Intact Financial Corporation (IFC) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Intact Financial Corporation Q3 2026 Results Conference Call. [Operator Instructions] Also note that this call is being recorded on November 4, 2020. And now I would like to turn the conference over to Geoff Kwan, Chief Chief Investor Relations Officer. Please go ahead.

Thank you, Sylvie. Hello, everyone, and thank you for joining the call to discuss our third quarter financial results. A link to our live webcast and materials for this call have been posted on our website at intactfc.com under the Investors tab. Before we start, please refer to Slide 2 for a disclaimer regarding the use of forward-looking statements, which form part of this morning's remarks, and Slide 3 for a note on the use of non-GAAP financial measures and other terms used in this presentation. To discuss our results today, I have with me our CEO, Charles Brindamour; our CFO, Ken Anderson; Patrick Barbeau, Chief Operating Officer; and Achraf Louitri, Senior Vice President, Personal Lines. We will begin with prepared remarks followed by Q&A. And with that, I will turn the call over to Charles.

Thanks, Geoff. Good morning, everyone. Thank you for joining us today. Yesterday evening, we announced net operating income per share of $3.63 with a combined ratio of 94%, including 4 points of CAT losses above our expectations. Our top line growth increased to 5%. This was driven by sequential improvements in personal lines as well as commercial and specialty lines, reflecting continued traction in our growth initiatives. Our operating ROE was 16% despite a 2-point drag from excess capital. This marked the tenth consecutive quarter that our ROE was above 15%. Let me now provide some color on each of our segments, beginning with Canada. In personal auto, our premiums grew 10% in the quarter, including 2 points of unit growth. Our combined ratio was strong at 91.2% despite close to 2 points more CATs than last year. Our pricing and risk selection strategy is really working, and we continue to gain market share with premium growth now outperforming the industry for 7 consecutive quarters. We outperformed the Canadian market in H1 by 4 points of growth and 5 points of combined ratio. This environment really plays to our strength. I know that now we operate in a market where capacity is fairly tight. Inflation in the past couple of years has been in the mid-single-digit range, driven by physical damage, stable accident benefit cost equation, but very high inflation in [indiscernible] injury liability. This has put a fair bit of pressure on the industry profitability. With product reforms reducing claims inflation and improving affordability for consumers, we expect industry growth in the mid-single-digit range in the next 12 months. We expect to continue outperforming the industry in terms of growth and to maintain our combined ratio in line with our current performance. We're keen to grow in this environment. In personal property, our premiums grew 7% in the quarter, including 1 point of unit growth. The combined ratio of 105 included 33 points of CATS. Underlying results continue to improve. And if you look at the past 12 months, our combined ratio in home insurance was 92.5%, consistent with our sub-95% guidance and close to our 90% average track record in the past decade. Over the next 12 months, we expect hard market conditions to persist, and we're really well positioned to continue gaining market share in this environment. In commercial lines in Canada, premium growth improved sequentially to 2%. This reflected 4 points from increased units and rates, partly offset by a mix shift towards smaller accounts. Our game plan to deploy technology, expand our product range and broaden our distribution, especially in specialty lines is really paying off. Submissions are up close to 10% in the quarter. With this momentum, we expect to outperform the industry growth in the next 12 months. We delivered a strong combined ratio in commercial as well of 91.9% despite catastrophes being 7 points higher than expected. Excluding this, the 85% combined ratio is right in line with our 5-year average. We continue to target a combined ratio in the low 90s or better. Moving now to our UK&I segment. Our top line growth improved sequentially and was flat in the quarter. supported by solid new business, particularly in specialty lines. Over the next 12 months, our quarterly growth rate will be uneven given the dislocation associated with the integration of and the deployment of new pricing models in a competitive environment. But over time, we expect a positive trajectory driven by new product launches, distribution expansion and continued improvements in broker service. The combined ratio of 94.1% was in line with our view of the current run rate. The U.K. team is executing on the action plan, targeting a combined ratio towards 90%. This