Definity Financial Corp
TSX:DFY
Earnings Call Analysis
Q3-2023 Analysis
Definity Financial Corp
The company's operating income has declined, yet it demonstrated resilience with an increase in net investment income and growing distribution income, leading to an operating return on equity (ROE) of 8.8%.
There was a substantial rise of nearly 29% in net investment income compared to Q3 of 2022, driven by higher interest income in a higher rate environment. The full-year net investment income is now projected to be around $170 million.
The company is well-capitalized with over $580 million in financial capacity, and there's potential to add nearly $600 million more if Definity continues under the Canada Business Corporations Act (CBCA). This underscores a strong balance sheet that supports strategic growth and investments, such as the recent acquisition of Gradon which constituted a $200 million capital outlay.
The company has seen strong revenue growth both in the most recent quarter and year-to-date, buoyed by robust insurance performance and a stable, improving income stream from distribution. This suggests a positive trend in the company’s diverse revenue channels.
New governmental measures in Alberta, related to auto insurance rate and profit margin control, may reduce the attractiveness of the province's market. The company is proactively assessing how to adapt its strategy while advocating for regulatory improvements to prevent further government intervention.
Management expresses confidence in nearing the completion of the CBCA process, which will influence the company's leverage strategy and the pursuit of transformative opportunities. The completion of CBCA is not expected to hinder the progress or potential of strategic deals.
The margin for personal auto insurance is anticipated to remain in the high 90s for the next two quarters due to seasonality. Looking into 2024, there are ongoing considerations about premium rate trends and claims inflation that may impact margin improvements next year.
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Good morning, ladies and gentlemen, and welcome to the Definity Financial Corporation Third Quarter 2020 Financial Results Conference Call. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, November 10, 2023. I would now like to turn the conference over to Dennis Westfall. Please go ahead.cat
Thanks, Joanna, and good morning, everyone. Thank you for joining us on the call today. A link to our live webcast and background information for the call is posted on our website at definity.com under the Investors tab. As a reminder, the slide presentation contains a disclaimer on forward-looking statements, which also applies to our discussion on the conference call. Joining me on the call today are Rowan Saunders, President and CEO; Philip Mather, EVP and CFO; Paul MacDonald, EVP of Personal Insurance and digital channels; and Fabian Richenberger, EVP of Commercial Insurance and Insurance operations. As usual, we'll start with formal remarks from Rowan and Phil followed by a Q&A session, where Paul and Fabian will join to help answer your questions. With that, I will hand it over to Rowan to begin his remarks.
Thanks, Dennis, and good morning, everyone. Last night, we reported third-quarter earnings that reflect a resilient performance in an active catastrophe period for the industry. Severe storms and wildfires affected communities across the country this summer, our catastrophe response teams stepped up broadcasters. While these events had a significant impact on underwriting income, we continue to leverage our strong broker proposition to provide overall premium growth of 9%. Our efforts to diversify and strengthen the earnings profile of the business were evidenced by strong commercial insurance results and a growing contribution from our insurance broker platform. Overall, we delivered a solid underlying performance, which, combined with robust net investment income, resulted in third-quarter operating net income of $17.6 million or $0.15 a share. Our 102.5 combined ratio included 13.5 percentage points of losses from cats, more than double what we would expect for the third quarter. Other results reflected continued normalization and frequency, elevated claim severity arising from [indiscernible], and persistent but now stable inflation.Results in commercial insurance represent another strong underlying performance in addition to lower-than-expected level of cat losses. On a consolidated basis, underlying results benefited from a 2.4 percentage point decrease in our expense ratio, which Phil will expand upon in just a moment. Turning to the top line, growth of 9% was driven by commercial insurance and personal property. As our strategy to diversify our mix of business away from regulated auto has been successful. We continue to expect top line to reflect our disciplined approach to managing growth through the cycle and for our significant rate actions in auto to return more balance in personal insurance growth in the coming quarters.On a per share basis, book value was 9.6% higher than a year ago. Continued strong operating results outside of cat losses drove an operating ROE of 8.8% over the past 12 months, illustrating the benefits of our diversification strategy. Although we've been successful in actively deploying capital in our broker distribution