the near term, I am more confident. I'm not taking a huge leap from a guidance point of view. But here's why I feel despite the inflation, in which we operate, a good degree of confidence about the automobile insurance business. First of all, we're 70% bigger in auto than we were 5 years ago. And automobile is a scale business. And so we do have scale. Second of all, we've increased our sophistication and pricing and optimized our pricing strategies through machine learning techniques across the whole portfolio in automobile insurance. And so we're at a degree of sophistication that is meaningfully ahead of where we were 3 years ago. Thirdly, the supply chain activities and the work we've done in supply chain, in my mind, is in a whole different league now. And that includes the fact that we're talking about body shops, but Paul, we have close to 500 lawyers defending our customers on our payroll. And so that goes straight to the cost equation, better indemnity outcomes and then better cost. And so you put these elements together, I think we're in better shape today in automobile insurance than where we were a number of years back. And then you look in the next 12 months, frequency is an area where there's room for deterioration beyond what we're anticipating. And then there's caution that we've built in the past 24 months. You put all that together, and you get a guidance that is sub what the long-term track record from a combined ratio point of view is, which is 95%.

Yes. Okay. And then you mentioned scale, particularly in personal auto, but a big part of the value creation or a part of value creation for Intact over time has been acquisitions. So let's talk a little bit about acquisition potential and where you feel you currently sit in terms of balance sheet capacity. Is there anything in terms of the RSA integration that's ongoing that would prevent you from doing further M&A or you're over past that point? How are you viewing valuation multiples out there right now in the market? Are they getting more attractive given some of the economic uncertainty? Or are they multiples high because industry profitability has been pretty good?

So just if I unpack your question. First, capital. We've printed $2.8 billion capital margin, 22% debt to total cap. As you know, when we do an acquisition, we comfortably get in the 25% debt-to-total cap zone. So before issuing shares, you probably have $1.4 billion of capital we could tap into easily. And then if we chose to push the debt to total cap past 25%, depending on the opportunity, every point of debt to total cap is about $325 million. So a fair bit of room. Our track record and how we price acquisitions and the outperformance that the business generates means that these acquisitions have contributed nicely to the earnings growth of the organization and the outperformance. And if you look at the track record of our deals, the IRR of the deals we've done in the past decade starts with the 2, and it's double digit, to be clear. And so why is that? Well, because we see M&A as an accelerator to our strategy first. We're largely intending to stick to what we're good at and where we have outperformance. There have been exceptions over time. But most of the capital has gone there, and that's our intention. And we need to remain cautious, like we want to see at least 15% IRR on the capital deployed in these transactions. So that's the lens that we use to answer your question, Paul, which is how about multiples. Well, I find multiples interesting, but they are secondary to us. What matters is how are you rewarded to take the risk of doing an acquisition. And if the answer is 15 and above, we're in. If the answer is not 15, then we're highly unlikely to be around. And as such, we see opportunities in a number of areas at the moment, clearly in distribution, which has been contributing nicely to our business. We would put our first dollar of capital in Canada today to take advantage of the outperformance that we have. But we're in no rush. And I think we have a very strong U.S. business now. We would deploy capital if we found an opportunity that generated this -- the right return. Not clear at this stage. There are lots of those, but nothing prevents us from doing an acquisition at this stage, Paul. And I would say the Canadian team, which had the most heavy lifting to do in the RSA integration, has done an incredible job, as you can tell from the synergy numbers, the retention numbers and the performance of the Canadian business. And while they wouldn't admit it, they're ready for another acquisition, I think. Operationally speaking, we are. But it is a long game, and we're choosing our timing carefully. But if anything was to materialize, we would be ready to do it, and I don't see constraints for any transaction in the Canadian marketplace. There's plenty of room left.

Hopefully, you're giving the acquisition and integration teams a little opportunity to go on vacation between deals. But yes...

Absolutely, yes.

But just speaking to the Canadian opportunities, it's not just me thinking about this. A lot of investors I talk to seem to be pointing to increased regulatory or political friction when it comes to large companies consolidating the market, right? The most recent example in Canada is Rogers-Shaw, got through at the end of the day but without its own set of issues. Does what's happening change at all your view that your upper limit in market share in Canada is still 25%, 30%?

Well, I think our upper limit, there's a difference between where we see ourselves in this decade versus what the upper limit is. I do think the upper limit is above 30%, myself. And I think like the P&C business is super competitive. One should not forget that there's 3,000 brokers, probably 100 insurance groups. Everywhere we compete, there's 15, 20 active competitors in the marketplace. The barriers to entry are not very high. There's capital coming in. I mean there's a fair bit of fluidity. MGAs are tapping into external capital to create competitive pressure. So it is a super competitive market, and it's obvious to the Competition Bureau, when they look at our deals, how much alternatives there are in the market. So I'm not really concerned about that. I think we want to build a great company that has a customer experience that is second to none. We want to be amongst the best employer in the country, which we are, and we want to grow our earnings power, in essence. And I think there's support for that, quite frankly, in the market. Whether it's governments, investors, brokers, it's super competitive. So the ROE of our industry is like 8%, 9% for a business that's far riskier than many of the other industries you can give as examples. I won't refer to any, but that's why outperformance is so fundamental.

