Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

Hello, everyone, and welcome and thank you for joining us for today's fireside chat with Intact Financial CEO, Charles Brindamour, following their Q2 '23 results that were reported earlier this week. My name is Geoff Kwan. I'm the research analyst RBC Capital Markets that covers Intact Financial. In terms of the format of today's chat, we will start up with the fireside chat portion, but there will be time at the end for investor Q&A. [Operator Instructions] First off, Charles, thank you for joining us today.

Geoff, I'm happy to be with you. It's the first day of my vacation. So what better than spending time with you and many investors across the world.

I feel bad for catching on day 1 of the vacation. So hopefully, we'll be able to get through this pretty smoothly.

First off, I wanted to start off on CAT losses. It's been something at least here for us in Canada. It looks like it's shaping up to be another active year in terms of CAT losses at least so far. But there is obviously other lingering factors that have been kind of keeping claims costs under pressure like auto part supply chain delays and whatnot. But my question here is, do you think that we could see hard market conditions on pricing over the near term across your various business segments? And at least maybe in Canada, do you think the industry has evolved through in part consolidation where pricing in the industry is maybe more rational today than what it would have been, let's say, a decade ago.

Yes. Geoff, we transformed our value proposition a decade going to take -- to make sure that we could grow into a world where weather patterns would change. And those whether patterns have changed in our performance and our growth, I think, makes the most of that environment. This quarter per se is within the range. It's definitely at the top end of the range, 77-percentile. We've had, I think it's the third worst second quarter in the last decade, but it is within the range. Our view is the trend will continue, and we see this as a source of growth. This evolution, and I'll get straight to your point in a moment and the changes we've made a decade ago involved on packing the products to meet the profile of perils and the evolution of perils in Canada. And I think the industry has evolved over time, People recognize the issues, I think, inflation, natural disasters, the reinsurers sent me a very strong signal at the start of the year that prices need to reflect this environment, that has contributed as well to what is a firm and hard market environment. My view is that this will persist for a number of years in personal property. And quite frankly, in commercial lines and in property intense part of the commercial lines market, it is very hard at the moment. And it's true across the world, we see that in our operations. And my perspective is that this will continue for an extended period of time. The second part of your question was a very structural shift here that changes behavior in the market. If I speak about Canada in particular, I do think that consolidation where better players take over weaker players and more disciplined one, and I'm not talking about some of the deals we've done, but a number of the deals that our competitors, many of them we respect, have done in the past, say, decade, yes, I think, brings a bit more discipline in the marketplace. I wouldn't count on that, Geoff, as I look forward in terms of the ROE trajectory of the industry, but players are more sophisticated. There's a bit more discipline in the marketplace. I feel very strongly, though about our ability to outperform as we have in the past, even if we're competing with I think, better players in general because my view is we're much better than we were a decade ago.

I wanted to follow up just in terms of where, I guess, a little over a month into Q3, we've already seen what seem like a number of CAT loss events, whether or not it's the floods in Nova Scotia, continued kind of wildfire activity across Canada. And then more recently, there was the hailstorm in Ottawa, I think as most people know, Q3 from a seasonality standpoint, tends to also be one of your high CAT loss quarters. But just wondering any color you have some are in terms of -- obviously, there's still going at a couple of months ago, but how has Q3 shaped up so far from a CAT loss versus your expectations?

So I was intense, I think putting strain on the claims operations. That's the business we're in. And if it's meaningfully above the guidance that we've given on CATs for the third quarter, at the end of the quarter, we'll issue a press release as we had in the past. But this is what we're good at. I think the organization is stepping up. I'm not worried about high quarter activity. And in fact, frankly, Geoff, this adds fuel to the hard market. I don't want to say as fuel to the fire, but certainly to the hard market. And as Guillaume pointed out yesterday on the call, I think we're -- we expect that our written rates and insured values to hit the double-digit by Q4, which is probably beyond what I would have expected at the start of the year. And I think one key point, Geoff, and Guillaume pointed that to me before the earnings call as we prepare the track record, I've been talking about [ 89.5 ] or something for a decade. In a world where you've seen natural disasters go on, what Guillaume was pointing out to me is that -- it was actually over 5 years and 3 years in improving combined ratio performance. And we're challenging ourselves to make sure that any tough global warming scenario much tougher than what people predict. We want to make sure that we can grow the business, help derisk society and do that in a fashion where we generate returns that we had in the past.

