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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Intact Financial Corporation Q2 2023 Results Conference Call. [Operator Instructions] This call is being recorded on August 3, 2023.
I would now like to turn the conference over to Shubha Khan, Vice President, Investor Relations. Please go ahead.
Thank you, Michelle. Good morning, everyone, and thank you for joining the call to discuss our second quarter 2023 financial results. A link to our live webcast and materials for this call have been posted on our website at intact.c.com under the Investors tab. Before we start, please refer to Slide 2 for cautionary language 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 important notes on adjustments, terms and definitions used in this presentation.
To discuss our second quarter results today, I have with me our CEO, Charles Brindamour; our CFO, Louis Marcotte; Patrick Barbeau, Executive Vice President and Chief Operating Officer; Darren Godfrey, Executive Vice President of Global Specialty Lines; Guillaume Lamy, Senior Vice President of Personal Lines; and Ken Anderson, Executive Vice President and CFO, U.K. and I. We will begin with prepared remarks, followed by Q&A.
With that, I will turn the call over to Charles.
Thanks, Shubha. Good morning, everyone, and thanks for joining us this morning. In the face of severe weather events across Canada this quarter, our teams were often first on the ground and affected communities to get customers back on track. It's in those moments that Intact takes all its mean. With the strength of our people, deep supply chains across the land, we're in a unique position to help society be resilient in bad tops.
Though the operating environment proved challenging due to the number of fire, flood and free events, we delivered an operating ROE of 13%. This is also what we mean by resilience. Yesterday evening, we announced net operating income per share of $2.30 for the quarter, down 30%, largely due to cat. Top line growth stood at 7%, excluding strategic exits, reflecting higher rates across all lines of business as well as improving units in personal auto.
Our undiscounted combined ratio was 96.3% in the quarter, despite 8 points of cat losses. Underlying performance was strong in all geographies. Now let me provide a bit of color by line of business, starting with Canada. In personal auto, premiums grew 6%, a 1 point improvement compared with the preceding quarter and up 7 points over the last three quarters. As anticipated, top line momentum is a function of both rate actions and our improving competitive positions as competitors move to catch up with inflation.
Retention levels remain strong, and we see positive signs in new business volumes. The combined ratio landed at 91.2% in the quarter, largely in line with our expectations given seasonality. Claims frequency remains below pre-pandemic levels and inflation pressures have continued to abate with the increase in severity slowing to 8% in Q2, down from a peak of 13% in Q3 last year and 9% in Q1. The drop in the quarter was primarily due to a decrease in the market value of cars and stable repair costs. The expansion of our supply chain continues to support our ability to absorb inflation.
Meanwhile, written rates and values increased by close to 9 points in aggregate during the quarter. Earned premium increases accelerated to 7% and are expected to catch up with Britain levels by Q3. Our balance sheet continues to show real strength as demonstrated by the favorable development from prior years. We look at both current and prior years together as we're continuing to build strength in the current year as well. Overall, we remain confident in our sub 95% guidance for personal auto.
Moving now to personal products. Premium growth was 5%, mostly driven by our rate actions and supportive market conditions. The combined ratio of 1.19 included 27 points of cat. An increase in severity driven by large losses and inflation also weighed on results by close to 5 points. Rates and insured values will likely reach low teens by year-end, while expect on-site to contribute to our performance as well. The personal property business in Canada's positioned to generate sub-95% combined ratio even in bad times as demonstrated in the past 12 months.
Given our track record in the upper 80s over the past 10 years, I'm confident we'll make the most of this environment in this segment. In Commercial Lines, top line growth of 6% was driven by our rate actions in hard market conditions, partially offset by targeted actions to optimize the portfolio. Despite 7 points of cat, the combined ratio was 89.5%, primarily driven by our profitability actions over time. This business remains very well positioned to deliver sustainable low 90s or better performance.
Moving now to our UK&I business. I'm pleased to see a solid combined ratio of 94.1% in the quarter. In personalizes, premiums grew 6% after adjusting for the impact of our exit from the U.K. motor market. We took rate actions amid a clearly firming U.K. personal lines market.
The combined ratio of 98% was in line with our near-term expectations of upper 9s performance. With initiatives to improve performance well underway, we aim to achieve a mid-90s combined ratio in this line by the end of '24. In Commercial Lines, after adjusting for strategic exits, premium growth was 6% in the quarter. We continue to benefit from hard market conditions, which support mid- to upper single-digit rate increases. The combined ratio was 92.1% despite 9 points of cats.
This reflects the strength of our platform and prevailing market conditions in the U.K. We expect to continue operating this business in the low 90s over the next 12 months. In the U.S., our business grew 19% in Q2, driven by the Highland acquisition last year, strong growth in high-performing businesses as well as rate increases. Despite an innovated 5 points of cat, the combined ratio was 91.3%, reflecting our profitability actions over time. We expect hard market conditions to persist in most lines, supported by higher reinsurance costs, elevated cat losses and inflation. Against this backdrop, we remain very well positioned to continue delivering low 90s performance or better in the U.S.
While the quarter put a strain on our claims operations, we remain focused on advancing our strategic agenda to continue to strengthen our moat and solidify our outperformance. True to expanding our leadership position in Canada, we've built on owning the 2 top brands in the P&C sector and recently announced the rebranding of Anthony Insurance and Johnson Insurance to Better Direct. This further bolsters the Strader direct brand across the country. I was also pleased to see that BrokerLink remained very focused on consolidating distribution with successfully reaching agreements in 17 transactions so far this year. Looking at our global specialty lines business overall, we are well on our way to build the most respected specialty lines insurer.
Premiums grew 12%, while the combined ratio was 85.2% for the quarter. We've made important advances in deploying predictive models in this business. And through our continuous focus on profitable growth and supportive market conditions, we expect to reach a sustainable sub-9-inch combined ratio over time and outperformed everywhere we operate. In our U.K. operations, much progress is being made in deploying machine learning and pricing and adding to our sophistication in commercial lines.