business, we continue to have a significant amount of financial capacity, putting us in a strong position to fund our strategic growth initiatives for the coming years. Turning to the industry outlook on Slide 6. We expect firm market conditions in both vertical property and commercialized to persist over the next 12 months, particularly following another active period of severe weather events and the dynamics of the reinsurance market. We believe conditions in auto lines will continue to firm as insurers aim to keep pace with underlying cost trends.Slide 7 illustrates our key financial metrics. Growth, combined ratio, and operating ROE were largely in line with our targets on a year-to-date basis, though unusually high cap losses in the third quarter reached our combined ratio above expectations. We are confident that we have the growth platforms to outpace the market over time, and we'll continue to protect and improve company profitability along the way.You'll see on Slide 8 that we continue to diversify and strengthen the earnings profile of the business. We closed the acquisition of the trade-in brokerage in early October. In 12 months, we have built an insurance broker platform approaching $1 billion in annual premiums with repeatable distribution income, which complements our underwriting operations. The addition of Graton provides immediate scale and market-leading presence outside of Ontario, where McDouble and McFall enroll its well-established operations. Each of these brokers have experienced management teams, highly valued brands and generate robust operating margins. I'm confident the additional distribution income from this platform will support growth in our operating ROE in the coming years. With that, I'll turn the call over to our CFO, Philip Mather.
Thanks, Rowan. I'll begin on Slide 10 with personal auto. Premiums were up 4.6% in the third quarter of 2023, largely driven by an increase in average premiums, which reflect the multiple rates increases we took earlier this year in both our broker business and in side. We are committed to taking a disciplined approach to growth and have taken further rate increases in Summit Ontario and expect to maintain our pause on all solid marketing activities in Alberta for the foreseeable future. Now, we are focusing on other areas of the business where we see opportunity for more profitable growth.Our reported combined ratio of 98.9% in the third quarter was 2.6 points higher than the prior year, but in line with our expectations. Severity was up from a year ago, though inflationary cost pressures are now stable and were down slightly from the first half of the year. Industry pools impacted the composition of our Q3 auto combined ratio compared to a year ago. While only a small drag in the quarter overall, pools negatively impacted the change in core attritional results by approximately two points, while benefiting prior year developments by similar amounts. Lastly, personal auto wasn't viewed to cat losses with a 2-point impact in the quarter. As we discussed in recent calls, theft continues to be a challenging issue for us and the industry, accounting for approximately 10% of our total auto loss costs and six points of loss ratio points over the last four quarters. In response, we are continuing to implement both underwriting and claims initiatives aimed at addressing theft and auto recovery. We've taken meaningful rate actions across much of our auto book, which we expect will result in earned rate improvements that will more fully benefit both top and bottom-line results in 2024. That said, we continue to expect this line of business to remain in the upper 90s for the next two quarters, reflecting anticipated levels of winter seasonality.Turning to Personal Property on Slide 11. This quarter is clearly one of catastrophe losses, which accounted for nearly 40 points of our reported combined ratio of 123.3%. As we previously communicated, we experienced 10 events that reached our definition of the catastrophe. Wildfires in BC represents the largest disease and was the only event to reach our reinsurance retention threshold of $40 million. Our results were helped by our multiyear aggregate reinsurance treaty, which is designed for periods such as this where multiple smaller events occur and reflect the full utilization of the treaty limit for 2023. We will again have this protection in place in 2024 as the final year of our 3-year arrangement. Beyond cats, ongoing actions to improve the underlying results are paying off as core accident year results improved four points from the third quarter of 2022.This improvement gives us the confidence to target a mid-90s combined ratio for the personal property line of business on an annual basis. We reported strong top-line growth of 11.8% for the quarter, benefiting from firm market conditions driving increases in average written premiums and the continued success of winning portfolios of business in the current market environment. In the upcoming couple of quarters, we expect our actions to improve and protect profitability, including the short-term impact has new business in CapEx-losing regions during recent events will somewhat dampen our current pace of growth. Beyond this, we remain confident in our ability to outgrow the industry over time, supported by strong growth relationships and scalable