And then I just want to ask one last question on this topic before moving over to auto. Currently, your CAT loss guidance on an annual basis is $700 million per year. And are you still kind of comfortable with that guidance? Or are there trends that you're seeing that could see a change in that sometime in the near term? I think Louis was saying on the conference call earlier this week is it's kind of an annual exercise in terms of how you look at the annual CAT loss guidance?

Yes. It is an annual exercise, Geoff. I think 1 quarter is not large in relationship with the amount of data we use to establish the CAT guidance we take into account how the product evolves, the size of the organization, the retention we're taking, the patterns we're observing from a weather point of view, but also where we think whether we'll go going forward. I think we're in the zone. Obviously, if you have the third worst quarter in a decade, this will likely add some a bit of pressure in our guidance, but we'll do the exercise a little bit later. In the meantime, we're focused on customers and making the most of what the market has to offer, which, in my view, it has lots to offer.

Perfect. I like I said, I want to switch over to next just talking about everyone's talking thing these days is personal auto and I wanted to start in with Alberta, right? In terms of the rate freeze that they've got, which seems to be through the end of this year. I just wanted to get, I guess, an understanding of how Intact has kind of their level of activity in Alberta that you're doing today. So maybe looking at it from a number of auto policy standpoint, how much are you doing in Alberta today? And would that number look like before they put in the rate freeze would have been much difference?

Things don't change that quickly in our space, Geoff, because we are so happy with the fact that the retention is very high. We retain 88% to 92% of our customers every year. So you don't see a huge shift in distribution of business. Alberta is about 17-ish percent of the automobile portfolio in Canada, 5-ish percent of the IFC premiums. And so what has happened, we increased rates last year before the freeze -- right before the rates kicked in by about 5% and the performance in the broker channel is good. There's not lots of growth, though the performance in the direct channel, in my mind, needs to be better. And as a result, we've reduced meaningfully our investments in marketing and therefore, our appetite to grow in that province. And the longer the cap is in place or the freeze is in place, the less appetite we will have, quite frankly. And I think they understand, well, this is politics. And frankly, the inflation just is not driven by the portion of the product that the government controls. It's driven by global circumstances for supply chains, cost of automobile parts, et cetera, have been heavily constrained. And therefore, it's just about politics, real bad policy, quite frankly. And I think you see that the market is getting tight in Alberta. We know that an insurer has pulled out already. And so I think the government understands that we're past the election and they'll come back to their senses in my mind in the coming year.

And I think there was some news out of Alberta, where it looks like they're maybe looking to add some sort of reforms on the insurance, whether the product or on the claims side. Just wondering if you're able to kind of talk about your understanding of what they may be looking to try to accomplish...

Yes. I think that -- the government needs to look at the part of the product that they control. And therefore, you get in the zone of body injury, accident benefit, et cetera. I think there's definitely an opportunity to reinforce the controls in place to avoid abuse and pain and suffering awards. There is an opportunity to give more options to consumers to better control their -- the cost and the coverage that they buy. And I think that's very much the zone that they will have to operate within. I think this will not eliminate the pressure that exists on repairing cars quite frank. And as a result, it's a tough zone to operate in to see meaningful benefits. I think the Alberta government, historically has done a good job to control the cost of pain and suffering awards, but there's clearly upside at this stage still.

Okay. I wanted to just switch over to auto theft. It's something that seems to come up in the news more often than it has used to in the past. Équité Association, they estimate that auto theft in Canada is, I think, over $1 billion a year now. Just was wondering from -- when you look at the accident year finance amounts, approximate how much of that would come from auto theft? And how has that moved materially from what you would consider kind of normal market conditions? Because it does seem like it's come up in the past couple of years in particular.