And that's combined with bolstering our broker value proposition in the regions in Commercial Lines. Our commercial platform in the U.K. is outperforming and growth momentum is building. At the halfway March of '23, we remain very much on track from a financial and strategic perspective. The operating environment explained to our strengths.
Top line growth is in the mid- to high single-digit zone. The outlook for both investment and distribution income continues to be favorable, and we're on course once again to deliver mid-teens operating ROE this year.
With that, I'll turn the call over to our CFO, Louis Marcotte.
Thanks, Charles, and good morning, everyone. While Q2 was an active quarter for severe weather events, I am pleased that we were able to deliver solid underlying results. Cat losses in the quarter were $421 million, driven by wildfires, floods and storms in Canada as well as non-weather commercial line losses in the U.S. and U.K. No single event met the threshold for reinsurance under our catastrophe treaty.
Although cat losses were double the expected level in the quarter, we have seen similar or higher levels of cats as a percentage of net earned premium 4x over the past 10 years. As usual, we will review our cat loss guidance at the same time as we release our Q4 earnings. Favorable prior year development was healthy at 4.7% for the quarter and remained at the higher end of our midterm guidance of 2% to 4% overall for IFC. This is consistent with our prudent approach to reserving and was particularly evident in personal auto, where we are still not fully recognizing the benefit of lower frequency and long tail losses. Our guidance remains valid in the midterm.
The consolidated expense ratio for IFC was 34.3% in Q2, 1.4 points higher than last year. The increase was led by Canada, driven by higher investments in technology, marketing and customer service. Going forward, we continue to expect a Canada expense ratio in the 32% to 33% range. In the U.K. and I, we expect the expense ratio to be largely consistent with Q2 levels.
And in the U.S., there is some seasonality in expenses, and I expect the annual expense ratio to be consistent with prior years between 38% and 39%. Overall, ISC landing at a sub-34% expense ratio for 2023. Operating net investment income increased by 55% in the quarter, driven by higher portfolio turnover and rising rates. 12 points of the increase was attributable to a special dividend on one of our investments. For the full year, we now expect investment income to be close to $1.3 billion. Distribution income was $137 million in the quarter.
The decrease of 4% reflects lower variable commissions as well as lower contribution from on-site compared to last year's elevated level. Underlying profitability is solid, and the pipeline for acquisitions remains healthy. We expect double-digit growth in the second half of the year, representing distribution earnings growth around 10% for the full year. Finance costs and other operating expenses amounted to $103 million in the quarter, up 11% year-over-year as a result of higher interest rates on recent financing and on short-term debt. Other operating expenses were largely unchanged from the prior year and in line with expectations.
Overall, net operating income per share of $2.30 was down $1 from last year, about $0.80 of which was driven by higher cat losses. Meanwhile, earnings per share of $1.30 was significantly lower than in the prior period, which had benefited from the $423 million gain on the sale of our stake in Codan Denmark as well as nearly $500 million of investment gains driven by our equity portfolio. Operating ROE of 12.8% was solid despite higher-than-expected cat losses over the last 12 months. which had an adverse impact of approximately 1.2 points. If I normalize for excess cats and the impact of the pension derisking transaction completed in the U.K. earlier this year, I see our operating ROE in the 15% range. In Q2, we marked the second anniversary of the RSA acquisition. Policy conversion in all the specialty lines in our Johnson affinity business is substantially complete and retention levels remain high. We expect policy conversions to be largely completed in 2024, with claims conversion and systems decommissioning still on plan to be completed in 2025. Value creation from the acquisition has exceeded our expectations. We estimate that annual RSA synergies at a run rate of $315 million in the quarter.
We remain well on track to achieve our target of at least $350 million and approximately 20% of net operating income per share accretion by mid-'24. The estimated IRR is still north of 20%. Book value per share was down 2% in the quarter-over-quarter as our earnings were tempered by caps and our fixed income portfolio was impacted by rising yields. The accumulated unrealized losses in our fair value through OCI fixed income portfolio accounted for a $4 drag on book value per share at the end of Q2. And amounts we expect will unwind over time if we hold these securities to maturity.
Our financial position continues to be strong with a total capital margin of $2.5 billion despite elevated cat losses in the quarter. We closed the quarter with an adjusted debt to total capital ratio of 22.5% and remain on track to take that towards 20% over the next few quarters.Overall, we remain well positioned to capture growth opportunities, organic or inorganic. Overall, the resilience of the platform was particularly evident this quarter as we delivered solid results while tackling inflation and shouldering elevated cat losses. Given the quality of our people, the strength of our platforms, our underwriting discipline and guided by a clear strategic road map, I am confident we can continue to grow net operating income per share by 10% over time and outperform the industry ROE by at least 500 basis points.
With that, I'll give it back to Shubha.
Thank you, Louis. In order to give everyone a chance to participate in the Q&A, we would ask you to kind of limit yourselves to two questions per person. You can certainly read queue for follow-ups, and we will do our best to accommodate if there's time at the end. So Michelle, we are ready to take questions now.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions] One moment, please, for your first question. The first question comes from Paul Holden of CIBC.
I want to drill down a little bit on the U.K. personal property and get a good sense of where you're at in terms of current rate increases, where you expect that to trend to? And how Intact compares to your key competitors in that market?
Thanks, Paul. Ken, do you want to show your perspective?
Yes, sure. Thanks, Paul. In terms of the market, overall, I would say market conditions continue to be competitive in the U.K., but we certainly are seeing evidence of firming, particularly in the home market. A few points of reference in Q2, I would say, new business rates at a market level are up mid-teens.
And for the larger peer set, the top 5 that's north of 20%. So there is rate movement occurring, and that does certainly show the market is firming. We still believe that the industry is behind the on-rate adequacy, and we continue to raise rates in that zone as well. And so we expect that upper 90s performance as those rates start to earn through in the second half of the year should be dealing with inflation and keeping up in that upper 19 on...
And I think, Paul, there's rates and then there's sophistication. So there's a fair bit of rate segmentation going on in the U.K. as well with a number of new models being deployed, a set of new variables being introduced in pricing come September. So lots on the go, and I expect the performance there to improve, get in the mid-90s by the end of next year.