Got it. Okay. And then you mentioned potential acquisitions in the U.S. as well. It's been 6 years since you acquired OneBeacon. In some ways, it's hard to believe it's already been 6 years. But I think you have to be very, and I emphasize very, happy with the way that acquisition has turned out. Margins look great, delivering very high premium growth today. You're starting to expand into new markets, I think, a little bit there. Like why not push harder in terms of acquisitions in the U.S.? I guess my question would be like, why not make U.S. a priority over Canada given you have a lot more whitespace to play with and the results are also really strong already in the U.S.?

Yes. I mean performance of the U.S. business under Mike's leadership, very strong. No doubt about it. The first order of business, Paul, when we did OneBeacon, which is now called Intact Insurance Specialty Solutions in the U.S., was to create outperformance. I was very clear, like we need to prove to ourselves first and to you in the exercise that we can outperform in the U.S. And what were the implications of that? Well, first, get out of the stuff where you don't think you can win, which we've done on closing and a few times after closing. And reflecting upon that, it's interesting to see that the business in the U.S. is approaching USD 2 billion now. I think it was a bit above USD 1 billion when we acquired. We shut down 4 lines, and yet we almost doubled the business. It just goes to show the opportunity set that exists in the U.S., primarily organically. So first, get out of things where you don't think you can win. Second, bring governance around pricing risk selection to make sure that we're pricing and thinking about risk the right way. Third, create sophistication when it comes to pricing and risk selection. Fourth, in-source the claims process and then make sure the expenses are in check. And that's what we've done with the team in the U.S., and today, it's outperforming. And running in the 80s and the lines where we have strength are growing. So that, I think, is in good shape. Second, the upside in the U.S. is the organic growth can be pretty impressive. Now we're risk takers though. You need to grow, and I say that risk managers, but we take risk every time we insure a customer. So once you create outperformance, second, build on your strengths from a growth point of view. So we're growing the lines where we're strong. We're expanding the distribution footprint, which is a low-risk way to grow. And then we're tapping into our global capabilities, which we have, a, with the Canadian business but also now with U.K. and Europe and the global specialty lines or the global network. And then you get to acquisitions. But Mike came at the Investors Day and said, "I think we can double the business by 2030 and read double the underwriting profit pool." That statement didn't rely on acquisitions. So acquisitions is there on the list. And if we could do one, it would need to be financially strong, along the lines of what I've mentioned before. But I don't feel the need to be more aggressive at this stage, unless we find something where it reinforces our strategy and we can generate 15%, 20% IRR.

Okay. Let's change gears to the more recent acquisition, RSA. And Intact recently decided to exit one of the lines of business there, the personal auto or U.K. motor business. Not really sure that came as a surprise to anyone or certainly didn't come a surprise to me, but probably worth a quick review of what drove that decision. And obviously, have some follow-up questions on that.

Yes. We strive not to surprise, Paul. It's never been a winning formula. So look, we entered the U.S., the U.S. -- the U.K., quickly figured out where we knew we could win, give ourselves a shot to improve things to figure out if we had a shot at winning. And then even if you think you can win, you need to make sure the absolute return you get warrants leaving capital there. And I think on so many fronts, we didn't see it in motor. And I think we could have done this earlier. If anything, I feel like we've been slow on this one. But this is where you have employees, customers, brokers, et cetera, you want to manage in as good a fashion as you can, all the stakeholders involved, but that's how we got to it.

And then now if I can contrast that to the U.K. home and pet insurance lines, which you continue to operate, where -- what are the differences? Like why do you think you want to keep the U.K. property business? I guess I'll [ probably ] focus on that one because I think results have been challenging the last number of quarters. So where do you see the room for improvement? What's the argument for retaining capital there?

Yes. So first of all, we have scale. We are in the third position in both these lines, 8% market share in home, 18% market share in pet. Scale is not everything. If you have scale and you don't have good return, that scale is irrelevant, I would say. But it's part of the conditions of winning in my mind. Second, the track record of these lines was -- home was, in aggregate, 96-ish, and the pet business was 94-ish if you look back 5 years. We can work with that. And it's clear there's upside from a pricing risk selection point of view. There's upside from a claims insourcing point of view. There's upside from a digital point of view. And as a result, you think, okay, maybe we can beat that over time, and it will help the organization focus because there was a lot of juice going towards motor at the expense of home and pet in my mind. Then the last point I would make, Paul, is one big difference between motor and home and pet is the fact that a big portion of the home and pet book are distributed through partners. But I think thanks, retailers, et cetera, it is about 1/3 of the market in the U.K. And it means that you don't have the same flexibility you do where in motor, we were, in essence, 100% direct. We have 2 small partnerships, but you, therefore, have far more flexibility to move. So I do think that home and pet are good businesses. We do have scale. It has good track record, and we will build on it.

So I think around the time I started covering the company and maybe around the time you took over as CEO, personal property in Canada actually wasn't that great line of business. So at least from a profitability viewpoint, right, it didn't have a great history. And there was a number of actions you took over a number of years -- was in a short period of time, but over a number of years, you took to improve that line of business. It's now one of the most profitable consistently and with consistent organic growth. Like what extent can you use that same playbook in the U.K?