Yes. Yes. I mean, theft started in Quebec close to 2 years ago. And given our presence in Quebec, we, I think, were on the issue very quickly. It's 2 points of loss ratio in automobile is used to, like the run rate was 2, and it's just to 5, Geoff, in 2 years. So that's massive. I don't think I've seen that in my career. Many people would say it's a long one. This is a big jump. What have we done about it? So work with the industry, try to encourage enforcement from police, not easy. I'll tell you that. We use the traditional intact lever of pricing and risk selection. This is very surgical. There are brands where the theft rate has shown by a factor of 2 and factor of 4, you can think of Japanese brands and then high-end SUVs, big issues. So we've adapted our pricing reaction mechanism to take the risk, full risk into account and then deployed car detection devices. We have a great partner where our recovery rate is, I think, 97%, 98%. And in fact, in 2022 recovered, I think it's 176 million vehicles to keep that in check. Despite all that good stuff, 2 to 5 points. This was been, you'll remember, into our explanation of inflation. You remember in the last year, 1.5 years, we've unpacked inflation for investors. This has stabilized in Q2, as Patrick has mentioned yesterday, but this remains an important area of work. It's gone from Quebec to Ontario. Now the Maritimes. And in my mind, we need more police enforcement in that space and more focus on that. But at our end, we're using our levers to defend ourselves and continue to perform well in automobile insurance and more importantly, outperformed.

Maybe to expand on that because I think when you're talking about some of the tracking stuff, is the relationship you have with Key tracking, there may be other ways that you might have there. And I mean to the success rate you've had so far, is that something that you feel like you could push further into your customer base kind of across Canada? Or are there other limitations that can kind of like a limit the ability to have that across your auto pipe base?

There's definitely room to increase our usage of tag. In fact, we've been using it in Quebec for longer than the rest of the country. We've brought it -- I think it's last year or earlier this year in Ontario, and our intention is to expand that. The issue is the supply needs to be there. And then there's a cost associated with that, which needs to be taken into account as well, and that implies working with regulators. So clearly very effective in my mind and an area that my team will keep advancing.

I want to talk about on the claims inflation side because if I remember correctly from the conference call, I think you were saying it's up about 8% year-over-year. I think it was 9% last quarter and the peak was 12%. I was wondering if you're able to dissect that a little bit mine. Again, I know you talked about late on the conference call, but just a reminder for people maybe that either haven't listened or if there's other data that you can provide. I mean what are the parts that you're still seeing as on a relative basis, problematic, what are the areas that you're seeing kind of more normalized inflation in one of the areas that maybe you're seeing reduced costs on the claims front.

Yes. 40% liability, 30% repairs, 30% total losses. That's the equation. In liability, low single-digit inflation, we're comfortable with what we're seeing there, pricing for it. And I think we've seen a shift, Geoff, between parts, value of cars and labor. And so you've seen labor pressure pick up while cost of repairs as stabilized and cost of vehicles per se or total losses drop a bit with, of course, theft going the other way. That is the equation. And so it's dropping at the speed we thought. But I would say, my own perspective on it is that the cost of a -- of parts and total losses stabilized a bit faster than I thought, but then the cost of labor is up a bit more. And I think true luck or Guillaume's luck as I like to point out, we're largely in line with where we thought we would be.

Right. You do a lot of your claims through your own network of preferred auto body shops. You have your own service centers and whatnot to help manage the claims experience for your clients. Can you talk about, I guess, what percentage of the auto claims are going through that kind of preferred network? Is there a target that you'd like to get to? Obviously, there's going to be certain geographies that may be less practical to be able to do it. I'm just wondering if you can talk about that. And then the other part I was going to ask on that question is, I mean, you've heard integrated on the property side with on site. Is there any merit to doing something similar on the auto side.