Okay. That's great. And then on Canada, personal auto, I mean, my read on the results and all your commentary is it seems very much on track with the expectations you've laid out over the last couple of quarters. Is there anything there that's deviating from expectations, whether it's on severity, frequency, ability to earn? Or is it very much what you would have expected sort of at the beginning of the year?
Guillaume, do you want to share your perspective?
Yes. So I would say it's exactly in line with what we're expecting. So far this year was 94.1% for the first half of the year. There's kind of mirror seasonality between Q1 and favorable and Q2 favorable. So 91% is also exactly their frequency going as planned. I think severity is coming down as planned, and we're getting the rates that we need. So exactly in line with expectations.
My surprise really is the fact that most of the pieces are falling in line with what we expected. As I've said before, there's lots of moving pieces. That's why we've remained cautious in this environment, both from a pricing and reserving point of view, but pieces are falling into place nicely. Patrick, any additional color you want to provide?
Not much. I mean inventories of new cars have improved in both Canada and U.S. That has helped the market values go down during the quarter. The prices of parts have been stable for a few quarters now and the availability of parts is back to pre-pandemic level. And we have the capacity in our body shops.
So Test continues to be a source of pressure, but it has stabilized over Q2. So no on the inflation pretty much aligned with where we were saying it going
I'd add that some because the pieces are falling into place that our own efforts to improve the supply chain, create capacity, certainly haven't slowed down. We've opened a number of new fully intact branded shops in the quarter and this year, and we feel that we're making really good progress on that front as well. And as we've seen throughout the inflationary environment in which we've operated supply chain, which is an edge that impact made a big difference.
The next question comes from John Aiken of Barclays.
Was hoping to have a bit of a discussion on Canadian personal property, fully understand the cat losses and the large loss events in the quarter negatively impacting the combined ratio. But presumably, these factors are what's leading to the confidence in terms of the premium growth because of the hard market hard price market environment, sorry. But I was wondering if you could talk about what the price increases is having in terms of your retention as well as new business volumes in the segment.
Darren, do you want to share your perspective from a top line point of view?
Yes. So on top line in terms of freight, we've been passing in the high single-digit rate and indexation of some insured for the past little while, and we've been passing that this year again. Retention is extremely strong. New business volumes are very same to auto. So we've seen more shopping and auto. We also see that improve the unit trajectory and property.
And we'll be looking at benefiting from that supportive market to try to put a bit more rates in. So we're going to look at increasing our rates by year-end by 2 to 3 points to benefit from those supportive market conditions.
Yes. So the market is very much trending in the direction we expected. I think people are increasingly waking up to the reality of the environment in which we're operating inflation, cat reinsurance, et cetera. You look at the unit trajectory from my perspective, in Q3, we shrank the units by 2% in Q2 and '23, we're growing by 1%. That's exactly what we want to see, and we'll make the most of this environment.
We feel very strong about our track record in personal property and looking forward to growing this environment.
That's great. And then as my second question, sticking with Personal Property, we saw prior year development in total remained unfavorable for the segment. Now I fully admit that this is not material. But is -- can you give us any sense in terms of what the prognosis is moving forward?
Well, reserves, obviously, are set at the end of each quarter to be adequate in a conservative point of view. So prospectively, I think you should look at our track record to assess what we expect. That being said, maybe you want to provide a bit of color, Guillaume, in terms of the mild adverse development in the quarter.
Yes. So we saw about a 1 point of adverse development in the quarter. Part of it is coming from last year's cat. So we had Hurricane Fiona late in the year. There was also a Christmas storm on Christmas Day in Ontario and Quebec.
And those have traded development in Q1 and also in Q2. I think from a Q2 perspective, like as snow melted and spring, some more damages were uncovered, and that creates some of that adverse development. There's also been some non-cat losses from late in '22, and that's adverse development in the quarter.
Yes. So I think, John, I look at our 10-year track record. In personal prop, you see PYD in the 3.3-ish range, pretty consistent last 3 years, 2.7, I don't see any meaningful reasons why one should see the world differently, prospectively.
The next question comes from Mario Mendonca of TD Securities.
Charles, if we could go back, and we obviously learned a lot about this company every quarter. But I wanted to distill it down to one particular line that I care about. And it's just the growth in book value for this company. Over the long term, a good rule of thumb is just to look at the ROE of the company, take off some kind of dividend amount like the one minus the payout ratio, and you get to a reasonable estimate of what the book value growth would look like. We're not seeing book value growth.
And I understand this is a pension derisking the realized losses and elevated non-operating charges. But let me ask you, and maybe Charles or Louis, what is the better indicator of value creation for this company when you look at book value? Would you look at it excluding the other comprehensive income, including the other comprehensive income? And then my follow-up question is can this company return to that sort of high single-digit book value growth going forward? Or has something changed structurally?
I think, Mario, at a high level, the two measures of financial success is ROE outperformance, which is 750 basis points in the past decade and earnings power growth as measured by net operating income per share, which has been in the 10-ish percent range, which is the objective in the past decade. This is where we start. -- there's nothing structurally to suggest that book value per share trajectory should not be consistent with those 2 sort of core metrics at this stage. And I think if you look at the sandbox in which we're operating and the quality of the business that we're building, I see no reason to change our view negatively on the contrary. I think that we're operating now and amongst the best earnings sources in the world, and we have great tools to grow those earnings and therefore, meet earnings power objective that I've just laid out.
Now maybe Louis you want to translate that in book value per share and get into the specifics of Mario's question.
Sure. Well, I totally agree with your perspective on it, Charles. I think there is a bit of a temporary hits right now, which you captured, Mario, on the pension buy-in the current movement in fixed income yields, which has depressed the book value. My view here is we should actually -- even if it's depressed a bit now, consider the unrealized losses in the book value because our expectation over time, we have the equity portfolio. It's a bit below target right now, but we expect returns that will contribute to ROE from our entire portfolio.