platforms.Moving on to Slide 12, you will see that double-digit growth in Commercial lines continued in the quarter, with gross written premiums of 13% versus the prior year. Growth was driven by strong retention of great achievements in the firm market environment, the further scaling of our small business and specialty capabilities. We believe that we can maintain growth at a similar pace into 2024. Commercial Lines combined ratio was very strong at 86.6% in the quarter compared to 93.9% in the same quarter a year ago. Result was driven by an improved core accident year claims ratio and lower catastrophe losses. We continue to expect the commercial insurance business to sustainably deliver annual combined ratios in the low 90s.Putting this all together on Slide 13, premium growth was 9% for the quarter, while profitability at a consolidated level reflected the unusually high impact of catastrophe losses, resulting in a combined ratio of 12.5%. Our expense ratio decreased by 2.4 points from last year due to a couple of factors: first, the negative impact of cats on our loss ratio and a corresponding favorable impact on expenses in the form of lower forty accruals, both contingent profit commissions and variable compensation. Second, expense management initiatives, including the reduction in signed marketing expenses from our targeted actions in Alberta. While sustainably, a reduction in commissions from the consolidation of our insurance broker platform benefited the expense ratio by about 0.5 point.We continue to focus on disciplined expense management and leveraging our growth momentum to become more efficient overall. Operating income was down, but resilience, benefiting from the expansion in net investment income and a growing contribution from distribution income, leading to an operating ROE of 8.8%. Diversified earnings profile gives us confidence that we can more sustainably generate operating ROEs that are inherently less volatile and with the expectation to grow over time. Slide 14 shows our investment portfolio in greater detail.Our net investment income, again increased substantially in the quarter, up nearly 29% from Q3 of 2022. This was driven by higher interest income from the combination of our proactive actions to capture yield in an increasing rate environment, together with higher reinvestment rates. We now expect full-year net investment income of approximately $170 million, recognizing the strong first three quarters of the year while also taking into account the impact of the recent cash outflow for our investments in Dada. As you can see on Slide 15, our financial position remains strong. We are well capitalized with over $580 million in financial capacity under our current legal structure and, subject to the continuance of Definity under the CBCA could add close to another $600 million in leverage capacity. These figures do not include our acquisition of Gradon, which closed in early October and represents a capital allay of approximately $200 million, substantial financial capacity, and the regulatory approval process for our fan CBCA continuance nearing completion through significant flexibility available to support our ongoing reinvestment team and growth of our business. Slide 16 shows recent capital management actions and longer-term priorities.While our capital management priorities remain unchanged, you will see we continue to make strong progress in our execution. We continue on our journey to the optimization of our capital structure. Our recent broker acquisitions represent concrete examples of our ability to deploy our financial capacity in a strategic and accretive path. With that, I'll turn the call back over to Rowan for some final thoughts.
Thank you, Phil. Before moving to Q&A, I wanted to provide my view on the situation in Alberta. We mentioned in the past that the province represents approximately 14% of our auto business, with more than 1/4 of solids auto premiums. In response to the government-mandated recalls announced earlier this year, we've essentially turned off all solid marketing activities in the province given rate inadequacy. While the rate falls will expire at the end of the year, the government has now introduced new measures that allow it to continue to control rates and profit margins. I believe these measures written the attractiveness of the personal auto market in Alberta, while the government's actions to be in the market require us to consider how we deploy capital to promise. As we assess our go-forward response for Sonnet in Alberta, we're committed to work with the government on regulatory improvements to the auto products so that further intervention is not needed in the future.In closing, I think the resilience of our operating model was illustrated this quarter, and I'm confident in the inherent momentum of the business. We delivered strong revenue growth in the quarter and year-to-date, and we are pleased with the strength of our underlying insurance performance. Distribution income is going nicely and provides a new, more stable income stream. Net investment income again benefited from our proactive actions to capture yields. And putting this all together, we moved forward with a strong and growing balance sheet, which enables us to continue executing on our strategic business. And with that, I'll ask Dennis to start the Q&A.
