Intact Financial Corporation (IFC) Earnings Call Transcript & Summary

Paul Holden, cover the financials here at CIBC. My pleasure to host Charles Brindamour, CEO, of Intact. So Charles, thanks for joining us. Pleasure to see you again.

My pleasure, Paul. Thanks for inviting me.

So from my perspective, Intact's coming off a very strong quarter. Operating EPS up 19% year-over-year, organic premium growth, 7% year-over-year. Book value per share, up 9% year-over-year. And LTM operating ROE right around 15%. And that's -- I'll remind you, well, not you, Charles, but everyone else on the line, despite elevated CAT losses over the last year.

Yes. 2x what we expected, in fact.

Yes. So when I look at the financial performance and results segment by segment, growth in investment income, everything just really seems to be humming from my perspective. So Charles, I think you probably must be having the best sleeps of your life.

This is not the Intact spirit, Paul. We're always on the lookout and I think that spirit translates into good performance and good outperformance over time, but light sleep is the way to go in our business.

Got you. Well, that's actually a good segue for the first topic, I want to talk about, because I get a lot of questions on it still like I've asked you questions multiple times over the years on this topic. I'm sure you get it from investors all the time. I'm going to start with climate change because it does feel like it's a topic that keeps some people up at night. I don't think it's the one that necessarily keeps you up at night, but for some investors I talk to, I think it certainly does. And look, I mean, you look at the data, CAT losses for the industry are climbing roughly 10% a year. So it's real, like the impact of insurance companies to Intact is real, no question about that. But I guess like the key question people are trying to get at is what does it really mean for the financial profile of Intact? Is Intact more risky investment because of climate change? Is there some kind of long-term impact on ROE. So again, love to hear your perspective on that and how you're viewing climate change and CAT risk sort of big picture.

Well, I think big picture is the right way to call this. I think that climate change and the increased incidence of natural disasters is definitely a deep trend that will be with us for a long time. And our strategy at Intact is to combine our strengths with where the world is going. And I think climate is something that the whole society should be focused on, but for us, we're in the business of derisking our customers. And this is not new for us, Paul, as you know, natural disasters have increased by a factor of 4 over the past 30 years. It became a decade ago a pressure point for us as a firm. And we've transformed our operation when it comes to property, both in terms of data we collect, how we price, the level of prices, the structure of the product, the structure of the claims operation and then our supply chain in addition to prevention. And our perspective is this is a growth opportunity. And I think if you look at the last decade, home insurance which is the line of business that is most sensitive to natural disasters for $1 of premium in home insurance, just to put things in perspective, you expect about $0.10 of natural disasters a year. So despite the headwind of natural disasters, this is a business we've ran at 89% combined ratio in the last decade, including last year, which was a 2x sort of gear. And so when you look at IFC then as a whole, it's not just home insurance, right? I mean we have now doubled down on commercial lines. You have personal automobile, which is not overly impacted by natural disasters and then home, so for IFC as a whole, natural disasters is only 4 points of premium. So that being said, when you go through a year like 2023 and the numbers you quoted exactly have a 2x amount of natural disasters at least the ROE gives you a sense that this business is very resilient. Now what we've done is we've asked ourselves coming out last summer, what if the world warms up between 3 to 5 degrees as opposed to the 2-ish degrees that the world is shooting for. And our perspective is that the cost of natural disasters over 15 years, that's the horizon over which we work, will increase by about 50%. And so our perspective is you can easily price for that, let alone all the elements we have in the toolbox. The only thing I would point out is that our models show that the unlikely events. So if you go further around the probability curve, they will double and as such, the cost of capital, my expectation and that's how we see it should go up a bit to reflect for this additional volatility. I do expect that this will lift -- continue to lift prices. We're in a hard market environment in home. I think this will continue. And it sustains in my mind that sort of environment in commercial lines, though there are other factors. So overall, Paul, I think because we have the power to price because we have a fair bit of control over the supply chain, given our track record, we see this as a profitable growth opportunity. That being said, for every dollar insured, there's $3 uninsured, and I think it is a problem that all of society should tackle. That's why we've invested so much in helping cities, provinces and the Fed deal with that problem.

Got it. And so Charles, I want to ask a follow-up question on -- you raised an interesting point on sort of the risks that are at the far end of the detail. Are those the risks that you would say are generally covered by reinsurance, like your approach to reinsurance. Is that what it's really designed to do is kind of cut off that tail risk where it might be 2x?