And therefore, I would capture all of the earnings into our expectations. And on that will drive book value per share growth over time. I think we're just in a tough situation now where equity markets are struggling. The fixed income yields have risen, and that's putting a lot of pressure on our book value. And then you have on top of that, of course, this quarter, cats and the hit we took from Devan.
I think over time, that will revert now, and I would expect growth to come back as expected with our guidance on NOIPS will drive, I will say, upper single to low double-digit growth over time in book value per share there's nothing structural. I think there's a bit more volatility going forward in the earnings because we're all classifying our equity portfolio as fair value to P&L. But from a book value per share that will, in our minds, contribute to growth and outperformance in the future.
So a related question then. When you have to make that decision between sort of like a trade-off between realizing higher yields on the investment portfolio, but the negative effect that could have on your book value, excluding accumulated other comprehensive income because I appreciate that it's already in there through the fair value through other comprehensive income. But [indiscernible], when is there -- how do you look at that trade-off between generating higher NII and the effect you could have on one way of looking at your book value? Or is that not a trade-off you consider?
No, no, no. We actually totally consider it. What's going on right now is we have more bonds that are actually classified as fair value to P&L -- so they are mark-to-market on a consistent basis. And when we trade them to capture higher yields, there's no impact on the earnings. The book value is not impacted here.
So in that respect, we have a bit more option now to trade the fair value to P&L bonds, capture more yields, and we're leveraging that opportunity. Then with regards to the other fixed income that are fair value to balance sheet to OCI, those there is a compromise here. And what you're seeing is we haven't traded those bonds as much as we've traded the ones that are mark-to-market to P&L. And we're trying to capture as much yield as possible on the ones that are going through P&L right now.
Okay. That's an issue point. So you're saying that the bonds that are mark-to-market through AOCI, those are not the ones that you're trading more actively.
Correct.
The next question comes from Tom MacKinnon of BMO Capital.
Yes. Just further questions here with respect to Canadian personal property. I think Charles, when you did your rundown on the lines, you gave kind of outlooks with respect to them. You said on personal property, you're going to make the most out of these times and that sub 95%. You've seen sub 95 in good times and in bad, but we really didn't get anything more specific.
So I was wondering if you can elaborate with respect to any of the profitability actions you're taking and how those would translate into what we -- into a combined ratio that we should be looking at for this segment over the next, say, 12 to 18 months. So if you can provide us with any kind of more guidance, if you will, with respect to that, that would be great.
Yes. Here's what we'll do. Tom, will frame the track record. Then we'll talk about some of the actions we have in personal lines from pricing and underwriting point of view. We'll talk about some of the actions we have in claims and in supply chain.
And that should give you a sense of why we feel pretty strongly about our ability to be well within that guidance prospectively. So Guillaume, maybe your take on the long-term midterm track record of the firm and tell us what you're doing from a pricing and underwriting point of view.
Yes. So track record, I think, speaks for itself. We've been sub-90% on average over the last 10 years, even better in recent period 87%, if you look at 5 years, 85, if you look at 3 years. That being said, it is a bad quarter at 119. I think Cat are obviously elevated.
But like we've seen elevated level of cat in the past. This quarter doesn't change our expectation of cat. I think this is a reminder that they're volatile and they can swing, but we're already pricing prudently on those weather events increase in frequency severity, but our average premium mass get base raising by more than 50% over the last decade. So that's on the cat side. I think on the underlying, we've seen a bit of an increase in severity in the quarter on top of the large loss that John alluded to earlier.
So on the severity front, a bit of pressure went from high single digit to low double in the quarter. I think it's important to distinguish between severity and inflation. We're not suggesting inflation is up from the indicators that we're tracking. It's broadly stable. We also have automatic indexation at ensured value that's hedging some of that.
But we see more severe damage, more expensive water claims, for example. So that's just one quarter. Is that a blip? We're monitoring the trend. And as I said earlier, we're taking advantage of the supporting market conditions to increase rates by 2 to 3 points to match that severity trend that we're observing and basically taking the actions to continue to deliver on the track record that I've..
I think a number of actions, it's important to point out that segmentation is a big ticket item as well, and machine learning largely deployed across the board in home insurance, also contributing, I think, to the improvement in the track record that you've highlighted. Maybe 1 point or 2 point on the supply chain.
Yes, quickly, just to give a bit more color why we referred to on-site as one of the key advantage we have. Over the years, we've internalized the claims process like more than 99% of all of our planes are built through our own operations. So in terms of -- in property, that's important because when Cathit, we can leverage that capacity across the country to respond quickly to the demand. When it comes to water damage in particular, the speed at which we respond is a key to contain costs and at on site. We've doubled the size of that business since we acquired it.
We have a footprint now that is across Canada. And to give you a bit of an idea, in normal times, on site and those about half of our claims, and it goes up to 60%, 65% of all of our needs in cat times. So that's a tool that allows us to have good access to capacity and improve customer service and contain costs
And the profit of that business itself will contribute and grow over time as we build on site and as we use it to a greater extent than intact.
Yes. quick follow-up there. The increase in the 2% to 3% that you're implementing in pricing with respect to Canadian personal prop, you had mentioned that you increased premiums by 50% over the last 10 years. So 2% to 3% doesn't sound to be as much as the 5% average you've had over the last -- over the last 10 years. So help me interpret that.
I think, Tom, we -- it's incremental to what's already in the pipeline, which is in the upper single digit. So we should be in the lower teens. This is on the back of -- as we've talked about before, an environment where our units are actually increasing and therefore, I think, contributing to margins perspectively.
Okay. And quickly on Onsite, how does your ownership of that company, which presumably does better in catastrophe times? How does that kind of work its way through the P&L?
Louis, do you want to provide your perspective on that?
Sure. So we own 100% of it. And essentially, the work we send them is obviously built to us. And then what we get through distribution earnings is our share of 100% of the profit margins they generate from the work they do for us. So it's purely it's additive to the distribution earnings we've been collecting for a long time.
So it's been part of the growth profile of that stream of earnings over the past, I will say, three years now.
And that's the distribution earnings that you just said you expect 10% up for 2023.