will be achieved by accelerating deployment of advanced AI models and pricing and risk selection, modernizing our technology platform and decommissioning legacy systems in addition to improving our productivity. In the U.S., growth came in at 3%, driven by our focus on expanding the best-performing verticals. Roughly 2/3 of the portfolio operates sub mid-80s in the U.S. These are the segments which drive our growth. And it's no surprise that we delivered another strong combined ratio of 85.2%. The 13th consecutive quarter below 90% and 18th consecutive quarter outperforming the industry benchmark. While our objective is to deliver low 90s or better, over the next year, we expect our combined ratio to be sub-90%. And over that period, we see our top line growth gaining momentum, driven by doubling down on our most profitable verticals, expanding geographic footprint in addition to adding verticals such as fine arts, U.S. construction liability and E&S casualty. Overall, as we look ahead, we're confident that our competitive advantages will help us make the most of a changing environment. And with the rapid development of AI being no exception. We firmly see ourselves as relative and absolute winners in an AI world. We've built our AI muscle in-house since creating the Intact Lab over 12 years ago. And today, we're a global leader in AI in the insurance space. It is, in our view, a tailwind to both our key financial objectives. Over the past decade, we've outperformed the industry ROE by an average of 670 basis points, 1/3 of that comes from pricing and risk selection and another 1/3 from claims and supply chain. Frankly, AI is making them both stronger. Pricing is where it matters the most and where we've been expanding our lead for years. We've built and engineered over the past decades vast proprietary data sets, structured and unstructured of customer interactions, ranging from shopping claims in addition to using public and contextual data. Given we're 2x larger than the next closest competitor, this is a huge advantage. And this is combined with a team of over 600 AI experts using the latest data science to feed our prediction models. Today, machine learning prices 94% of our Canadian personal lines business and 75% of our commercial lines. When including our operations in the U.S. and UK&I, we have more than 600 of our own models in production. Some believe generative AI will level the playing field. We strongly believe the opposite. Simply put, you can't prompt your way to a sophisticated pricing model without the ingredients that we have at scale. In claims, our second area of outperformance, we spent years internalizing our supply chain. AI multiplies the value of that choice. We handle more than 95% of claims in-house. So we see every step of the claims journey from first notice, final repair. That gives us data no one else has, sharpens our fraud detection, reduces indemnity leakage and helps our adjusters and lawyers close files faster. And when a basement floods where car needs repair, to our own people and supply chain network like on-site and our auto service centers that get the job done, frontier models can't replicate that as this advantage is rooted in the physical world. And now to growth. Over the past decade, we've grown net operating income per share at a 12% CAGR, ahead of our objective, driven by organic growth, margin expansion and capital deployment. There's no doubt that AI has already expanded our margins and that will continue and accelerate. As AI changes how retail customers shop, our distribution advantages become even more valuable. Customers choose insurers they trust based on reputation, reviews, claims experience and price. I layed out how we outperformed on price. And we own Canada's #1 and #3 brands with Intact and Better Direct, and 3 out of 4 customers are advocates, a very strong digital platform, including the country's most unloaded insurance app. Because we own our platforms across brokers, direct to consumers and agencies, we have the optionality to win however, customers choose to interact with us. We're obviously actively focused on ensuring we win in LLMs as well as with agents in time. All of this is already translating into financial results. This is not just a promise. We earned today close to $250 million in recurring pretax earnings, and expect to double that in the next 24 months from our AI deployment, which we measure. And we see a substantial runway beyond that. So in closing, Q3 once again demonstrated not only the strength, but also the resilience of our platform to deliver strong growth and outperformance in good and in bad times. Our teams did outstanding work supporting customers through multiple weather events, and I want to thank all of our employees for their dedication and commitment to helping customers get back on track. Thank you. And on that, I'll turn the call over to our CFO, Ken Anderson.