So the overall penetration in the preferred provider relationships, we added 65% and penetration in the -- within that in the Intact branded or owned service centers is about 20%. Obviously, we're customer driven. We want to create a bucket season and add buckets and customers choose the path they wish to take, okay? It's been hard to move it above 65%. It seems like customers have established relationships with Garage Body Shop, a churner of people they are comfortable with. Sometimes they're rather enough and pushing that past 65% has proven to be difficult. So I don't know how much upside there is there. That being said, there's definitely upside to increase the usage of Intact branded and Intact exclusively dedicated shops in the coming period, and we're really focused on that. We're in the 20s at this stage in terms of number of shops and we're adding shops every quarter. We have started to put a bit of capital in one shop to test a model where we partner with entrepreneurs to consolidate, but this is a test we're committed to that test to be clear. It's not a strategic shift, but we always like to understand what the options are. On the property side, Geoff, it's always been very clear to me based on customer feedback and what hit my desk that there was a capacity and a quality issue in home restoration. And we've been exposed to that space for a long time. We felt there was a great business opportunity to build a business there, put capital there and a great opportunity to improve customer experience. In fact, cycle time is down, NPS is up. It's working beautifully and therefore, and making money contributing to distribution earnings. And so I'm really keen to put more capital there, improve customer experience, manage indemnity and then create an additional source of profit. We like those investments where you've got 3 sources of upside. You can see us put more capital there. The future of transportation is less clear, the electrification sophistication in driving technology, et cetera, we're impressed by how independent entrepreneurs adapt to that. But it's one thing to be impressed. It's something else to put meaningful capital where the deeper trend is less clear to us. And so it's our sense at this stage, we're creating optionality, but capital will go towards property more so in the meantime, we'll build definitely partnership where capital is not an integral part of the partnership.

Got it. I wanted to just talk on the sub-95% combined ratio that you've talked about targeting in the auto business. When I think back to your Q1 earnings call, I mean, you sounded relatively confident that over the next 12 months or whatever it is that you feel like you can do it. And listening to you on the Q2 call, it sounded to me at least that confidence or that conviction was even higher than what it was in Q1. Just wondering if that is a fair statement. And do you feel like we've kind of seen maybe the peak, I'm not going to hold you to it necessarily, but do you feel like from an excellent year claims ratio that we might have hit the peak.

I mean [ 91.5 ]. I have a few points of seasonality, 3-plus we're in the zone. We're happy with where driving frequency and severity sitting theft as stabilized. Rates written close to 9, earn close to 7%. Upside, therefore, at the line ends up being earned. We have some more rates coming. I feel good about what we've achieved in personal automobile when you look at what's going on in the world on this front. And I think our reserving actuaries have played this very well in my mind, tremendous insight and coordination with the pricing guys. And they've given me lots of confidence that we can absorb surprised us. So we're confident with our guidance. But you know what, I think we don't want people to get excited. There's lots of casualties when you look at other companies. And so we're comfortable with our guidance and working hard to beat it, to be clear. But you're getting in a zone in automobile insurance with that sort of performance, growing units creates value. You're well above your cost of capital in sub-95% given this is a longer tail, there's more investment income potential and the capital requirements are quite manageable there. And so we're in that zone at this stage. Top line is changing favorably. We remain cautious. We've invested more in marketing. It showed up in the expense ratio. I would not want people to think that we'll run that business meaningfully below sub-95% even though I would love to achieve that to be clear.

Maybe one last question before I switch over to personal property. And just on the rate side, Intact generally tends to move early when you see signs of claims inflation or pressure on the claims side. We've seen various competitors that have been putting through are getting approved, meaningful rate increases. Just how do you think you are positioned today relative to your peers? Do you think they have to kind of catch up on rates and therefore, when we kind of think about policies in force growth and how that might trend over the next year?

I think we're middle of the pack. The closing ratios are good. Good enough to justify investing more in generating response. There's a cost to invest in generating response. We want to translate that response into sales. And I think we're middle of the pack. It's hard to generalize Geoff because it depends between Quebec, Ontario, et cetera, where we're more competitive in certain parts of the country. And our growth profile is very different across the board. But units are very coming in at this stage. And for me, as the industry catches up, I think we'll see some more momentum in personal automobile. But I don't think we're top quartile market at this stage.