Correct. Correct. And I will just point to -- I talked about the fact that we had less than last year, partly because the onsite on-site had the surge in Q2 last year, and you might remember, they had a lot of work done on the BC floods, which happened a year earlier. So that surge happened in Q2 last year. We didn't see the same surge this year.
Still profitable, still delivering earnings to our distribution stream, but just the fact that they had the surge has impacted a bit the growth year-over-year in Q2.
Patrick, maybe you want to share your perspective on Pipeline. [Indiscernible]
That's a bit of additional color. To your point, it's countercyclical to underwriting, but with -- not recognize exactly at the same time when the claims happen, it's reserved right away in our underwriting results, but the rebuild process happens in the following months. And that's what when we look at Q2 despite the large cat amount, at on side, a lot of that work is in front of us in the coming months to do the reveal.
The next question comes from Doug Young of Desjardin.
I wanted to just go to expenses in Canada that don't really usually focus on expenses, but some of the commentary is interesting. But -- so Canada was up 15%. Can you delve a little bit further into what you're seeing the impact from inflationary pressures on just your own expenses? Was there any onetime items? And Louis, I think you talked about the ratio in Canada getting to the 32% to 33% range, like what gives you confidence in this? Is this just earned premium growth? So the absolute cost has come down, but it's more top line growth. And I'll leave it there. I may have another onto expenses, but I'll leave it there.
Sure. So we saw a bit of an uptick in Q2, and I shared driven essentially by our IT or technology investments, and we're investing in our back office platforms. We're investing in AI. There's a lot of investment in IT going on right now, and that is an uptick of it in the quarter. The other one is our marketing spend and service levels.
So we're ensuring here. And you hear us talk about growth we are spending a bit more on marketing, and we need to be sure that we can handle the response. So some service level improvements have been impacting the expense ratio. So I think that's a -- it's not an inflationary-driven rise. It's really our activities and our investments that we choose to pursue to meet the demand and improve our business and eventually service and performance efficiency.
So that's how I would bucket the Canadian one. And I think it's going to be hurt back over time towards the 30% to 33% guidance I just shared with you. Obviously, top line will help. But we're also making sure that we contain our expenses and invest in the right place. So reinvesting some productivity gains against expenses.
There is inflation. We have to make sure we retain our people, but we make sure that that's combined and offset as much as possible as much as possible with productivity.
So Tom, if I tie it back to strategy and how we're running the business, number one, service and customer experience is really important for us. labor market is tight turnover is higher in particular in service areas, and we've hired in service to push the experience up a bit more than what we had anticipated at the start of the year. So that's number one. Number two, we've noted that Canadians have started to shop to a greater extent. Our price point is becoming a bit more competitive than it was at the year at the start of the year, we've decided to spend more to generate response, capture that growth.
And I think when it comes to technology and AI, a number of calls we've made to increase our investments, I don't need to right on the worldwide technology and AI is an area where we should double down. I think that's a bit of a blip in the quarter, but I'd stick to Louis guidance because when we make these investments in time, we make trade-offs obviously. And that's why you've seen a good performance from an expense point of view over an extended period of time. And also, I'd point out that by channel, where we compete, we have a meaningful expense ratio advantage compared to our peers, both in the broker channel as well as in the direct channel.
Just a follow-up on expenses. Can you remind how the reinsurance cost gets intended? Obviously, reinsurance costs went up this year. That doesn't seem to be what's driving the expense ratio higher. Like how does that get embedded here as well?
No. So the reinsurance costs are actually in ceded premiums. So they would affect the premium, the ratio, if they're more important, but the actual increase in the reinsurance spend is not hugely material. I mean, there are dollars attached to it. But when you look at the ratio point of view, not a significant impact. So it actually is netted from the top line rather than being included in expenses.
And then just second, Charles, you kind of touched on something I was thinking about, but you've got earned premium, like in personal auto, you got earned premium growth is catching up and should be surpassing your loss cost growth. And at the same time, you're picking up your marketing IT stop spending, it sounds like these 2 items are related. And so are you -- so it sounds like you're comfortable hitting the gas here given the profit pocket that you've got in personal in Canada really do drive growth. Is that really the message?
Yes. Doug, I think it is the case. We're comfortable with what we're seeing in the environment. We're comfortable with our risk selection strategies. You look at what we've actually delivered in terms of performance 94-1, I think we're in the value creation zone, and we're open for business, where it makes sense in most markets.
And what -- and this is last, like what gives you pause? Like obviously, personal auto we described it interesting, but what gives you a pause when you think of the personal auto market, you've been through the ups and downs? Is it regulatory? Is it inflation? Is it something you don't know like...
What gives me pause would be, say, a province like Alberta, where rates are frozen, that gives me a pause. So to be very clear. But in general, we're very focused on pricing adequacy. And we're comfortable growing in this environment, quite frankly. I want to make sure that from a service point of view, the provinces where we have the strongest growth at this stage, I want to make sure that when customers reach us, they have a good experience.
So it's a matter of finding the right balance between generating response where your rates become competitive and then providing customers a good experience. And then we're very focused on quality Doug. As you know, we have a very distinct advantage in terms of measuring quality at the customer level beyond pricing, and we're very focused on improving the quality profile of the portfolio as we grow. So I don't know if you can use the expression any more pressing on the gas. But certainly, we're comfortable with the momentum we're seeing. We remain very focused on quality.
The next question comes from Brian Meredith of UBS.
I'm just curious with just all the commentary here on cat losses and obviously, it affects your stock. Any thoughts on trying to use reinsurance maybe to mitigate some more of this volatility -- just thoughts on that one...
I think that volatility in a way is not something that keeps us at night, provided we're rewarded for it. And in my mind, in property lines at the moment, whether it's personal property, special prop in the U.S., et cetera, et cetera. I do think we're rewarded for that volatility. It's embedded in our track record. So passing a portion of our margin for the sake of hovering smoother quarters through reinsurance, not really how we're thinking about the business.