Yes. So first of all, I would say that reinsurance is there for more than 2x actually because 2x was last year. And if you can run your business with ROEs close to mid-teens when you have 2x, should you give away a portion of your profits to reduce volatility, we're not sort of thinking along those lines at this stage. But when it gets more intense than that, definitely, that's why reinsurance is there. I mean we view reinsurance mostly as a way to make sure there's no capital issues. And so the main peril where reinsurance is relevant is quite actually -- there are very few of the perils that are climate change driven that would get big enough to largely speaking, to call for a meaningful amount of reinsurance protection. Reinsurance would kick in as it did for Fort McMurray, for instance, a number of years back to chuck that tail. But I would say that we don't want to use reinsurance just for volatilities purposes.

Well, Fort Mc actually kind of leads me to the next question, which is regarding wildfires, right? Last year was a particularly bad year for wildfires, already starting to see news headline, wildfires spreading already in Canada this year, which is a little bit earlier, I think, than normal. So on that note, I think was really interesting to see is Intact launching that agreement with Wildfire Defense Systems. You talked a little bit about on your call, but maybe some of the people on the line missed it. I think it's worth repeating sort of how that agreement came about, how it works and what kind of protection it provides for Intact and for Intact's customers most importantly?

Yes. I think you're right, Paul. It's -- last year was a year where the amount of hectare burned was almost 8x the historical average and was 2x the burn area on record historically. And so you enter 2024 that were 50 active fire on the ground, actually. And so it's not surprising that there is activity already in the -- on the West Coast. We're -- we've done a fair bit of work in terms of pricing for that. We've invested heavily in prevention. We're actually working with the most at risk municipalities with either the Mayor or the fire chief to share with them how best to protect their cities in relationship with wildfire. For customers per se, we have a number of prevention measures, but the agreement that we've used or that we've announced and put in place with wildfire, the fed systems, is one whereby if you're within -- if an active fire is within a certain number of kilometers from where you live, we will go and protect to the extent we can, your property by doing prevention work, dealing with flammable materials and shrubs and things like that to reduce the odds of being exposed to fire and reduce the odds of adding the damage in the first place, which is in the customer's self-interest. And obviously, for us, we think that it can have an impact not only on frequency of claims, but also on the severity of the damage itself. So as we often do in building our value proposition, we don't think of what we do as a financial transaction. We think of what we do as helping our customers derisk, get back on track, but ideally avoid the claim in the first place. And I think this is very consistent with how we think of our business.

Last question for me on this topic. So -- the federal budget included an initiative started National Flood Protection Program here in Canada because we don't have an existing one. So probably something that is good for the population. As you mentioned, a lot of risk is uninsured. But are there any kind of implications for Intact in the insurance industry more broadly as a result of that National Flood Protection Program?

So I think that let's just frame the issue we're trying to deal with here. There is about 15% of the Canadian population that lives in high-risk flood zone. Why that is the case, bad land use and land use planning. And I think we ought not to forget that in a world where natural disasters will expand, we need to be very careful about where we build, and I think that's something we haven't been careful before. As an insurer, obviously, we provide flood coverage in -- for the remaining 85-ish percent of the Canadian population. In our case, it's 83% of our customer base had access to different levels of flood coverage depending on the risk. So every time there is a flood and the frequency of flood has gone up, guess what, the federal government with the disaster financial assistance ends up picking up a big portion of the TAM for people who have built in flood plains. So the idea here is to be preventative in nature, put in place a flood program where people who live in flood zones actually pay for that coverage. The industry will administer this, but this will be for the account of the government. That's kind of the design at this stage. So I think it does make sense because it allows the government to collect a premium to a certain extent for the risk that they're bearing anyways. I don't see a major issue for the industry or a major impact other than we will be fronting the government's effort. If that program comes to life, will be providing the service to a large extent. And I think that is the main implication because we cover those customers just not for flood, but their houses are insured for fire, wind and other damages. But the additional flood coverage is meant to be provided by the government. I think the question, Paul, if we get philosophical I am in England, now it's 5 hours later. So you ask yourself bigger questions. I don't know if it's good public policy to encourage by making coverage available to people to build in flood plains, but that's a debate maybe for a cocktail later tonight.

Sounds good. Okay. Well, let's switch topics again. I think climate change is obviously an important one. But let's talk about personal auto. So seeing good top line growth, better top line growth than I was expecting, so very good top line growth in personal auto today, seeing good margins as well. So my question is like -- where do you stand in terms of how you're viewing rate adequacy ex Alberta, and we can talk about Alberta separately in a second, but ex Alberta sort of rate adequacy, where competition sits and thereby your appetite to grow policies in force.

Bottom line is this environment plays to our strength. I think you've seen us shed market share when the industry was not pricing for inflation, Paul. And I think we're in the zone now where we're very comfortable with our rates -- coast-to-coast all provinces in and benefiting from an environment where the industry is catching up. It happens at the same time as Canadians are shopping way more than they did a couple of years back. And so what this means in practice is growth is good, retention is good, and we're comfortable with our prices. We're writing at about 10% rent increases at the moment. We're earning upper single-digit rate increases at the moment and there's very good growth momentum, that is slightly above inflation, we quoted sort of mid-single-digit inflation in this environment. So environment where we're happy to grow. And clearly, that's what we're showing with low-teens growth in the first part of the year.

Okay. And let's say we'll come back to Alberta. I only want to ask maybe one question on it because there was a lot of questions on Alberta on your conference call last week, but how does this -- and both you and one of your competitors, a publicly traded competitor, referred to capacity coming out of that market, right, which at the end of the day, is not good for consumers. Doesn't help balance the market. So I don't know how do you see this likely getting resolved over time?

Well, I think that there's no doubt that capacity is leaving that market. Why? Because I think inflation was higher than the cap that the Alberta government has put in place. And those who were not quick to price for that inflation are kind of in a tough spot at the moment. We've been pricing for inflation, whether it's bodily injury inflation, technology-driven inflation and then the inflation that followed COVID because of supply chain impacts and so on, we've been pricing proactively that stuff since 2016. Those who have not, they will find themselves in a tough environment and find all sorts of ways not to write business in Alberta, at the moment. So yes, it is not good for consumers because supply of the product is what you aim for. And our industry is super competitive. There are very few industries in Canada where for every product in every province, you have about 20 active players. But those are getting tired in the Alberta marketplace. So how I think this solves itself, it solves itself when Alberta turns its attention to the real problem in the Alberta marketplace. And the problem they can have an influence on and it is legal representation of claims. The automobile insurance regime next door in British Columbia, a public system got into real trouble, a number of years back, clamped down on legal activity, and it drove a bit of pressure in the -- I don't know if you've seen the lights have closed here. There you go. I'm not supposed to be in the office, I guess. And so there's been a bit of pressure from lawyers coming in the Alberta market and creating inflation in bodily injury as we have talked about. And I think so long as Alberta does not act on that, I think there will be some inflation in that province. And I think they need to go to the root cause of the issue. And I think over time, the cap will be lifted because the inflation that is reflected in the cap, which is the CPI, doesn't have much to do with the automobile insurance inflation. Overall, I'm very pleased we've been proactive in that province, and we are growing in that province. And I'm comfortable with our position at this stage. But we're really happy if we can help the government deal with the issue.

I said I'd only ask one question on that topic, and I shouldn't have said that because I'm going to ask another. Because it's something you said kind of tweaked the thought in my mind, which is another question I always hear on this is like what is the risk to contagion, you've heard the question too. [indiscernible] Ontario does the same thing. And sort of one of the comments you made that want me to go here was on reduced capacity, reduced competition. And everything I've seen and read from FSRA, the regulator in Ontario, is all about increasing competition, right? They're driving to increase competition. So I don't know, is that a fair assessment. FSRA is still very much on the path of they're unlikely to put through rate caps because they want to see more capacity in the market, not less.

Yes, I think so. I think that they're a sophisticated regulator. They are focused on the sources of inflation. You've seen good reforms in the Ontario market. They've been very proactive actually at dealing with the inflation that they can control, which is an accident benefit and bodily injury. The recent budget talked about some reforms. And the last thing they want is a capacity issue in the market because this is when it becomes a real issue for consumers, and that's when it becomes really political. And so I think that they get that. They've been through that 20-plus years ago. They don't want to go there, and they are very proactive and sophisticated as far as I'm concerned. Paul, I don't want to say that there's no risk of contagion. I've always been very clear about that, but I'm not overly concerned about that though.

Got it. Okay. Good. A little bit more of a, I don't know, modeling-type question, I guess. So premium growth of 11% to start the year, again, very good and better than I was expecting. Does that slow or can a double-digit pace of growth be sustained through the rest of the year?

I do think that the level of growth, I mean, look, there's close to 10 points of rates approved and baked in when you throw in the increased value in the car pool. So between rates and the increased value of the carpool, you've got about 10 points. And so I'd be very surprised if we ended up in a negative unit territory before the end of the year. So I'm quite positive about the growth in that line of business.

Okay. Auto thefts have been very topical because it has had a real bottom line impact on claims losses. Where are we kind of at in that file just in terms of progressive -- sorry, progress on reducing claims because of all the initiatives from the insurers, from government, from the police, et cetera, it seems like a lot of efforts have been throwing at trying to solve this issue.

Yes. Theft real issue, not a new one, but one that's tripled since 2021. It started in Quebec migrated to Ontario, and now we're seeing it in some other provinces, including The Maritimes. We, I think, were quick to price for it. It's been a pressure point, but it's not a pressure point anymore for us. Keep in mind, Paul, that 1% of vehicles drive 40% of the theft. And we like to think in highly segmented fashion, and that's a stat that is important. So we really zoomed in on that 1%, both from a pricing, risk selection underwriting, but also we've asked our insured to tag their vehicles, with devices where we can track, actually, if a car has been stolen and the recovery rate is very high. So I would say not much of a headwind for us prospectively, very good momentum at the industry and government level and need to remain focused on it, but I think we've acted decisively on this and starting to be up.

I haven't heard that 1% accounts for 40% stat before. So that's an interesting one. So afterwards, you're going to tell me which car not to buy.

Yes. I will do it afterwards. I don't want to reveal competitive advantages at this stage.

Okay. It's kind of a sort of a different angle on not just personal auto growth, but maybe personal property growth as well, right? Like Canada has seen a big boost to population due to immigration in recent years? Is that an opportunity to grow policies in force across personal lines? Is any -- does Intact have any specific strategies in place to target new immigrants to Canada?

So immigration is a big source of growth for the country. It was a massive source of growth in 2022. It's been much talked about. It's a core driver of GDP in the country. And as a result, a growth opportunity for us. When you survey newcomers to Canada, it's very clear that when it comes to insurance, they need help. They need advice. And this is, in my view, a very good opportunity for brokers as well as for agents and therefore, for broker-linked, we have grown our brands, I think, both Intact insurance and belairdirect as well. I think tapping into this need for advice and service in my mind is a big opportunity. And overall, I think it contributes to our growth. We don't have the specifically newcomer focused strategy, Paul, I think we're really focused on going beyond expectations for customers, whether it is through the claims experience or the digital experience, and we have -- if you look at automobile insurance per se, we have $1 trillion price point in every province where we operate. So you can conclude that we have an offer for everyone.

That's more price points than we have people. So yes.

Plenty of room for immigration as far as our algorithms are concerned.

Absolutely. Good. We still have half an hour left, but I want to remind people if you do want to ask a question, please e-mail me, so paul.holden@CIBC.com, I have my outlook up here. So e-mail me, and we'll make sure we get your question in. Sort of a question, again, a macro type question, but from a different perspective. Canadian consumers are clearly feeling the picture of higher cost of delivering plus higher borrowing costs. What kind of impact might that have on demand for Intact's personal line products?

Paul, when we survey customers, it's very clear that they want to be -- they want a simple transaction. They want to be understood, and they want value for money. And that last point is coming out stronger in the most recent survey. It's very clear. When you look at our performance in our top line and what we see from customers, I would say, first of all, retention is very strong. But more importantly, Canadians are shopping way more than they used to. I think in the order of 25%, 30% more. So that's one thing we see. And because our prices relative competitive position has improved in the last year, this is a net benefit for us because it's a source -- this shopping is actually a source of growth. I think the other element here is the fact that every call is a longer call now, like there's way more activity in our operations because people are trying to find ways to save in their -- on their insurance product. And that's really -- so more traffic and more time when our customers is how this translates into our operation, but overall, a source of growth. Now it's important to keep in mind that when it comes to value for money, Intact has a broad range of offering. And in fact, if you took -- take belairdirect for instance, which is focused on insurance simplified, this business is growing really quickly as well at the moment because it is a great value for money is the name of the game in the case of belairdirect. Our digital channels are on fire. I'd say we're -- the growth individual channel is up almost 75-ish percent, I think, in the last few months. And as such, within our product range, there's lots of opportunities to find, I think, an offer that suits customers.

Okay. Good. I'm going to ask you, I'm trying to see some questions come in. I'm going to ask you one more before I get to the audience questions. So I like in this whole of this -- you talked about all the pricing points you have. You also talked about more coming through the digital channel, people doing more price shopping. Just kind of wondering what role is AI playing in this? I know you've talked about investments in AI in the past. So this would seem like an environment where you can exploit AI capabilities even more than sort of the normal environment? Am I correct in that? Maybe you can just give us sort of a sense of what you've implemented to date and what kind of impact AI is having on business performance?

Yes. For us, it goes straight to strategy, Paul, because if you look at our track record of ROE outperformance over 10 years, this is not random. It comes from a very deliberate strategy with 3 pillars to outperform, pricing and risk selection and think data and AI, claims and supply chain, capital and investment management. So 1/3 of the ROE advantage comes from being smart at using the data we have and then using techniques to model the data we have to better price for risk than our peers. That is about 1/3 of our ROE advantage. So close to a decade ago, we said we really need to double down on that advantage in a world where data was exploding and AI started to become potent. Like this is not a 2023 phenomenon. And so we built a massive muscle, I would say, in AI over the last decade. It's north of 500 people. That's all they do between Canada and we have a development shop in Hong Kong as well, and we have today 370 models in the field, and that's generating about $120 million of recurrent earnings. How we use it? The bulk of our usage of AI and call this machine learning primarily has been in predictive analytics, namely pricing. We have what we call revolutionized all our pricing algorithms in personal lines, and we're transforming commercial lines at the moment. Then we've invested a fair bit in natural language processing and speech analytics. Two different things, but a different bucket for us. And that was aimed at customer experience primarily and the efficiency of customer interactions. It's been historically 25%, 30% of our efforts. It's becoming an increasing portion of our efforts. And lastly, with the big advances in large language model and generative AI, we have a number of initiatives on this front, but it is primarily targeted to customer experience. And it is primarily targeted at keeping customers in the digital channel, increasing trust in the digital channel and our ability to grow in the digital channel. But I would say, Paul, this is a muscle that is well developed at Intact and one we've invested in massively over the last decade and one we will invest in massively in the coming decade. And we don't depend on anybody else for that. We've built that in-house because we think it's an important competitive advantage.

Got it. Great. Okay. So turning to some audience questions. So the first one is with respect to M&A opportunity. So the question is Intact was proactively talking about being ready to deploy capital into the next acquisition opportunity with RSA being fully digested. And so that message was delivered a couple of quarters ago. The specific individuals said they didn't hear that same message be repeated on the last conference call. I was just wondering if anything has changed.

Nothing has changed. I think that the RSA integration in Canada is largely done. And that was 75% of the synergies and that's why you've seen upper teens net operating income per share accretion. And we think this transaction internal rate of return starts with the 2 and it's double-digit to be clear. So it's north of 20% IRR. And so like a big portion of the anticipated value has been created and we've been focused on the past 24 months in parallel, with the transformation of the U.K. business, and we're in really good shape in the U.K. I mean, this was the low-single-digit ROE business here in the U.K., and we're well into the teens now after the transformation we've done and we're just starting to expand that business following the acquisition of NIG. So when it comes to M&A, number one, area of interest is Canada. We think we've got plenty of room to grow in the Canadian context as an insurer and as a distributor, this is where the first dollar goes. Secondly, we'd like to grow our presence in the U.S. both from a manufacturing point of view or by buying MGAs and we've done some of that already. In the U.K., at the moment, because we've announced the acquisition of NIG or direct clients, commercial business for brokered commercial business last year, the next 12 to 18 months will be really focused on integrating that business. So in terms of M&A, North America, I would say, is where the focus is, and we're absolutely ready to do something. But at the end of the day, we have, I think, very well-established economic standards. It needs to be strategic in nature, and we don't do deals just to do deals or to create punctual accretion.