Got it. I want to switch over to the personal property. I only had a couple of questions, and I think you actually answered lot of them earlier just on the rate side, just given what the cat losses we've had that, I guess, people can expect pretty meaningful rate increases over the next year. I want to switch it over then is on the claims inflation side. I think you talked about on the call, there's still some pressure there, whether or not it's labor issues. I think it's specifically you're talking about. There's other areas within the supply chain. But just wondering if you could can talk about where we are today on claims inflation, what are the areas that are maybe still store points and where are areas that you're kind of seeing some relief.

Inflation has been thoroughly stable in the past 18 months, actually, where we've seen severity changes in the mid-single-digit range. It's increased in the quarter. And as we said, some of it is large losses. Some of it is mix of claims that is profile of claims. You're left with 2 to 3 points of additional inflation. The areas where we see pressure beyond the labor element of this is on the material side, paint is a area very surprisingly that there's a fair bit of inflation, sidings and flooring material would be areas where there's a fair bit of inflation, and this seems to drive what we've observed to a certain extent in the past few months and certainly this quarter.

I wanted to switch over now just on the commercial lines part of your business. You've been integrating your global commercial special lines business. If we use the baseball analogy, kind of what inning are you in terms of integrating the global platform? And what inning would you say you are in terms of optimizing the cross-border business opportunities to grow claimings written?

Second. There are 9 innings, right?

Yes. That is correct. Last time I check it was 9.

Yes. So second would be my perspective. I think first order of business for me is values and leadership. And I think we moved really fast on that. I'm happy with the team we have. And I think under Mike's leadership, we have an organization that appears to be living the values of Intact and that's where it starts because when you rely on professionals in the field like that, we want to make sure that the moral compass of the organization is set at the right place. Second, where we can integrate businesses on our platforms, we should. And so that is primarily Canada. And in this case, the specialty lines business of RSA was at the tail end of our systems integration is 1/3 integrated at this stage. So there, you're probably in the third inning. Third, outperformance. Darren pointed out today or maybe I did in my remarks, 85% combined ratio across GSL in Q2, a good reflection of the performance were helped by the market as far as I'm concerned. But we're outperforming everywhere we operate. The governance mechanisms, many of them have been deployed. We're making important advances from a pricing and risk selection point of view. We're exiting or deemphasizing lines in Europe, in the U.K., in the U.S. still where we're not happy with the performance or where we don't think we can outperform. And I think there's a fair bit of upside to control exposure to a greater extent and bring science in the field over the coming period. But I would say from an outperformance point of view, we're in the fourth, fifth inning, probably. And then finally, how do you orchestrate that and generate growth out of your global capabilities that is connecting the dots between U.K., Europe with North America's platform, bringing global -- bringing the lines where we want to grow globally on the other side of the Atlantic, there, I think we're in the first inning. And so in aggregate, to stick to analogy, second, third inning, but I'm very happy with the platform that we have and spending a fair bit of time with our teams there because I think it will be an important growth engine, but it's all about earnings power, not top line growth, and people get that had impact and 85% good starting point.

If we happen to have a recession, are there certain business lines within the commercial portfolio that maybe investors should keep a closer eye on or one that they shift would kind of be wondering about in that type of environment? And are there certain business lines that maybe tend to do better in that sort of environment?

I Yes. I think the -- when I look at our firm and I look at the product mix, and the performance of the product through economic cycles and the covariance between the products we have. You've got here a pretty defensive and resilient earnings mix, I would say. Your question is more specific than that. And so in periods of economic stress, what do you need to keep an eye on. And I'll take the bottom line perspective, Geoff, to answer your question. I would say builders' risk and real estate type coverage is one area you want to keep an eye on. As pressure is put on the real estate sector, maintenance is not the same, et cetera, et cetera, and that can be a source of pressure. The second area you want to keep an eye on is management liability. In periods of economic stress, market stress, lawsuits for management teams, Boards of Directors et cetera, can increase a bit. So that's the other area you want to keep an eye on. And finally, I would say surety and maybe to a greater extent, contract surety, not unrelated to the first point I've mentioned is the third area where you want to keep an eye on to make sure that there's not too much pressure that you're pricing for the risk. And sitting here today, I would say that both from a reserving point of view, and from a pricing point of view, I do think that the odds of an economic slowdown are properly reflected in our pricing for our commercial lines business. The areas of upside in economic slow down, the amount of driving taking place is definitely one. And the number of kilometers driven by vehicle tends to drop, and that goes straight to frequency. On the line of surety side of things, when traffic drops, and by that, I mean, commercial traffic drops, your liability exposure drops as well. And then on the home insurance front, then obviously, there's a mix here of moral hazard and then people being in the house more than they were historically and therefore, keeping an eye on things to a greater extent. Past that, I think we're getting into anecdotes. And I would say we've shown throughout various economic cycles that, a, we can outperform, but generate very good ROEs no matter what.