I don't know, Darren, Louis or anyone has a different perspective here. But I must admit we're -- in relative terms, Brian, we use the reinsurance less than our peers. We're focused on managing tail risk because we want to protect our capital and ability to grow our book per share if we go on that scheme. But viatility, not as much, quite frankly, because over time, you look at how companies use seculatetive reinsurance and various amounts of reinsurance, you realize that you're sending good margins away. And frankly, if we're rewarded, happy to keep it. I don't know if anyone on the team wants to add color here.
I totally agree. I think the track record also in the past in property, in particular, is such that I think we've made the right choices. And I'd like to say the level of profitability allows us to absorb volatility. And so yes, we'll take a bad quarter. We connect quickly afterwards if there's a trend.
But over time, it's proven we can deliver and get better returns by keeping the level of volatility acceptance we have re tolerance that we have right now.
Yes. All right. We've increased retention this year, Brian. And I think one of the things you're seeing in the quarter is everything is under the retention. That's in part why the load is high. But I think if you look at it beyond a quarter, we were uncomfortable with the sort of cost to achieve greater stability quarter-to-quarter.
Got you. Makes sense. And then just a second question, just curious, maybe a little bit of insight into what the M&A landscape is looking at right now, both on the insurance broker side and maybe on the underwriter side.
Well, the M&A landscape for us, Brian, has changed meaningfully in the past 5 years because our unfortunaty set went from $40 billion in the street to about $400 billion. If I look at the segments in which we operate. So when that comes opportunities, and I think that there's a broad range of opportunities, quite frankly, where we operate at the moment. Important for us, as a firm, though, is that the first lens that one should use to decide whether or whether M&A is an opportunity or not is whether you outperform -- and I would say we outperformed in most markets, maybe not in new tappers lines at this stage, but Canada U.S., U.K. commercial lines, we have solid outperformance in place.
So that's the first lens. And then if I look at that environment, I'd say that there's a number of opportunities at the moment. The question is, can you find the right conditions at which to maintain the sort of track record we've shown from an M&A point of view. Then if I go towards distribution, which are smaller transaction, I think we've seen a number of eye-popping transaction that we don't think reflect a trend because we don't think the sort of valuations we've observed in larger transactions is actually sustainable. But we're able to continue to do small to mid-sized transactions in the range where we can generate double-digit returns that we would like to generate double-digit returns, taking into account our 70/20/10 financing structure.
So I feel really good opportunities. We're very focused on creating outperformance where we operate. And when we feel the outperformance is there, we're prepared to deploy capital. If I go back to operating income per share growth, the beauty of that measure as a measure of success is that it captures three levers. One, customer growth one by one; two, margin expansion; and three, how smart you are at using cattle, and that includes capital deployment to M&A.
And frankly, today, I feel that those three levers offer plenty of opportunities. And we feel pretty good about the environment in which we operate. I think Louis you want to add some color.
Well, just the other side of that balance sheet is ready. We can do a transaction at any time. So strong balance sheet, and I think our truths are ready as well. So there's no constraint internally to deploy capital and effort on M&A if something comes up. It's the other side, there's even a 22% debt to total cap, we will do an acquisition to more warning if something was available.
The next question comes from Jaeme Gloyn of National Bank Financial.
Just want to go back to personal prop real quick and just to make sure I've got this all correct here. By the sounds of it, it does not seem like there's any concerns on your part with respect to underwriting in terms of like risk selection or segmentation ran on those lines, which is this really isn't anything that you need to rework or go back to the drawing board in terms of how you're underwriting personal property risks in Canada, whether it's geographic or business line types of risks or covered peril. Is that fair?
It's absolutely fair. Jamie, I would point out that about a decade ago, we've unbundled the home insurance product to build it as a payroll-based product. We collect data accordingly, and we price accordingly. And as a result, as the profile by province of how perils have changed over time is embedded in how we're pricing and approaching the product. And then a lot of work to be done or that was done in the past decade on the supply chain to take advantage of the demand on the property side of things, improve customer experience and maintain costs.
So there is no concern with segmentation per se, we have what we call revolutionize our pricing algorithms by using machine learning and reaping the benefits of that.
That's clear. Next, in terms of the global specialty platform, your progress on your road map talked about launching the go-forward strategy in Q2, kind of try to line that up with U.K. specialty lines growing double digits on the top line. How much of this go-forward strategy is baked into that result? And what kind of upside should we expect from that rollout? And maybe some color on exactly what it is.
Darren, maybe you want to comment on GSL's results maybe in Q2 and then highlight of the strategic road map.
Sure. Thanks, James. I mean, obviously, as we said, an 85 combined in Q2, good results. And really, I would suggest solid performance across all of our geographies and also solid progress from a top line standpoint across all of our geographies as well. Obviously, there's a number of pieces of our road map that we highlighted at Investor Day.
Obviously, we think one of the bigger levers is around pricing and risk selection and increasing sophistication there. We're making solid progress in the quarter. We've got a lot more activity ahead of us in the remainder of this year in '23, but also moving beyond that into '24, '25 as well, too. I think as we look forward for the rest of this year and into next year, I think the one lever that we'll continue to focus on is what I like to refer to as a little bit of our global muscle. And by that, I mean, sharing of capability, sharing of expertise, not looking to broaden appetite or anything else like that, but really starting to leverage some of our multinational capabilities and how do we leverage skill sets, resources, expertise across our various different operations.
And I think you can look to London and the U.S. and the interaction between those two markets as well is a muscle that we really haven't flexed, I would suggest at this point in time, and that's something that we'll be looking to build out further in '23 and '24.
Thanks, Daren. And I think what we've laid out at the Investor Day is we think that with the verticals in which we operate and the global capabilities that Darren has talked about that by 2030, we should be able to double the earnings power of that business. And so organically, we can get a long way there. And I think our capital deployment opportunities, we'll pursue those. Key in all of this, and Darren talked about risk selection and bringing science in the field, that will be very important to maintain a sub-90s combined ratio throughout in that segment. But so far, so good with an 85% combined.
And just to quickly follow up on that top line, like the 12% growth in Q2, is that -- can you break that down between rate and unit growth.
Darren?