Thanks, Charles, and good morning, everyone. Last night, we reported strong third quarter results, demonstrating the earnings power and robustness of our platform. Net operating income per share was $3.63, our second highest result for a third quarter. This performance sustained operating ROE at 16% and 18% when adjusting for under leverage and excess capital. Book value per share increased 8% year-over-year to $111.11 and reached double-digit growth, excluding AOCI. Let me add some color on the strong performance in the quarter. The overall underlying current accident year loss ratio was solid at 55.4%. Our consistent track record of healthy favorable prior year development continued, contributing 6 points in the quarter. This was close to our quarterly average PYD over the past 2 years and broadly consistent with the second quarter. If you want to estimate near-term PYD levels, our recent experience provides the most relevant guide. But our view remains that the current accident year results and prior year development should be assessed together when evaluating performance. You also need to keep in mind that we increased the threshold for losses to be categorized as catastrophes on January 1 this year. This keeps close to 1 point of losses in the current accident year ratio in Q3 compared to last year. So all in, the combined current accident year and PYD measure has improved year-over-year, reflecting our continued profitability actions. Catastrophe losses were $660 million in the quarter, 4 points above expectations. Over the past 12 months, CAT losses have been close to our $1.2 billion annual guidance. As usual, we will provide our CAT loss expectations for 2027 when we release fourth quarter results. Moving to expenses. The consolidated expense ratio was 33.9% for the quarter, a small improvement year-over-year. We continue to invest in data, AI and technology to strengthen our competitive advantages and in our brands to drive profitable growth. At the same time, we maintain discipline on the overall cost base. We expect our consolidated expense ratio to be at the higher end of the 33% to 34% range for the full year 2026. Beyond underwriting, this quarter also highlighted the strength of our diversified and recurring sources of earnings. Operating net investment income increased 5% to $422 million, supported by growth in assets and higher yields. Our reinvestment yield is now 4.6%, 50 basis points above our portfolio book yield. This momentum supports our expectation for net investment income of over $1.7 billion this year, rising to over $1.8 billion in 2027. Distribution income was another strong contributor in the third quarter, increasing 16% year-over-year to $171 million. BrokerLink delivered solid organic growth and improved margins. On Side, our countercyclical restoration business, was very active following the recent CAT events and grew revenues by more than 30% in the quarter. We continue to expect distribution income to grow by 10% annually over time. Moving to our balance sheet. We are operating from a position of significant financial strength and flexibility. Adjusted debt to total capital of 16.3% was largely unchanged from the second quarter. Our total capital margin was $3.6 billion, well in excess of what we need to manage volatility and leaving us with significant capacity to deploy capital. During the third quarter, we repurchased approximately $200 million of our shares, bringing total buybacks over the past 12 months close to $600 million. At current valuation levels, share repurchases represent an attractive use of capital. We intend to remain active while balancing strategic flexibility with our core objective to maintain a strong and outperforming ROE. Our M&A track record over the last decade shows an IRR north of 20%, and the landscape continues to improve. We're sometimes asked about buying back even more shares given how undervalued they are, and the strong shareholder support we can expect to finance an acquisition. In theory, that makes sense. But in practice, there is a limit to the amount we can expect to raise from investors for larger transactions. Therefore, given how constructive the M&A environment is, we're being deliberate about preserving capital for opportunities that can create significant shareholder value. Overall, we continue to deliver on our 2 financial objectives. The first is to outperform the industry on ROE by at least 500 basis points every year. We've consistently exceeded this objective with outperformance of 740 basis points in 2025 and an annual average close to 700 basis points over 5 and 10 years. Our second objective is to grow net operating income per share by 10% annually over time. Here, too, we have exceeded the bar, delivering compound annual growth of 14% over the last 5 years and 12% over the last 10 years. And we have all the levers to continue compounding in excess of 10% going forward. First, organic premium growth is supported by an addressable market now 10x larger than a decade ago and a robust multichannel distribution strategy. Second, operating margin expansion is fueled by our industry-leading capabilities in AI and our deep expertise in claims and supply chain management. These 2 levers, coupled with continuing to invest in distribution and share buybacks, provide a clear path to compound noise at 10% annually over time. And that is before the significant upside from M&A, which, given our track record and the opportunities we see, remains our preferred use of excess capital. We're in a strong position and focused on continuing to deliver long-term value for our shareholders. With that, I'll turn it back to Geoff.