Thanks, Rowan. Joanna, we are now ready to take questions, and I'll ask if everyone please limit the number of questions to two before the reviewing.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instruction] First question comes from Geoffrey Kwan from RBC Capital Markets. Please go ahead.
Hi, good morning. Just wanted to follow up on your comments on Alberta. I just wanted to get your sense there. Like how would you describe the likelihood we see measures and introduced in the reducing claims cost to hopefully help ensure adequate competition in the province? Or do you think we may see some capacity getting pulled out of the province is the current rig regime persists?
Rowan here. Yes. Look, I mean, I think that this is a recently new breaking news. And thus, we do need to understand the details from the government that we have been through the industry in touch with the Alberta government and the regulators as well. We also at for some of the details to be outlined. I mean I think when you step back, you could look at this and say, well, the fact that the REIT fees or the way pause has been lifted is a good news story. But unfortunately, there is now a cap that will be imposed for some definition of a safe driver, which would be a substantial part of the portfolio. One of the concerns we have is that when you think about that percentage of 3.7% which is meant to reflect CPI trading. What we do know that over the long fall, the loss cost trends in automobiles are higher than that. So that's why we think that's not going to be inadequate over time. Of course, there are other things that are happening as well in the province. And as an industry, we have suggested reforms to the government. They have put a performance in place in the past, and that would certainly be helpful if product reforms go forward. One of the more short-term impacts are that generally, the product performs that you put in place tend to address accident benefits and bodily injury claims and not automobile physical damage and really where the short-term pressure reflecting this inflationary environment is actually short-term claims at the active physical damage. So I think as you step back, it can't be seen, I believe, it is good news.And I do think that there will be some views that the market is, at least in the short term, less attractive than other jurisdictions across the country. And that's why I think people will have to decide what they want to do. When I just step back for a moment for us, both of the broker business, auto and Sonnet auto represents about 6% of Definity at premium. We feel that our broker business being so much more mature is clearly in a different position than the Sonnet portfolio and the Sonnet portfolio in the grand scheme of things is still less than 2% of the Pilates premium, but it's material for solids. And that's why we have reduced our marketing expenses dramatically there. The portfolio is actually contracting as you have a normalized retention ratio. And so for us, we've got to just understand the details and then decide how we move forward. And I don't think we're going to be unique, quite frankly, in that approach, Geoffrey.
Okay. That's helpful. And just my other question was just on the CBC approval. Just any updated thoughts on timing taking so long? But also, in terms of pursuing major or it's called transformative acquisitions. Do you feel like you can only try to pursue those after you get approval? Or have you been willing to pursue it if it did or has come up prior to getting the approval to convert?
Yes. Thanks for that, Geoffrey. I won't estimate the specific timing, but we do believe at this point now, we're nearing completion of the process. So, you use a sporting analogy, I'd say we feel like we're in the bottom of the mine at this point. And we're looking forward to getting that process completed. And as I've said before, we don't control the outcome or the timing, but we're very confident at this point that we're at the late stages and that process is coming to an end. In terms of the acquisitions, I'm looking at transformative opportunities. Obviously, the near-term impact of the ICA restrictions is on leverage. It wouldn't restrict us on preference shares or equity raises. But also, if you think of the time horizon to actually complete the deal once you go through regulatory approval, we'd estimate that the CBCA process will be out of the way long before we'd be through that. So, we haven't seen it as a hindrance to any of the current deals. Obviously, you seem we've been very successful on the broker side, and it hasn't inhibited our views of pursuing any strategic opportunity.
The next question comes from Paul Holden from CIBC. Please go ahead.
Thank you. I want to talk a little bit more about the margin outlook for personal auto. So, I think you mentioned sort of high 90s for the next two quarters because of seasonality. I don't know if there's any data points you can give us on to help us sort of think through the entire 2024, maybe some update sort of on where premiums earned versus premiums rates fit and claim inflation trends. Just kind of help us think through what kind of margin improvement we might be looking at for next year?
Yes. Thanks for the question, Paul. I mean, I think you just sit back for a moment, we're definitely feeling much better about the personal auto environment than we were over the last couple of quarters. And what we have seen is that essentially the normalization has occurred, and we're seeing now flattening trends in severity for sure. And then, whilst there's still a little bit of a tick up in frequency, particularly if you look at it year-on-year, that is now getting to be quite marginal. And so, I think when you think about those trends, looking at slightly higher frequency and kind of flattening, but still elevated very, you get a loss cost trend which is in that kind of middle single digits. Now when you then say how do we think about that, you know we've taken a significant amount of pricing and rates. And so in the third quarter of this year, are reiterated now in the 13%, 14% range, and that will continue into the fourth quarter, of course. And the earned rate has been building all year and it's now at about 6.5%. And so, we're getting very close to that cost of a period. And as we've kind of called before, we think in Q4, we will have actually crossed over where the earn rate will be outpacing the loss plus trending and therefore, you start developing a margin contribution. And everything looks pretty solidly trending into that direction. Our guidance has been that we'll be in the upper 90s, and that continues to be the case because as you get more power from this earth rate, we actually do go into a seasonal period where Q4 and Q1 are seasonally higher. So that's probably why you see a faster margin improvement. But then, as we get into the rest of 2024, that mathematics still kind of works its way through. So, I think that will be the kind of high-level trending we're seeing, and it feels like it's now normalized. We're comfortable and confident that the inflation has stabilized. And so that's important. And then the other point that I might just ask, Paul, to touch on with the significant rates that have gone through, we know mathematics are going to work for us. It then just depends on what the more competitive market looks like in retention ratios -- so any color you could add on, on that point.
Yes. Thank you, Rowan.
And so as we've called out before, we felt we were a little bit ahead of the market in taking such significant rate on our auto portfolio. And what we've seen is a response in the marketplace where double-digit rate is flowing through many of the markets. That has reflected in our results where we're starting to see a tick up in new business and retention rates, which essentially gives us some confidence that the market as a whole has been rational and flowing through the loss cost into the need for additional rate. We expect that to continue to be quite firm or definitely for the rest of this year and into most of next year, we expect that those hard market conditions to continue.
That's very helpful. And then my second question is with respect to the investment portfolio and income flowing off of that. Can you just provide us what the market yield is versus the book yield? And I know duration's going to have some impact in terms of the potential investment income there. I guess what I'm really trying to get at is if the entire book rolls over at current market yields, what's kind of the upside?
Yes. Thanks, Paul. So the current market yield is about 5% on the portfolio and current book yield is about 4%. So, we're still maintaining about a 100 basis point gap between those current market values. So, I would say there is still opportunity as we move forward into next year to capture some additional yield in that rising rate environment. Now obviously, so worker in deals are, and they've been pretty volatile. And as you've seen, we've been pretty proactive in deploying capital into some of the broker acquisitions. And so, the pace at which we deploy cash out of the portfolio may impact the accumulation of future interest income. But certainly, we still believe that the rate environment is supported right now by capturing additional opportunity and generating a higher level of return overall for the company.
The next question comes from Jaeme Gloyn from National Day Financial. Please go ahead.
Thanks. I just wanted to dig in on the Alberta portfolio a little bit more. Could you give us a little bit more detail on how the broker market is performing in Alberta in 2023? Like is this -- has this been a profitable business for you so far year-to-date? And obviously, if that's the case, the view is that you would sort of maintain your share or continue to grow slightly into 2024. So a little bit more color on how that Alberta portfolio in the broker segment is growing and how profitable.
Yes. Jamie, that's a great question. And actually, it's a good description of the situation for us in Alberta. So the broker portfolio is far more mature, as Rowan mentioned earlier, and we were fortunate to get the rate approved that we needed in advance of the most recent rate plus. And so we feel that it's progressing well and generating required profit. The challenge, of course, is how long will this -- the rate case continue? And how much will it impact? And so, there are loss cost trends that continue as we had mentioned. And so, the long-term prospect is one that we'll continue to look very closely. But in the near to medium term, we're quite comfortable with our positioning in that marketplace with that portfolio.
Okay. So prospects for growth in Alberta and the broker market are still present?
We still strongly believe in the Alberta province in terms of investments. And as we've mentioned, we've recently closed that Dragon acquisition. We continue to be a strong participant in that marketplace, and we are actively working with the government and the industry to look at solutions for making that a rational marketplace. So we'll continue investing in that space and the broker based on the back of our success on the brokerage side.
Okay. Got it. And then just a clarification question in personal auto. Did I understand from the prepared comments, pools had a negative impact on the core by about -- and then PYD by 2%, was it a 4-percentage point combined impact from industry pools? And can you describe a little bit more about what was within those pools and driving that outcome? And it seems like you took a bigger share than maybe you -- your overall market share would imply.
Yes. Thanks, Jamie. No, maybe I'll step back and just provide some clarification. So, think of it in 2 ways. What did it do to the actual quarter itself? And then what do the polls do to the year-on-year comparison? So if you actually look at Q3 distinct and the 98.9% combined ratio for the quarter is about a 1 point drag from pools in that number. So, excluding pools, the core portfolio was just under 98%. So, there's one week drag in that. When you look at the year-on-year comparison, the overall drag itself isn't that different. But where it does show up is some geography between core accident year claims ratio and then prior year claims development. So, if you look on Slide 10, you'll see that the core accidental claims ratio year-on-year went up 4.6 points. Of that number, 2 points was pools. So in other words, if you exclude the impact of the pools, the underlying accident year went up only 2.5 points year-on-year. That's actually a very positive story for us because it shows that the rate actions that we've been taking are starting to earn through and they're starting to close the year-on-year gap from an accident year performance. And because the pools impact year-over-year wasn't that much, what happened in the opposite way is that the prior year favorable claims development moved, not quite 2 points, but more or less the other way. So, the impact of that negative variance on for accident year was more or less offset on prior year payroll claims development. So, if you want to exclude it, it's not 2 points off both of those numbers is a bit of a wash overall. So key takeaways about a 1-point drag on the distinct quarter, the underlying book like 98% for Q3 of this year. And then year-on-year, the core accident year claims ratio tighter than you'd see on that representation of the 2.5 points year-on-year variance improving trend and starting to close in on from what we've seen in earlier quarters. If you look at the full year on the polls, it's pretty much a wash. So this is a bit of Q3 timing going on. It's creating some noise in the individual numbers. But on an overall basis, we don't see anything unusual offset market share and like that.
[Operator Instruction] The next question comes from Mario Mendonca from TD Securities. Please go ahead.
I don't remember you spent a lot of time on the tax rate, but there obviously stood out this quarter, and I think I understand your explanations as it relates to cash and dividends received from Canadian corporations. What I'm asking you to think through now with me is if we look forward a year and we tax the Canadian dividends in a different way, in line with the budget, the '23 budget, what would the tax rate have been? Would it have been materially higher in a quarter like this?
Thanks a lot, Mario. Not materially, no. So if you just think of it from a dollar perspective, if that change happens and all of those dividends become taxable, it's about an $8 million impact on an annual basis. So it's about $2 million a quarter. It usually impacts on a more normalized quarter, a couple of percent of the overall tax rate. It looks weird this quarter because you've got obviously the impact of the cat losses consuming the contribution from underwriting results. So, I think the step back is, if that change happens, it would be about $8 million on an annualized basis, about $2 million a quarter. So not material at all to the overall numbers. But certainly, that number bounces along each quarter based on just the contributions of operating income come from the different sources.
I see your point about the quarter tends to exaggerate the effect a little bit, but I would move on to something a little different. I always look at this company DEFINITY as having kind of excess capital and capital flexibility. That's the sort of the whole point of the demutualization. But I did notice that this quarter was different. Your MCT was off about 12 points, and I think your presentation shows that a fair bit of margin was eroded this quarter. Is there anything on the horizon that would make you see a scenario where you'd have to slow the pace of growth, direct written premiums, just essentially slow the pace of new business to accommodate a slower growth in your capital margin. Or is that really far like not really plausible in the current circumstances?
Yes. Thanks, Mario. No, I don't think in the near term, we'd have any concern around that. Really, what happened in the current quarter is you had two perfect storms coming together a little bit. Obviously, the catastrophe losses were very high. So if you think about the current quarter, we have 13.5 points of cat losses. Normally, we'd only have about 6. So that's actually a meaningful impact on the current quarter. And at the same time, you saw those rising yields coming through the investment portfolio. So, a combination of both of those is what caused some of the compression. On the MCT, the 200% you referenced, that's what we leave on the operating company. That can move around a bit. Our natural kind of level there is maybe like 190% to 200% operating range. So, we actually usually dividend out excess capital into the parent so that it's available for deployment. And obviously, you saw we did the trade deal post quarter end. So, there is a bit of a disconnect between making sure the operating company is well capitalized, which we obviously focus on and then the overall financial position of the company and that financial capacity metric, we think just gives us the representation. Sometimes, it's just -- you're trying to manage your expectation of how the quarter will close what it actually has. So sometimes you just -- the level at which you draw out or even can bounce around a little. But big picture, I think we're a long way off having the concern from a capital standpoint, part managing in terms of our organic growth potential. And we think that's a low...
Thank you. The next question comes from Tom MacKinnon from BMO Capital Markets. Please go ahead.
Good morning. Two questions here. The first, just really about Sonnet. I think you used to have a 2023 breakeven outlook then moved out to 2024, given the Alberta situation, is there any potential for this 2024 year-end breakeven for Sonic to be pushed out any further?
Tom, it's Ryan. Look, I think as far as San continuing, it's moving along the way we would have anticipated. We did as far as a year ago, kind of say that the targeted breakeven would be at the end of 2024. And that was really driven at the time, mostly about the inflation period in the first part of where we were and the changes to the macro auto kind of cyle. And so I guess that issue and the Alberta issue, which being 25% of Sonnet auto portfolio, and there was actually a larger percentage at the beginning of the year than that is certainly not helpful to solid. But there's a number of actions that we are working with the later on as far as that product and province is concerned. But outside of that, what we are seeing is on still on its path to profitability. We're focusing on margin and the growth at this stage of the business, shaping the portfolio into higher quality segments, particularly all the work we've been doing on Definity. The example is Definity in Q3 grew 27% year-on-year. So that shows you that, that traction does getting on some traction. It's now in aggregate over 25% of the total portfolio. And so there's no change in our kind of guidance there to the solid kind of outlook at this stage that we have there's any kind of caveat we have around that. It really depends on our outlook for 2024 with respect to Alberta. If we can find a good solution to go forward, and I think nothing changes really in our guidance. If we have to take a more extreme action, they don't have to reflect the implications that, that has. But overall, it's still trending the way we had expected it to be by and large.
Yes. And then the second question, given that I think your tone was that the regulatory approval has not been any hindrance to looking at deals. I wonder if you can share with us what you're seeing out there with respect to broker acquisitions or the acquisition of an insurance company, pricing trends within that suspect the broker acquisition that those are becoming increasingly expensive. Any flavor or any comments you could share with us with respect to what you're seeing in the marketplace in terms of pricing of potential deals or availability?
Yes. Look, we are active. Tom, it's part of our strategy. And it probably wouldn't surprise you that there's more activity on the broker side than there is on the insurance carrier side. I think our thesis is that there will be more opportunities for each consolidation on carriers over time. And we think some of the market pressures and things like a tighter reinsurance market, things like greater broker expectations for interfacing our technology modes of scale is all leading into, we think, an environment where we will return to more of a normalized consolidation. And as you know, over time, the industry typically trades at as well as by a couple of points of market share. So we're active. We have very experienced Corp Dev team, and we will see an update when we can on that one. I think on the broker side of things, this is clearly a big part of our strategy that we've deployed this year we'll be successful in deploying capital. We like this business because of the stable high-margin earnings. We also like it because it gives us access to a high-quality portfolio. So as an insurance company, we get two streams of income, both the distribution income plus the running income. And you've seen that actually starting to help the stability of our earnings, so good earnings diversification. In terms of your comment about pricing, I think it's pretty stable now for certain even what we've seen through this year, there doesn't seem to be a tremendous difference direction up or down on these levels. I would say that the valuation of high-quality brokers is certainly elevated to what would have played it for a few years back, but it certainly seems stable. And I think it is very much dependent on the quality of the assets. And the assets that we've been successful in adding to our broker platform are all top partners. They're all very profitable. They have been very sizable and I think you have a scarcity issue around those quality businesses. So I think that, that trend is going to continue. And I would say, we are pleased that our proposition is resonating. We have not been the high bidder in the transactions we've done partly because it's a really unique solution that we bring into the marketplaces. And that continues to have a healthy pipeline. And in fact, Medusa done a couple of small deals in the quarter, and that's going to continue. I think that programmatic smaller bolt-on trend is finding quite a bit of interest in the marketplace. So I think we're quite optimistic in terms of continuing to build that channel out. We were really pleased of how much progress we've made this year and when we first acquired Victor, we had hoped to double that over a 5-year period, we've pretty well done that faster than we thought and we see good opportunities in that area. And again, we think this is a very definitely accretive to us and very supportive to driving us into our targeted operating ROEs. So we like that we'll continue with that. But of course, we're still very focused on insurance carriers as well, which we know we need to do to get ourselves up to that top five ambitions more to come when we can.
The next question is the follow-up from Paul Holden from CIBC.
My last question. I just want to drill down a little bit more on the overall picture for personal auto. I think it's important just given your commentary around Alberta and the obvious challenges there, particularly for on it. And I guess really what my question is sort of putting together the premium rate earned you've highlighted versus the claims inflation for the total portfolio and then the drag on Sanet volumes from Alberta. Is it correct to assume that the overall outlook for underwriting income for all of personal auto is still positive despite the headwinds in Alberta?
Yes. It's Phill here. Yes, I think, again, a pretty good description of the outcome, as Rowan had mentioned, with our earned rate increasing towards the end of this year. And actually, it continues to increase into next year. So not only does that crossover period occur at the end of this year, but then we expect that continuation of the earned rate to offset the trend and make up a little bit for that Alberta drag. Of course, as we've said before, the Alberta drag is not -- it hasn't been finalized, the degree to which it may be or may not be contributing simply because the regulation or the direction that's come out recently hasn't finalized all the details. So we're going to continue to work with the regulators and with the government in Alberta to understand the real implication to the portfolio. But this has been going on for the better part of this entire year. And what we've been doing is proactively managing our portfolio to adjust for that. So we haven't still redirected assets and capabilities to other provinces. We continue to focus very much on our commercial and personal property lines. And so we look at this as an entire portfolio. You've asked specifically about personal auto. It's not same thing. We have operations in most of the provinces, and we manage this actively throughout the provinces and with the inclusion of new products such as our UBI Sonnetship product, which I've mentioned in previous quarters. So we'll continue to actively manage this portfolio adjust accordingly to the Alberta scenario and maintain our guidance around profitability in this form.
Yes. Thanks for that, Phil. And I think the way I would kind of summarize that Paul is, firstly, you take into consideration the size of solid auto. It's not huge, but it is running at an underwriting loss. And so as we contract that line of business effectively the size of the loss reduces. Then on top of that, building up on Paul's comments, which is rate earning in premium growth, I'm thinking back up is clearly a that the question about will the earnings and the auto portfolio improve going forward? Absolutely, it will -- we're past the trough and our personal model will become a bigger contributor again to the portfolio.
I think that's a very important point. Thank you.
There are no further questions. I will turn the call back over for closing comments.
Thank you all for participating today. The webcast will be archived on our website for one year. The telephone replay will be available until okay until November 17, and a transcript was made available on our website. Please note that our fourth quarter and year-end results for 2023 will be released on February 15. That concludes our call for today. Thank you, and have a great day.
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