I want to pass next is on claims inflation. We normally talk about claims inflation in the auto business and the property business. Are the things that we kind of be thinking about on the commercial side, whether or not things that have been more favorable or less favorable.

I've said this before. I think the area that's been benign in commercial lines in the last year or 2 has been severity on the casualty or liability side of things. Now there's a bit of inflation there. For me, that's the area to look at. It hasn't been benign in the U.S. in the past decade, to be clear. But that's the area that we're watching, not because we're seeing something now, but because these tend to be longer tail. And if inflation picks up, you can be in a position where you need to catch up a few years' worth of missing inflation. So I would say my teams and commercial lines, the claims guys and the actuaries are very focused on finding potential sources of inflation in liability and commercial line so that we don't miss that, especially in an environment where you can price for it.

Last question I had is on the commercial side. It's just on the M&A. Obviously, you bought OneBeacon many years ago. You've done, I think, a couple of bolt-on or a few bolt-on type deals. Just wanted to get a sense in terms of what does the environment look like today? And also your appetite for M&A, both on the manufacturing side as well as on the distribution.

Louis pointed out yesterday in the call, rightly so that from an organizational point of view, we're ready. I'll say this. The bulk of the integration is done in Canada. There's some work left to be done in the specialty lines integration in Canada. But otherwise, our teams are ready for a challenge, I would say, across the platform. Second of all beyond personal lines in the U.K., I see outperformance across the board, and that's the license for capital deployment. So that's the Intact part of your question. And the balance sheet, I think you've seen is in very good shape, and we expressed his confidence that if there is a deal, it be a good one, and we have the firepower to deal with it. Now with regards to the environment, our sandbox is 10x what it was 5 years ago. And therefore, the opportunity set from an M&A point of view has expanded. And because we made progress on our performance, there's more opportunities for Intact than there was 5 years ago, and there will be more every year because the sandbox is bigger. We're very focused on making sure that we don't true up our track record of 15% to 20% IRR on these transactions. I'll say this. Even though there might be more opportunities. So from a manufacturing point of view, if we could put capital in the Canadian marketplace, we would. I think we'd like to have a relationship with 1 in 3 Canadians. We're at 1 in 4. And if we could continue our progression to build leadership in Canada, we would. In the meantime, there are still many opportunities to consolidate distribution in the Canadian landscape and between brokerings and the partnerships we have with a number of consolidators in Canada, I see this pipeline still being pretty healthy. Very important for us to make sure that all these transactions stand on their own and generate solid double-digit IRR. That is the measure of success, no subsidization there. So far, so good. BrokerLink did a few. I think we're staying away from transactions, which are really hard to justify from a financial point of view, but there's plenty of opportunities left in the market. In the U.S. per se, same thing, I think, we would have an interest in expanding our manufacturing footprint through M&A. Keep in mind, we have 12 verticals that we like, and there needs to be a meaningful amount of overlap with the areas we're good in today. We're at that stage in the U.S. We've entered already. So now it's scaling up what we're good at, not branching out in a bunch of other places. So while the U.S. is a big market, I would say that the amount of opportunities from a manufacturing point of view are certainly not 10x what they are in Canada. And therefore, the distribution lever in particular, MGA investment that reinforce our specialty footprint in the U.S. is the one we've pursued good opportunities there in my mind, the demand side of the M&A equation not as high, so to speak, as what you would see in traditional brokers where there's a lot of consolidation. multiples have come down a bit in the U.S. interest rates very high. The multiples were very high to start with. So I'm hoping this lends itself to more consolidation of MGAs. And then on the other side of the pond, I think commercial lines is an area we certainly would see ourselves gaining in scale. But I think at the end of the bigger numbers need to work. But I think people are ready and our performance is good as far as I'm concerned. And so we're on the front foot.

I wanted to switch over next on reinsurance. Obviously, we saw rates went up a lot for this year. And then I talk about Intact specifically, but it does kind of seem like within the industry. One of the ways that insurers have kind of coped with the higher rate increases has been to like reduce coverages, increase retention, those sorts of things. How should investors and your shareholders kind of thinking about the impact of these elevated reinsurance costs? In other words, like can these cost increases be effectively passed on to customers? Or is there some higher risk that may have to be retained or absorbed by the insurers?

Yes, that's the question on the hour, Geoff. Definitely. So reinsurance and in particular, CAT reinsurance kicks in January 1 or July 1 and hit the earned premium right from the get go. So to not hit your bottom line, you need to anticipate what will come and price for that ahead of them. And my reinsurance team, very strong. By the way, [ Stephen Herridge ] comes from RSA topnotch anticipated what would happen in January, much a year last year. We've put that in our plan, integrated that in our pricing, and we're ready for much of what happened. It turns out to be a bit more expensive than what we thought. But in large part, anticipated and somewhat price for. And that's important. Otherwise, there's a mismatch between what you can charge customers and what the reinsurers are targeting you. And we haven't seen a ton of pressure there. It is fueling the hard market, and I think it will push the hard market for a few years. You've seen retention increase across the board. You've seen a number of players reduce their capacity, and that is a function of the fact that there was a capacity gap at the reinsurance level. And so the retention increases you're seeing, Geoff, in general, are not all intentional on the insurance part. Sometimes they are imposed by the reinsurers because capacity -- there was a gap in capacity, foreign exchange-driven, ROE-driven capital requirements driven, et cetera. And so I think you definitely have a lever to increase retention. But in many cases, it was imposed by reinsurer. We've increased our retention in Canada to support the CAT program from 200 to 250. And I think in the U.K. and the U.S., same sort of 25%-ish range, a function of what reinsurers wanted to see and a function of our own assessment of how much it would be to pay for this solutional protection, and we felt that at our new size as a firm, we could increase retention, better deal for us.

I know we're starting to get close to time, and I know we've got a couple of questions that have come in from listeners. Maybe we can go to those and to be so if we have some time I can ask you maybe another couple of questions that I had. So the first question that came in was, do you think it's going to be more difficult to price risk, especially with the impact of climate change going forward? Can you really rely on historical data sets -- the historical data set to guide future patterns?

I think you have to be using history, but it needs to be informed by your thesis about the future? Absolutely. And I'll give you an example. You would look back 10, 20, 30 years to figure out how much natural disasters to embed in your pricing and home insurance. You can't do that anymore. You need to look at the past, and you need to trend it forward, and you need to embed in your trend analysis where you think natural disasters will go given global warming. There's a fair bit of science on that. And as an example, a thesis of ours, which is -- we didn't come up with that, we just studied what happened was the fact that the west of the country would become 20-ish percent dryer and the east would become, in particular in the spring and winter 20-plus percent wetter and that's to a certain extent embedded in how we're thinking about the business. So no, I think if you look back, you will underprice in property, the risk prospectively. The other question you need to ask yourself is if there's more volatility around your view of the future, do you need to shoot for a higher ROE. And so when we talk about our track record in home insurance being in the 80s, this is more than the average ROE that one would need to price P&C business, broadly speaking. So allowing for margin for risk is important, and that's why our track record is 89-ish and our guidance is $7.95 even in bad times. This is an explicit reflection of the risk that exists in that space. And then you need to change the data you collect. We've made massive investments in geospatial techniques were geo-coding, our risks, you need to get far more segmented for the risks that we're taking as a firm as an industry, and this is an area where we've been really focused, including deploying machine learning models in the past few years in that space.

The second question that came in was they thought that the expenses in Q2 were maybe a bit elevated. Is this higher level what we should continue to expect given the continued tech investments? When do you expect the investments to result in better earnings growth?

Well, I think the operating income per share growth in the past decade was 12%. The objective is 10%. I feel like where the money goes and kind of paying up as far as I'm concerned. Louis mentioned yesterday that 32% to 33% expense ratio for the Canadian franchise is what you should expect for consistent with history. As we mentioned, there were blips, some were deliberate calls on our part, whether it's adding more people to make sure the service is good, adding to the marketing equation to take advantage of the response in this environment and then doubling down on a few areas in technology, we felt made sense. But sometimes, we make calls midyear. But in general, if you look at our history, we're making trade-ups. We've modernized all the platforms. We have invested massively in AI. We are one of the top digital value proposition in the market. And all that was done in an environment where we've outperformed our peers from an expense ratio point of view in the broker and direct channel because we're making trade-offs. So I think our perspective is this year a bit of a blip, but prospectively, we should be in the zone we were in before, and we're investing massively in the areas that I've just talked about. Where do I expect our investments to pay or pay more. One of the calls we've made, Geoff, 7, 8 years ago was to say, we need to modernize all the back end. If we want the front end to be agile and evolve at the speed at which customers want to see their experience change, many people focus on putting lipstick on our cake back ends, started there. We tried to do both. And I think the big area of opportunity I see from a strategic point of view is that, as we're coming at the tail end, I'm talking about the Canadian business here, as we're coming at the tail end of the modernization effort, a big portion of the envelope that's embedded in our track record from an expense point of view will be reinvested in front-end type investments which should be more effective to generate growth than when you invest in the back end. I do think it's very important to do it for a long run, but not as effective as generating traffic, obviously, as investing in the front experience of the technology platform.

Got it. I wanted to go back and maybe ask a question or so on the UK&I business. On the personal property side, I think you guys have talked about exporting the Canadian playbook, so to speak, to optimize the results in the U.K. Can you kind of talk about what you've done so far? What are the things that still kind of remain in your to-do list?

Yes. Well, let's remain to be done, Geoff, because for our techniques models to be effective, you need very good data. And you need systems that are modern. And I would say the business we picked up in the U.K. had data gaps and/or [ CAT ] systems. And we're deploying next month a new system in home insurance that has more pricing capabilities than actually that is adding variables from a pricing and risk selection. So that is the first step, big step. Our team in the U.K. has done an awesome job in my mind to bring that to bear, and I'm looking forward to see the benefits. The other thing we've done is we've put on the ground, a Chief Underwriting Officer in the U.K., who knows in-depth what good selection is. She comes from the Canadian business has been in the pricing and underwriting field here for a few decades and expertise on the ground in my mind, is very important. We've then added a few squads in our AI lab to help our team in the U.K. with enhancement in their pricing and risk selection model using the machine learning and various predictive techniques. And we've also changed how to define success. And that sounds simple but it's not simple. Where we have gone from an environment where the U.K. operation was trying to manage a number of measures of success in pricing to one where you start with the ROE, and then you ask yourself whether your prices are adequate or not. And totally changed our way of thinking about pricing and how we define success and how we monitor success and adequacy of rates. And I think those things together should take us in a zone of better performance in personal property. And that's beyond trying to create productivity in reflecting inflation in the rates and environment where competitors were slow to do it. And that's why our platform in the U.K. is shrinking in the home insurance. Fair bit of work done on the claims side of things, where there are initiatives now to in-source with a greater extent initiatives to change our relationship with a number of partners in the supply chain. And I think there's lots going on. But U.K. PL is a tough environment, we need to push as hard as we can.

Perfect and perfect timing that does take us to an hour. I want to let you get on to your vacation now. So Charles, I wanted to thank you so much for joining us today and for the listeners that connected. Thank you for taking time of new schedules to listen to us today. And that does end this session. And so you now may disconnect. Thank you very much.

Thank you. Thanks, Geoff.