Yes, we have -- if I look at most of our markets, and I would include U.S. I'm in Suria, U.K. and European as well. We're in that sort of 7% range from a rate standpoint, and that's relatively consistent. Now within our different verticals, obviously looks very different.
And within the vertical itself, it looks very different given the significant segmentation. But we're in that 7% range. On top of that, if you think about P&C, you can think about indexation and so forth. So again, there is some customer growth in there. Obviously, let's not forget that Highland in the U.S., in particular, is contributing about half the growth, which we'll see that continue also in Q3 as well.
So it's a real mix to James, in terms of: one, that MGA acquisition in the U.S. and solid, solid rate. The rate environment has really not changed in the last few quarters, and we continue to see good momentum and favorable operating market across all of our different geographies. So we very much expect that will continue. And then as I said, there's some customer growth in there as well.
Yes. I would add my surprise when I look at the GSL growth at this stage and the 12%, if you think what Darren has said, you probably have upper single digit of rate in trip values, and then you have 3, 4-ish points probably of call this customer growth. But it's important to keep in mind that there's profit improvement plans in pretty much every jurisdictions where we operate. So that good growth is net of lines of business shrinking by 25%, 30%, et cetera. I didn't think we would be in that zone of growth, given how robust the action plans are where we've had profitability in the past.
And so as we solidify the fundamentals, it gives me hope that the earnings forward trajectory there is pretty good for many years to come.
The next question comes from Geoff Kwan, RBC Capital Markets.
My first question was just on the commercial lines, just broadly on a global basis. I was wondering if you could maybe flag if there are certain lines that are delivering like very good and/or very strong improvements in terms of claims ratios. And then conversely, are there certain segments that you would say maybe not performing as well or maybe seeing noticeable deterioration in recent quarters?
Darren, do you want to share your perspective?
Yes. I think what continues to be the highlight, Geoff, is on the property line of business, in particular, in our excess property book in the States. We saw another lift in the rate environment in Q2, even beyond the high levels of Q1. We're pushing close to 40 points of rate there in that particular segment. And we don't see that slowing down.
Submission volume continues to be very, very high there, and it's a fantastic environment to be operating in. And that particular line of business has delivered exceptional results historically, and no doubt we'll continue to do so. I think where some of the pressures we see in the market, and really, this is no different to past quarters, you can think about financial lines, public D&O, not concerns for us in terms of our D&O portfolio relative to a profitability standpoint, but we're not growing that given that particular market environment. So again, when I look at all of our lines of business and business units globally. When I look at the relationship between growth and profitability, very, very strong correlation.
Our high-margin businesses continue to have exponential growth, those that are either not with great market conditions or with profitability challenges, the foot on the break through a little bit too. So we're managing improvements in margins through improvements in mix as well, too. And that's very much a consistent approach that we're taking across all of our franchises.
Okay. And just my second question is, Canada Personal Lines, what's the rough like percentage of customers that are bundling their auto and property today, how does that compare to what you would consider as normal? And has the recent trend been kind of like -- and do you expect that to kind of increase from here or maybe decrease?
Guillaum, do you want to take a crack at Homerocombined?
Yes. So we see more bundling and property. So the majority of our property customer would also have the auto. But I'd say roughly half of our auto customers as a property. I think we're looking at ways to increase that level.
I think there's benefits from a retention perspective when the risks are bundled. So we have strategies in place to try to increase that level, but that's roughly the amount that we're seeing. And it's been relatively stable over many years. But there's clearly a benefit in having more than one product with a customer.
The next question comes from Lemar Persaud of Cormark.
Can you give us an update on inflationary personal property and how that compares to other parts of your business. So I guess where I'm going is, I'm wondering if there's any divergence between the impacts of inflation on other business lines. You guys talked about how the pressure is abating in auto, and it's easier for us to see, but what are the -- are the trends evolving a little bit differently in property? In personal property, personal property to be clear.
Yes. Good. I think providing a perspective of the last year and some of the blips in the quarter we've touched on, but your perspective, Patrick.
No. I mean the real inflation in property has been fairly stable. And I would say not only in the last year, but it has been there for a while. If I look at the severity increase overall has been pretty sustained, there was some additional inflation on material that started shortly after the pandemic and that continues. But we haven't seen that go up.
There is no real disruption in the supply chain for material. There's been a bit of an increase in labor due to the capacity pressure overall in the market. But I wouldn't say that the macroeconomics are putting inflationary pressure on the main components of property right now. But the damage itself in the quarter is more what we've seen that was a bit more severe. But we're not too concerned with the trajectory of the inflation in that line business.
As far I'm going at is the higher claim severity that you guys are seeing. Is it suggest that, I guess, the very trends in auto should be declining, but in personal property, maybe it does remain elevated because of higher labor costs and materials costs. Like if the trajectory then from where we stand today, is it a little bit different?
Yes. The inflation in auto has been more volatile. It's responded much more to the market value of cars when that supply chain was more disruptive. In property, it's been fairly stable. We don't see it necessarily decline from here, but it's been fairly flat, while the availability of parts, the market value of cars, we see the inventories of cars going up, and there are some real dynamics that is supporting the decrease in inflation in auto and property is more sustained at the same level, and we don't necessarily assume that this will go down the same way going forward.
Yes. And I think it's fair. And to Guillaume's earlier comments, there's been a couple of months in the quarter where we've seen burst, so to speak, in severity. Some is large loss. Some of it is mix, some of it is inflation.
We want to make sure we're on top of that, and we'll continue to monitor that. But otherwise, those two environments are -- I don't want to say independent completely, but largely.
Okay. Perfect. And then maybe for Louis, just going back to this book value per share questioning from Mario. How should we think about the timing of unwind of that $4 of unrealized losses weighing on book value per share. Would a reasonable proxy be the duration of the fixed income portfolio, so I think around 3.5 years -- is that the right.
Yes, that's what I would use.
The next question comes from Nigel D'Souza of Veritas Investment Research.