Thank you, Ken. [Operator Instructions] So Sylvie, we're ready to take questions now.

[Operator Instructions] First, we will hear from Jeame Gloyn at National Bank Capital Markets.

Yes, first question, just maybe on personal auto. And I just wanted to dig into your views of outperformance versus the industry? Saw that the industry outlook lowered just a bit on Alberta reforms, but what gives you that confidence that you'll continue to outperform industry growth rates and deliver still in, let's say, the high single-digit range?

Thanks, James, for your question. That's exactly right. Our view is that we'll outperform the industry and that the change in outlook is essentially driven by reforms Alberta, namely where, come January 1, all new claims will be subject to a new regime. I'll ask Achraf to give perspective on the new Alberta regime, which I think is excellent for Albertans. But what it means in practice is that the severity on all new claims come January 1 will drop meaningfully because we're moving towards an all care model. And I think that premiums will follow accordingly. That's how the industry works, the cost equation changes, premium follow. And I think there will be a onetime impact in 2027 because of the deployment on all new claims come January 1, and that's pretty much the only reason why we have modified our outlook. Achraf, why don't you give a bit of color on Alberta and then I'll come back on outperforming?

Thank you, Jeame, for the question. That's exactly right, Charles. So maybe first, I'll start by saying the reform itself is called CareFirst because it puts the needs of Albertans first. And the way it does that is by limiting the tort access allowed, which is crucial in our view to containing the cost and keeping the system focused on care rather than litigation. Consumers will also benefit from not only more affordable and stable insurance prices, but also faster treatment that's focused on recovery and free from the delay of legal process. So as a result, a bit as Charles explained, the reform lowers meaningfully all new claim costs starting January 1. You should expect to see negative year-over-year claim cost inflation in the province which translate to lower inflation in total Canada. And this will drive lower rates in the province in 2027, and more importantly, the CareFirst reform brings back the system to sustainability after industry lost close to $1 billion over the last 2 years. In other words, after the 1-year reset in 2027, we should expect to see controlled level of inflation. And we are optimistic that the reform will have a positive outcome for Albertans, and we remain committed to working closely with the government and regulator to ensure a successful delivery.

Yes. I think, Jeame, the issue in Alberta said it was so litigated that you had massive amounts of cash settlements, a big chunk of which didn't go to injured parties. I think the government took the bull by the horn and basically said, we will put all the resources towards getting Albertans back on track following an accident. Very good reform in my mind, not only for victims, but for all drivers in Alberta. And I think that everybody benefits in that context. And so we're very positive on the outcome for Albertans. And if you look more specifically at the inflation equation that we're operating under now pre-reform, there's probably 3 elements in there you want to think about. The first one is the inflation, all this mid-single-digit now anchored in physical damage inflation. We don't think that's going away. Liability inflation driven by a number of provinces, Alberta being the biggest one, was double digit. And then at the other end, accident benefit as a product across [indiscernible] hasn't shown much inflation. So in aggregate, you're in the mid-teens. Alberta is tackling the high inflation mid-single digit -- sorry, did I say mid-, I don't know, mid-single digit. Alberta is tackling the high inflation. There will be this onetime impact in 2027, hence, the change in outlook. And the product they're putting in place will also contain inflation prospectively. Now you've seen us seen over time, shrink our market share as people were behind on inflation. And as people are now catching up, we've outperformed now by close to 4 points in the recent past. It's still a tight pricing environment. We're putting our brand to work, our service to work, our digital channels to work we don't see the outperformance changing in the near to midterm.

And that 4% was Canada overall? Or -- just to clarify.

Yes, Canada overall.

And then on the same theme and perhaps you can relay it over to personal property as well if bundling is a component of this, of course. But looking at policies in force growth, unit growth, still kind of in like the 1-ish percent range. Is it really like Alberta and pulling back on Alberta that's been a drag on seeing acceleration or further or higher growth rates in that unit perspective? Or is this something we could see start to inflect now that Alberta is back online and you're broadly more comfortable with the pricing environment?

I think the in-force picture is a lagging indicator. I think your written unit growth is, in my view, a more relevant indicator. We have good growth in most of the markets in which we operate at different level. We take our spots depending on the health of the market. Clearly, as we saw these reforms heading in the right direction in Alberta. And as the industry is really in a real tough spot, being a leader in the marketplace, we chose to grow in that environment. And I think this turned out to be the absolute right call. I don't know, Achraf, if there's anything else to add on that?

No. I think Jeame touched on the bundling [indiscernible]. It's relatively stable. It has been stable, slightly higher than 50% in both products, slightly higher on the prop than personal auto. And I think to your point, Charles, the unit growth is at 1.5% year-to-date, is in that zone is in ended range. Of course, there are areas where we're more careful others where we're more bullish from the growth. But overall, that has been stable since the start of the year.

Yes. So the bundling, the big thing at our end, I think depending on the province and the line of business, you're in the 50%, but there are provinces where it's close to 70% actually. And it's been a good retention tool for us.

The next question comes from John Aiken at Jefferies.

In terms of the combined ratio in the UK&I, we've seen in previous quarters some large losses negatively impacting that, we saw improvements this quarter. was there a fundamental shift that we saw in the quarter? Or were there actually some tailwinds that helped the combined ratio this quarter?

Ken. Yes, sure. No, Look, fundamentally, John, you look at the performance in 2024 and 2025, you see an average of 94%. And I think last quarter, we called out that what we saw in terms of large losses in the second quarter was very much anomalous. And our view was that the underlying performance was sub-95%, and that's what you're seeing in the third quarter. That's our view of where the performance is. And I think absent a surprise, we would anticipate in the near term being in that zone. So no excess or unusual large loss activity in the third quarter and nothing unusual to call out. I think the performance in the third quarter reflects our view of where we are today. To be clear, our objective is to push towards combined ratio in the U.K. And that action plan is focused really on 2 main areas. Firstly, on the loss ratio, rolling out and embedding the pricing sophistication across that portfolio fully, which should bring 1 to 2 points of loss ratio improvement. And then on the expense ratio side, we know we have a gap to peers in the zone of 3 points. And over the next 36 months or so, the aim is to improve particularly the technology cost in the U.K. where we're embedding new technology, but until it's fully embedded, you can't switch off the existing technology. So you end up with an outsized technology cost in the near term, and that's what we're working hard on over the next 3 years. And can you remind me how long you think that process is going to take in terms of the conversion of the technology? Yes. I think we talk about the outer end around 36 months. So that's our view today. In terms of the performance, though, clearly, '27 should be better than '26, particularly given the first half of 2026.

Yes. So I mean we're -- we've been deploying new systems since last year. There are multiple products and lines of business in that region, CL as well as -- and the challenge is that RSE had multiple legacies. We don't operate like that. So we're unpicking those 1 by one. And while we're deploying technology now, your policies need to have migrated before you can get rid of the old technology, hence the 24 to 36 months window.

Next question comes from Tom MacKinnon at BMO Capital.

Wonder if you can give some color with respect to what you're seeing with commercial lines, largely in Canada? You've talked about pressures in some of the bigger accounts, but not necessarily in SME. Why do you believe that's the case? And as we continue to see rate pressure in North America on commercial lines, when do you expect that seem to dip into the SME in Canada, or if you don't, why?

Yes. No signs of that in the SME space. You're seeing retentions north of 90%, very stable. Some of the metrics are even improving in that space. And when it comes to price change per se, you're seeing almost mid-single-digit price changes in that space, very steady. It's a growing portion of our portfolio, Tom. That's why I've talked about the 2 points of mix shift downward in our remarks. It's a sign that we're growing in that space at a much faster clip than we are for larger accounts where we're shrinking. And so -- but we're not seeing a migration. I don't know, Patrick, if there's any color you want to add there.

No that's right. When you combine rates and exposure, we're really on the mid-single digit for SME and for a good portion of mid-market as well. So no change. It's been quite stable around that for many quarters now.

Yes. And Tom, that would be consistent with what we've seen in the past 25 years, and I'd like to talk about before that, but we were not as present people are on the table today. But certainly, it feels very much like what I've seen before and maybe a little bit better.

And what's the mix in terms of net premiums or commercial lines in Canada between large and SME?

Yes, I think we see -- in commercial lines in Canada, you're looking at 80% to 80-plus percent is in the SME mid-market space.

Next question comes from Doug Young at Desjardins Capital Markets.

Just want to go back and to the Alberta reform and the personal auto. And it sounds like the claims inflation and the benefits you get kind of happened January 1 and pricing gets adjusted over the next year and then earned premiums will be reflected. So is this -- are we going to go through a period actually where you get margin expansion through 2027, a bit of 2028 and then it kind of stabilizes because it seems like that might be the case, but I just want to understand that. And is that what you saw with the Ontario reforms as well?

I think that we're -- what we're seeing, Doug, is you look at our performance to date, it's a very good indicator combined ratio wise of what to expect next year. It's at the lower end of what we call sub-95%. That's why we're specifying what to expect next year. I think in aggregate, at the industry level, clearly, the performance of the industry is unsustainable in Alberta. That's why there were capacity issues. People then want to be in Alberta or grow in Alberta. And I expect the overall loss of the industry in that province to shrink at the industry level as inflation comes down and that will be translated into better premiums for Albertans. But when it comes to us, I feel like looking at the performance right now is probably the right way to think about our performance next year, which is better than mid-90s. But I don't want to telegraph margin expansion, no.

No. And specifically about Alberta, if you were alluding to a potential mismatch between the timing of where the cost benefit would happen and the premium, both will be aligned, so there won't be a mismatch there. Yes.

Okay. So it's not like your -- the cost comes down immediately and the earned premium coming through or the reduction comes down later. That's more matched through 2027?

Yes. I think we're in the last stretch before the reforms become effective, but think in symmetric terms here. That's probably the best way to think about it.

Okay. And then I had some in the UK&I, but I think most of that has been answered. But on the U.S., it feels like you're more optimistic on both the margins and the growth over the coming year. And maintaining your combined ratio in around mid-80s or below 90%, I think, is what you said. I mean what gives you the confidence given obviously the competitive trends? You talked about new products. You talked about distribution relationships. Like what has really kind of turning that confidence to be more positive on the outlook in the U.S?

I think it's the fact that the growth is all coming from the best lines of business. As I mentioned in my remarks, you have almost 2/3 of the portfolio that operates sub mid-80s, and that's where the bulk of the growth is coming from. So at the very basic level, just simple math, we feel good about the way we're building the U.S. business. And we're investing in teams and we're deploying new products. And obviously, the products we pick are products that will be accretive to our performance. Patrick, I don't know if there's additional color you want to add?

Some of the new lines that you've talked about as well, fine-arts CNS casualty are just starting. So I think they'll gain momentum as well to support the top line. That's why we see an acceleration in top line growth while maintaining very good profitability in '27.

Yes. We've got 12 verticals in the U.S., Doug, and we can really calibrate the growth where we want, and that's what we've been doing, and that's working well. I'm pleased with that. I mean, it's surprising to me that we're outperforming the specialty lines benchmark in the U.S. by 7 points of combined ratio and growing marginally faster. I think the denominator is not huge, and therefore, it's easier to grow in that space. Ken, did you have any color you want to add there?

But as you also said in your remarks, we've had 13 quarters sub-90 combined ratio. So -- and in the recent past, it's mid-80s. So the confidence in maintaining that is sub-90% for the next 12 months is it's fairly strong.