I wanted to circle back on personal auto and the guidance for the combined ratio. So you're guiding for sub 95. And I'm wondering why that guidance wasn't updated operated to a low 90s combined ratio given the trends you're seeing, you're currently at low 90s, you're expecting the industry premium to grow at high single digit and plan severity is trending lower. So I would expect combined ratio to kind of remain stable from where it currently is. And if that is the reason you're not seeing that because you are your premium growth rates are going to lag or be below the industry since you moved early to raise premiums?
Or do you think that claims are going to move higher because of frequency more than offsetting the moderation in claim severity? Just trying to understand why the guidance implies for the combined ratio could just higher from here?
Sub 95 or the guidance we've provided, there's lots of moving pieces at this stage. And as I mentioned earlier, it's surprising that we were right on most of the assumptions here. And because there are many moving pieces, we want to make sure that we remain prudent in our guidance, Guillaume, I don't know if there's any color you want to add. But I -- we have no intention of changing the guidance in the near term, and we stay focused on our econ plan.
Not much better. I think, Nigel, you pointed out to the areas that can be uncertain from our standpoint, and that's why we're keeping 795. But you're right that the inflation and the rates are crossing and we're going to be in a position where we're going to cover inflation going forward.
And Well, as I pointed out, I think that we were taking cautious stance from a pricing point of view, and we're taking a cautious stance from a reserving point of view. And I think the market is gradually recognizing the inflation focus we've had now for a few years, and that's why we're comfortable to grow in this environment as our price and value proposition becomes more competitive.
And just two specific follow-ups on that. Are you going to continue increasing premiums at a high single-digit rate in line with industry? And then the second is when I look at the claims or policy, I think Q2 is up somewhere around 3.8% to 4% year-over-year, which is less than the 8% year-over-increase in same-series -- so just wondering if cleaning frequency, was that lower this quarter versus Q2 of last year? And if so, why, why was the lower.
So claims frequency was broadly in line with last year, a bit of an increase. But I'd say it's negligible. I think it's been stable for the past few quarters, and it's at the level that is still quite below historical. On the rate trajectory, we're currently close to 9 points. I think we're working with regulators to maintain that level.
I think we have good data that kind of show the path. And I think we're confident that we're going to be able to maintain a good level of written rates. And this is going to be in line with what we expect the inflation to be going forward. So I think as we learn more about where inflation stabilize, we're also going to adapt our strategy. And this is a really regulated market and a lot of provinces. So I think that's another component to your question earlier about the $7.95.
And sorry, last point on this, just on the claims for policy, is that bigger right? Is it up less than the 8% year-over-year increase in claim severity? And if it is, why -- like what's the factor driving a lower increase in your total claims policy versus the trends you're seeing in severity?
I think we need to reconcile, I guess, your read of claims per policy here because the balancing factor between frequency, severity is mix can change provincial mix can change to get to this number. So I'm not 100% clear as to which data you're referring to. And so maybe up, up towards.
I'll just -- quickly, sorry. Just maybe it ties into the fact that your policies in force have increased this quarter and reversed the trend in prior quarters. So maybe you could touch on what that increase in policies in force weighted towards the end of the quarter? Or how is that distributed because that might be possible to the variation?
Yes. The growth is picking up month after month. So to the extent that's relevant, which I'm not sure, but clearly, there's gradual growth taking place. And as a result, you can assume a greater weight towards the end of the quarter. But I think we'll just go back to make sure we understand which metrics you're actually assuming it.
The next question comes from Grace Carter, Bank of America.
Hi, everyone. Sorry if I missed this earlier, but I guess looking at the personal auto results being in line with expectations, that differs versus what we've seen from a lot of the larger players in the U.S., which experienced an acceleration in pressure in the quarter versus expectations. I was just curious if you could provide any color on whether there's something structural in the Canadian auto market versus the U.S. auto market that might have contributed to that gap or if we should consider the gap more of a result of actions that Intact specifically has taken? And I guess, how can we be confident that we won't see a similar resurgence and severity going forward?
I think we've been prudent early on to act on inflation at the expense of the top line. So that would be one may be different. Second, during the pandemic, we have provided lots of relief to our customers, primarily through onetime cash return as opposed to dropping rates. Why? Because when you change your rate position, you need to have a clear sense of where the next 12 to 18 months will go was very hard to do in the pandemic.
I would say this is a second difference between a number of market operators. Third of all, we're in the business of getting people back on track. We repair cars, we repair homes. We don't -- we're not overly focused on cash settlement, which can lead to a different outcome over time if you realize the repairs are much higher than the cash you've received. And I would say from a strategic point of view, I would highlight that those are 3 difference between impact and many market operators.
Then Patrick, you might want to highlight other differences that exist but equally important, what we're doing in claims and supply chain to fend off inflation in personal automobile.
Yes. The only other significant structural difference I would point is the pressure on the long-tail coverages that U.S. seem to have been facing for now a number of quarters. The products between the 2 countries are different, not only are the difference between Canada and U.S., but even within the U.S., they differ by states and there are some states where there seem to be a lot of development in these lines of business that are not really relevant for our markets in Canada. So that's on the other structural aspect.
From a supply chain perspective, we've been developing our Rely Network preferred providers, both in auto and property for a decade. That network overall has been handling more than 2/3 of our repairs. And over the past few years, we've added to this network by having a few repair shops that we fully own and operate ourselves. And over the past 18 months, we've opened additional dedicated shops. These are shops that we select the operators because of the quality of their service, the quality of their processes and repairs and of containing costs.
And they are now fully indicated to our capacity and these shops together and 20% of our repairs plus the Reliant's worked behind it. So we've seen the cycle time of our repairs improved by 1/3 when we compare the normal repair process versus what we can achieve within these dedicated and fully operated shops...
Thank you. There are no further questions. I will turn the call back to Shubha Khan for closing remarks.
Thanks, Michelle. Thanks, everyone, for joining us today. Following the call, a telephone replay will be available for 1 week, and the webcast will be archived on our website for 1 year. A transcript will also be available on our website in the Financial Reports and Filings section. Our 2023 third quarter results are scheduled to be released after market close on Tuesday, November 7, with the earnings call starting at 11:00 a.m.
Eastern the following day. Thank you again, and this concludes our call for today.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines.