Intact Financial Corp
TSX:IFC
Intact Financial Corp
Intact Financial Corporation stands as a formidable titan in the landscape of property and casualty insurance in Canada, its narrative woven through decades of strategic growth and unwavering customer trust. Originally sprouting from its roots as a modest mutual insurance outfit in Quebec, Intact transformed over the years through a series of shrewd acquisitions and organic growth initiatives, shedding its mutual status to align with the demands of a dynamic market. Today, Intact operates not only within Canada but also has broadened its footprint into the U.S. and Europe, skillfully navigating the challenging waters of the insurance sector. The company employs a diversified business model, providing insurance products that cover everything from homes and cars to businesses, adapting flexibly to market demands and pricing strategies that align risk with return.
The engine driving Intact’s profitability is its adept underwriting and risk management skills, combined with a keen focus on customer service. By leveraging advanced data analytics, Intact is able to assess risk more accurately than many of its competitors, ensuring that premiums are carefully calibrated to represent risk. This attention to detail, while maintaining an expansive distribution network, helps the company capture market share and maintain profitability over the cycles. Intact also benefits from a strong investment arm, where it uses the float generated from policyholder premiums to invest in a diverse range of securities, creating an additional revenue stream beyond underwriting income. Through these intelligent maneuverings, Intact Financial not only succeeds in a traditionally conservative industry but also secures a position as a forward-thinking, robust player in the global insurance arena.
Earnings Calls
In Q1 2025, Intact Financial reported a robust 10% rise in net operating income per share to $4.01, bolstered by increased premiums across Personal Lines. The combined ratio remained solid at 91%, demonstrating operational strength despite higher catastrophe losses. Revenue growth reached 3%, with guidance for mid-single-digit growth in the upcoming year amid competitive pressures. Capital stability is strong, with $3.1 billion in capital margin. The company anticipates ongoing annual net operating income growth of 10% and aims for a combined ratio improvement towards sub-90 by 2026, driven by strategic initiatives, particularly in the UK&I sector.
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Good morning, ladies and gentlemen, and welcome to the Intact Financial Corporation Q1 2025 Results Conference Call. [Operator Instructions]. Also note that this call is being recorded on May 7, 2025, and now I would like to turn the conference over to Geoff Kwan, Chief Investor Relations Officer. Please go ahead.
Thank you, Sylvie. Hello, everyone, and thank you for joining the call to discuss our first quarter financial results. A link to the live webcast and materials for this call have been posted on our website at intactfc.com under the Investors tab.
Before we start, please refer to Slide 2 for a disclaimer regarding the use of forward-looking statements, which form part of this morning's remarks, and Slide 3 for a note on the use of non-GAAP financial measures and other terms used in this presentation.
To discuss our results today, I have with me our CEO, Charles Brindamour, our CFO, Ken Anderson; Patrick Barbeau, our Chief Operating Officer; and Guillaume Lamy, our Senior Vice President, Personal Lines. We will begin with prepared remarks followed by Q&A. And with that, I will turn the call over to Charles.
Thanks, Geoff. Good morning, everyone, and thanks for joining us. The first quarter of this year reinforced our position of strength. We reported a 10% increase in net operating income per share, achieving $4.01 with strong contributions across the business. Our book value per share grew 4% from last quarter and 13% year-over-year. These results underscore the resilience of our platform and our ability to succeed both operationally and financially, even in an environment of market volatility and economic uncertainty.
Top line growth was 3% in the quarter. This was attributable to continued momentum in Personal Lines, to both rate and solid increase in units. In Commercial Lines, growth was muted due to specific profitability actions we're taking in the U.S. and in the U.K. in particular. And we continue to see pressure in large accounts across all jurisdictions. That being said, rates remain in the mid-single digits in most lines, and while we maintain a focused approach on earnings growth, we're confident in our ability to achieve strong top line growth.
We have a really good action plan to ensure that we seize on all available opportunities. We expect growth to improve for the remainder of the year as remediation actions taper off and our actions kick in. Our combined ratio was solid at 91% despite 2.5 points of higher catastrophe losses this quarter. This highlights strong underlying results and healthy favorable prior year development across our businesses. Now let me provide some color on each of our lines of business, starting with Canada.
So Personal Auto, premiums were up 11% this quarter. This was a function of both rate actions and a 2% increase in units. As profitability remains challenging for the industry, in particular in Alberta, we expect hard market conditions to persist over the next 12 months. Our combined ratio of 97.5% included a 4-point impact from severe winter conditions, which was higher than seasonal expectations for a first quarter. Overall, the combined ratio remained in line with our full year sub-95 guidance.
In Personal Property, premiums were up 9%, driven by rate actions and unit growth. We continue to expect hard market conditions to persist given the impact of severe weather activity over the last couple of years. And despite challenging winter conditions, we delivered an 88.9% combined ratio in the quarter. Again, in Canada on Commercial Lines, premium growth was 1%, reflecting mid-single-digit rates in most lines.
There was a 3-point drag primarily from business mix as well as continued competition in large accounts. Given the constructive market conditions, we expect industry growth in the mid-single-digit range over the next 12 months. The combined ratio continued to be very strong at 81.2%, this reflects our underwriting discipline with a 4-point improvement in the underlying current year loss ratio from last year.
Moving now to our UK&I business. This quarter saw a 4% decrease in premium. The remediation actions in the direct line portfolio impacted our top line by approximately 3 points, while competition in large account space continued. Given the current market conditions, we expect industry premium growth in the mid-single digit over the next 12 months. And as mentioned earlier, we expect that the remedial action on Direct Line will taper off in the coming months. The underlying performance of the business in the U.K. is generally in line with expectations. The combined ratio of 97.6% includes elevated CATs and large losses in the quarter. Overall, the UK&I business remains well positioned to evolve the combined ratio towards 90% in 2026, really in line with the trajectory we started to see in '24.
In the U.S., premiums decreased 3%, which included a 5-point impact from the nonrenewal of 1 large account. In aggregate, rate momentum was in the mid-single digit across the majority of lines. Our remediation work on a few verticals will continue to taper in '25, which will reduce the top line drag. From an industry perspective, we expect premium growth to continue to be in the mid- to high single-digit level over the next 12 months. Combined ratio in the U.S. was strong at 86.8%. The portfolio is positioned to be less exposed to weather-related CAT risks as was evidenced by losses related to the LA wildfires which were $10 million in the quarter. So going forward, we expect to continue delivering a low 90s or even better performance.
Let me now highlight the progress on some of our key strategic initiatives. First, building scale and distribution to further expand our leadership position in Canada is an important pillar of our game plan. BrokerLink, in the quarter established itself as a coast-to-coast player by making its first acquisition in British Columbia, with over 200 locations nationwide, BrokerLink is well on its way to reaching its near-term objective of $5 billion of premiums by the end of 2025.
As part of our journey to become the leading Commercial Lines insurer in the UK&I, we announced that RSA, NIG and FarmWeb will rebrand as Intact Insurance by the end of this year. This is the natural next step in the evolution of our UK&I business. We're thrilled to associate the Intact brand with the excellent progress our teams in the UK&I have achieved. Additionally, being a global leader in pricing and risk selection is key to our success. As part of our pricing sophisticated efforts, we implemented new proprietary advanced models in the U.S. during the quarter.
Roughly 1/3 of the U.S. premium now leveraged these advanced models. These efforts support GSL's ambition of sustaining a sub-90s combined ratio. And then to be one of the most respected companies, we need to be a leader in building resilient communities. That means reducing our carbon footprint and doubling down on climate adaptation. I'm pleased to report that our emissions are down 23% to date, on our way to 50% down by 2030. We also doubled our commitment to municipal climate resilience grants. You can find a lot more in our social impact report.
As a business, we anticipate and plan for uncertainty and our consistent outperformance stands as a testament to this. We stress test many scenarios ranging from tariffs to broader geopolitical tension, and we manage our business accordingly. From a financial and operational standpoint, not only can we weather the big storms, but we're also really well positioned to play offense in this environment. We're proud of our track record over the past decade and are well positioned to achieve a net operating income per share growth of 10% annually over time and to outperform the industry ROE by at least 500 basis points every year.
With that, I'll turn the call over to our new CFO, Ken Anderson.
Thanks, Charles, and good morning, everyone. We start the year on a strong footing with net operating income per share of $4.01 in the first quarter, an increase of 10% from last year. Each of our operating performance drivers, Underwriting, Investment and Distribution income were up year-over-year. This droves an operating ROE of 16.5% over the last 12 months, despite a few points of drag from higher-than-expected catastrophe losses. And our balance sheet remains strong and resilient, with $3.1 billion of total capital margin at the end of the quarter.
Let me provide some color on first quarter underwriting results. The overall underlying current accident year loss ratio improved to 60.3% year-over-year. This reflects strong performance in Commercial Lines in Canada, and the U.S. In Personal Lines, the ratio remains solid despite severe winter conditions in the quarter. And in the UK&I year-over-year improvements in our DLG portfolio were more than offset by increased large loss activity in our Specialty business.
Moving to catastrophes. We reported $244 million of losses in the first quarter. Higher-than-expected CATs in the UK&I were mainly due to two named storms. And the CAT ratio in the U.S. was driven by a few large commercial fires. We continue to expect approximately $1.2 billion of annual catastrophe losses with approximately 1/3 anticipated in each of Q2 and Q3. Favorable prior year development was strong at 6.9%, reflecting continued prudent reserving across all segments of the business.
This strength was particularly evident in Commercial Lines, which represented 2/3 of the total in the quarter. Also, nearly 1 point was from favorable development on prior year catastrophe losses. Q1 tends to be the quarter that has more favorable PYD as all claim's development is from the previous years. We've mentioned before that we reserved cautiously and the combination of current accident year and PYD is the best way to assess the evolution of the underlying performance of the business.
On that measure, the year-over-year improvement overall was 1.5 points. The consolidated expense ratio of 33.5% improved by 1 point from last year and was in line with our full year expectations to operate in the 33% to 34% range. Operating net investment income increased 9% from last year to $415 million, driven by a higher book yield, which is now in line with our reinvestment yield at 3.9%. On a sequential basis, the $17 million increase in investment income was due to nonrecurring distributions of $9 million and in part, favorable currency movements.
Based on current markets, we still expect investment income of approximately $1.6 billion for the full year. Distribution income increased by 17% to $117 million, driven by organic growth higher margins and our ongoing broker consolidation activities. We expect distribution income growth of approximately 10% for the rest of the year with some fluctuations from quarter-to-quarter.
As Charles mentioned, we announced the re-branding of RSA to Intact Insurance, a major milestone for our UK&I operations. We will report the accelerated depreciation of the RSA and NIG brand intangibles over the next 12 months in integration costs. Overall, we expect to see a reduction in full year restructuring and integration costs compared to last year. Moving to our balance sheet. We continue to maintain a very strong financial position. We ended the first quarter with book value per share just over $96, up 4% quarter-over-quarter and 13% year-over-year.
Capital margin reached $3.1 billion at the end of the quarter, and our adjusted debt to total capital of 19.1% continues to be lower than our target and 30 basis points lower at the end of 2024. Our performance continued to demonstrate the strength and resilience of our platform, and we're energized by the opportunities ahead. Our balance sheet stability means we are ready to deal with any impacts from increased economic uncertainty, while also being ready to capitalize on growth opportunities as they arise.
At our upcoming Investor Day on May 21, we look forward to delving further into our game plan to grow organically, to strengthen our margins and to effectively deploy capital. These are the key pillars of our objective to deliver 10% NOIPS growth annually over time, while sustaining at least 500 basis points of annual ROE outperformance in the years ahead. With that, I'll give it back to Geoff.
Thank you, Ken. In order to give everyone a chance to participate in the Q&A, we would ask that you limit yourself to two questions per person. You can certainly re-queue for follow-ups, and we'll do our best to accommodate if there's time at the end. So Sylvie, we're ready to take questions now.
[Operator Instructions]. First, we will hear from Tom MacKinnon at BMO Capital.
Just a question with respect to the favorable prior year development, I think you've talked about 2% to 4% of net premium earns as being longer-term guidance. You've -- I think you've reiterated that you probably run towards the high end of that. If we look at the Q3 and Q4 of last year, you were probably running in the high 5s and now 6.9% in the first quarter, albeit there's some seasonality, as you pointed out with respect to Commercial Lines. I mean, do you continue to guide towards the high end of that 2% to 4%? And what's driving that?
Great question, Tom. Ken, why don't you maybe unpack the favorable development, which is really strong, and then I'll take the guidance point after.
Yes. So you're right, Tom. Q1 was favorable, 6.9%. A couple of elements, I guess, firstly, as you said, Q1 tends to be more favorable than other quarters. All the development is coming from prior years. We did have about 1 point of development from the significant prior year CAT losses in 2023 and 2024. I would say in Q1, PYD was healthy across all geographies. But I would point out, in particular, Canada Commercial, where it was minus 13%.
Worth noting though that in Canada Commercial, the 5-year average on PYD in Q1 is 9%. So whilst elevated, not extremely so. I would say, overall, we're still guiding at the higher end of the 2% to 4% range, that reflects, I guess, a cautious approach that we're taking in the current accident year as well. And that goes back to what I said earlier about looking at overall current accident year and PYD to sort of assess underlying performance.
Yes. And I think to your question on guidance, 2% to 4%. We're challenging ourselves as to whether that guidance shouldn't be updated. And we'll talk about that at the Investor Day, which I'm sure you'll attend in a few weeks from now. I think post-COVID, we took a cautious stance in terms of the guidance itself so that you guys had a good long-term perspective. And I have to say that their strength across the operation, probably a bit beyond what we anticipated, and we'll challenge ourselves on the guidance. I don't expect any meaningful or a real substantial change there. But your observation, I think is dead on.
Okay. And a quick follow-up, just on what you have called corporate and other expenses. That line kind of jumps around quite a bit. If I look over the first, second and third quarter of last year was 28%, then 60%, then 39% and then 49%. And now it's 27% in this quarter. Is there seasonality to this thing? I mean this is just more of a modeling question, what would make that jump around? Should we look at the same pattern from last year?
Yes. I wouldn't point to anything unusual. Tom, there can be a bit of lumpiness from accounting adjustments, but it's not overall a significant number, you may have some quarter-to-quarter volatility in it.
Next question will be from Paul Holden at CIBC.
I'm going to ask a follow-up question on the PYD. So just going back to the reserve triangles you provide annually, I noticed some large favorable development associated with the 2019 to 2022 years. So wondering if you're still benefiting from those accident years or not? And if you are reminding us on why there is abnormally high favorable development associated with those years?
I think, Paul, just keep in mind that the average duration of reserves is between 2 and 3 years, depending on the jurisdiction in which you're looking at across the platform, we tend to have a short tail book even in the U.S. And I would say that those early years would have much less of an impact now given the duration of the portfolio.
Okay. That makes sense. Just have to check. And then Charles, you made a number of comments regarding sort of the normalization or tailing off of remediation actions across the various Commercial Lines. Maybe you can give us a better sense of sort of when that premium growth should gravitate more towards the mid-single-digit growth range, quickly on maybe each of sort of Canada, U.K. and U.S., I imagine the timing is a little bit different across each, but some sense of timing on that would be helpful?
Yes. High level, Paul, I expect that you'll see a buildup between now and year-end. And that is a function -- one big drag is the direct client integration, which is a drag of close to 4 points. And I'll let Ken provide a bit of color there. And then in the U.S., you have a couple of points that come from remedial action in three verticals. Specifically, entertainment, environment and some -- and financial services, and that should taper off as well in the second half of this year. Ken, I don't know if you want to add a bit of color there.
Well, on the Direct Line specifically, we've said it before, but just worth reiterating, we picked up about GBP 100 million more premium in that -- GBP 100 million more premium in that acquisition than we anticipated. We initially booked it as a quota share. Now the business is coming into our platform and the remediation activity has been going on for a few quarters and continues in Q1 and into Q2. And that's why, as Charles said, towards the second half of the year, we should start to see some of that remediation taper off in terms of growth. So that's what's relevant to the drag that we're seeing in Q4, Q1 and likely a bit in Q2.
A bit in Q2, indeed. And I think, Paul, Beyond the remediation, what else is building up. And I would say that from a growth point of view, I would zoom in on five areas where we've doubled down in the recent months, given some of the pressure to make sure that the growth trajectory takes advantage of what we have in the toolbox. One, the speed at which we're deploying sophisticated pricing tools, in particular in the U.S. and in the U.K. means that where performance is well beyond our targets, we can reinvest some margin in the right areas. Second, broker relationships and distribution, big area of upside.
We're adding new brokers in the U.K. and in the U.S., and we're going deeper in those broker relationships. In fact, we're seeing the number of submissions pick up across the board, including here in Canada, and we're also investing in distribution. Third, through technology and operational improvement, we're quoting more of those submissions than we did so last year. That's in part why the new business generation is actually quite strong. If you look at Canada, for instance, where the issue, as I've mentioned, is mix. That's not remediation. It's just where we have the grid of success.
Fourth, we're upping our game from a service proposition to broker across all jurisdictions to really create a distance with other insurers, and that includes deploying technology in the field. And fifth, we're expanding our vertical set and leveraging our global network, in particular in global specialty lines. And when you stack up that game plan, with a market that is constructive in which we have a lot of room to grow. I think we should see in the second half of this year an improvement in the trajectory of the commercial lines' growth.
Next question will be from John Aiken at Jefferies.
It was an excellent explanation, Charles. I just wanted to carry on the commercial side. In each of the three various geographies, you did talk about mid-single-digit rate growth across the platform. But -- and basically, your guidance for the industry seems reasonably positive, particularly in the U.S. But I wanted to ask you about the level of confidence you have in terms of that guidance. And I guess, more importantly, what are you hearing from your commercial client about their outlook for the economy and basically the instability that we're seeing out there?
Yes. I think the environment, I would say, overall is constructive. It's at the larger end of commercial line that you're seeing a fair bit of pressure. That is market pressure per se, and we see that in all jurisdictions. Otherwise, fairly constructive. Your question really is about economic impact and what we see from our customers. And fair to say that in the past couple of months in the first quarter, we have seen some changes. I don't think they're a major issue in terms of topline at this stage.
But in some segments, I'll give you an example, multifamily dwelling, that market is down meaningfully in the U.S., for instance. In transportation lines of business, we're seeing a bit of a slowdown as well. And so we're starting to see at the economic level, some changes indeed. And as this becomes more ingrained, we'll report on that in the next quarter. So far, we're seeing some signs but nothing major. Now keep in mind, when you look at our business in relationship with the economy, our retentions, like in Personal Lines, you need to be insured.
And so topline and Personal Lines is not really sensitive to economic changes and retention is very strong. Same thing in Commercial Lines, really, especially in the SME and mid-market space, the economic pressure, you see at the higher end of Commercial Lines, but then people need to insure themselves. In Commercial Automobile, you'll see sometimes a bit more variation because it's easier to put a fleet on the block, so to speak, and reduce the amount of insurance you give. But otherwise, people keep insuring themselves and retentions remain very strong across all our markets in the low 90s, upper 80s, depending on where you look.
Next question will be from Jaeme Gloyn at National Bank Financial.
Just wanted to touch on something bigger picture just in terms of the regulatory environment. Can you give us an updated picture in terms of what your conversations are with either provincial regulators or federal regulators as it relates to the regulatory environment? And are there any potential risks? Or is this a non-story at this stage?
I guess if we start macro, and we look at the uncertainty that exists in the economy at the moment and markets to a certain extent. My observation would be that prudential regulators are on the front foot; they're engaged in a constructive dialogue. And quite frankly, I'm impressed by the engagement, right? People want to understand where the risks are coming from and how to protect the system. So really not a concern.
On the contrary, I think that prudential regulators are very proactive and more dynamic than what we've seen historically. That's the first observation. It's true here in Canada, and I think it's true in other jurisdictions, U.S., U.K., where we operate as well. Second, one layer down, good news with the Intact business is that home insurance is not regulated, doesn't need to be because it's super competitive. Commercial Lines is not regulated, it doesn't need to be because it is super competitive. Personal Automobile, as you know, is regulated and maybe we can share a perspective there.
And I would put Personal Automobile in two buckets: Alberta, which is a problem and has been a problem for some time. And then the rest of Canada because we don't do Personal Automobile outside Canada. And I'll ask Guillaume who deals with regulators or interacts with regulators on an ongoing basis to share his perspective about the country and maybe say a thing or two about Alberta.
Thanks, Charles. So yes, I'd say, broadly speaking, the regulatory environment and Personal Auto. Regulators are really moving towards protecting consumers and fair treatment of consumers, which is very aligned with our way of operating. I think from a rate regulation perspective, this is even becoming more and more flexible in some markets. So I think the trend overall there is positive. If I focus maybe quickly on Alberta. So as we have alluded to in previous earnings call, there is core pressure in the Alberta market. I think industry profitability is deteriorating.
And we've seen recently some competitors showing increased signs of capacity issue above and beyond what we've seen last year. It's clear that the current situation is not viable. And while the rate increase -- the recent increase in rate cap relieves some pressure, there's still pressure building up in the industry. So we believe it's very important for the government to allow the industry to get back to rate adequacy on both new business and renewals before the reform by eliminating the existing rate cap in place.
Otherwise, capacity will keep deteriorating, which is not a good outcome for anyone, consumers, government or insurers. On the reform itself, I think we're fully supporting. Reform is addressing the right issues from a fundamental perspective and certainly a major step in the right direction, but we think there are still actions that need to be done before we get to that reform.
Yes. I think, Jaeme, the -- we want to grow in personal automobile. And it's a very competitive marketplace. But the industry is losing money, not just in Alberta, in aggregate across Canada. And I think regulators understand that. And in many jurisdictions, they're focused on the root cause of costs. So I think overall, it's a constructive environment. I think home insurance is the other area where we're spending time with government officials to make sure that the focus on the root cause of the cost pressure in home insurance, they understand and act upon. And what is that?
Well, the root cause of the cost pressure is the changes in weather patterns, and it becomes an issue when you build in the wrong place, when you build with the wrong standards, when you don't invest in infrastructure. And these are the areas we engage with cities, provinces and the federal government. And I think there's a general recognition that the governments on those three levers need to do more. And now it's not just Intact or the industry who says that which we've been saying for 10 years, but I think citizens are actually putting pressure on governments to do that.
And so constructive dialogue there. So back on Auto, I would say I don't see a major risk, but Alberta, even though the cap is higher, and you have a reform in the pipeline for 2027, we're a bit worried for the market about the trajectory over the next 2 years. That's why we're working very closely with the government of Alberta to make sure that they have options and solutions if the pressure was building before the date of the reforms themselves.
Great. And then going back to your prepared remarks, you mentioned that you were well positioned to take a more aggressive stance in this current environment. Just wondering if you can elaborate on perhaps what you meant by that more aggressive posture? I'm not using your exact words there, but that was kind of the tone that I took away from that last comment from you.
Yes. aggressive is not part of our lexicon, but being able to play offense in a tough environment is certainly part of our modus operandi. So I'll ask maybe Ken to share a perspective on how we've stress tested the organization and why we think not only defensively, we're in a strong position, but why we think we can play offense. Ken?
Jaeme, we've stress tested a range of scenarios in the current climate and very well positioned to navigate, I would say, a wide range of economic outcomes. We've mentioned the $3.1 billion of capital margin, debt to capital at close to 19% at the end of the quarter. Also point out the investment portfolio is very well diversified. Common equities are about 10% of the portfolio, over 80% of our debt securities are rated A or better, and the currency exposure to U.S. and GBP also provides a hedge against any Canadian dollar weakening. So overall, our business is very resilient and from the modeling we've done, even in quite severe downside economic scenarios like a prolonged trade war, we're very much in a position to play offense and capture growth opportunities.
And I think that's what Charles was referring to. And I would go further, I'd just say in extreme tail risk scenarios that go beyond economic impacts for example, tension leading to actual geopolitical conflict, we have a toolbox of actions available that we can activate to mitigate any impact. So very well positioned defensively, but equally in a strong position to play offense and excess capital very strong at the end of the quarter, and I would say, building up as we move forward.
Yes. So clearly, Jaeme, our thought process here is to seek opportunities as there is uncertainty building up in the system.
Next question will be from Doug Young at Desjardins.
Maybe a two-part question on the U.K. operations. One, expenses were elevated this quarter, but they seem to jump around a little bit. So I don't know if there's anything abnormal in the expenses this quarter. If this is kind of a new run rate or the expense and expense ratio. And then you talked about higher large losses in the UK&I Specialty Lines business. Is this related to DLG or RSA? Maybe you can flesh that out a little bit.
Maybe I'll take the first part -- the second part first, Doug, and then come back to expenses. 97.6 combined ratio in the quarter, two elements to point out. The elevated CAT losses 3 points from those storms. But then, yes, 2 points, I would say, of elevated large losses. They're in the London market, the Specialty Lines side of the business, so not related to the Direct Line operations. And just, again, large losses can be a bit lumpy, and we had an elevated quarter. And as I say, isolated in the Specialty Line side of the UK&I business.
That, as I said, brings the run rate to the 92, 93 range, which is where we would expect to be right now. Then in terms of the expense ratio, overall, at an IFC level 1 point improvement versus last year. But in the UK&I, the 37.5%, I would say, was in line with our expectations. But is about 1.8 points higher year-over-year. I'd say there's three elements to that. Firstly, we're increasing our IT investments as we build the platform towards being that leading Commercial Lines platform in the U.K. I would say secondly, we have some costs related to the Personal Lines exits where systems are not fully decommissioned.
And I would say lastly, there's a bit of top line pressure over -- from a top line point of view over the last few quarters that impacts the earned expense ratio a little. So if we were to look forward, we would expect the expense ratio in that 37% zone as we move forward in the midterm. And I would say all of this, as I said, in line with expectations and baked into our view that we should be evolving the UK&I business towards that 90% expense ratio -- sorry, combined ratio by the end of '26.
Okay. And then secondly, I mean you talked a lot about increased competition in the large cap or large commercial market. It's in Canada, it's now in the U.S. and now it's in the U.K., I was hoping you could delve in a little bit what's driving this and is this starting to creep into the mid-cap or SME business? And if no, why not? It's just -- where I'm going is it feels like more cap was going after the commercial businesses and whether it's external capital or whatnot? And could this lead to a bit of a plateau in the market cycle and growth over the midterm here? So that's where kind of I'm going at this.
Yes. Doug, I'll ask Patrick to share his perspective, and then I'll provide a bit of color as well.
Yes. Doug, If I look at the lines of business in particular where there's been softer lines, it's clearly in larger accounts. So if I look in Canada, you'll think about the larger accounts starting to see some pressure also in what we call mid-market. And then in the Specialty Property that we call large property schedules of big buildings is where we see more competition. In the U.S., it is some of the larger accounts as well, but some specific lines like we talked about, FinPro, D&O, E&O, Cyber as well as Specialty Property. And in the U.K., it's really more in the Specialty Lines that we see more pressure on rates.
So overall, Doug, it's a continuation of the large commercial lines customers from what we've been talking about last year. The difference, I would say, is we're seeing competition pick up in large property schedule as well, more so than 3, 4 months ago. But still at the large end of Commercial Lines customers. Then your question is, can this come downward?
And I guess if you look at our experience over many years and you followed our company for many years, you know that the SME and mid-market space is not as volatile, so to speak, as the large Commercial Line space. So there is pressure at the top end of mid-market, but I would observe that retentions are pretty strong across the board. And closing ratios down a bit in a world where rates are pretty healthy, but this translates for us, in particular in the Canadian context into a mix shift.
In other words, our success is greater with smaller customers and smaller mid-market, which is a 3-point headwind but not really a headwind to the bottom line on the contrary, I would say. And this is a pattern we've seen historically over decades. So I'm not really concerned to see the sort of competitive pressure at the top end migrate downward right down to the SME account.
Next question will be from Mario Mendonca at TD Securities (sic) [ TD Cowen ].
Charles and Ken, in response to Jaeme's question about playing offense. I think Ken, you gave us a good explanation of why Intact is in a position to play offense. But I thought what you were going to address is what does playing offense mean to Intact. Like can you talk about what actions would constitute Intact playing offense?
Just to put things in perspective, the capital generation of the organization is really strong. There's the north of $3 billion buffer. You look at the operating ROE 16.5% you have north of 2 points of excess CAT, okay? So that gives you a sense of capital generation. What does it mean in practice? First, it means that we're on the front foot from a growth point of view, and we're doubling down on investing in the service we provide to brokers. In other words, we're not paying defense in terms of the investments we're making. Second, it means double down on the investments we're making in technology and accelerating the road maps that we have.
Third, and maybe more importantly, when it comes to actual capital deployment because the first two things, not so much capital, but rather using our resources effectively, it means acquisition. And so what that means in practice for us, Mario, is that we would love to deploy capital in the Canadian marketplace, in the U.S. marketplace, both from a manufacturing and from a distribution point of view. Despite the fact that you hear, there's a lot of uncertainty. People are on the sideline. That's not the mindset we're in, and we would be prepared to deploy meaningful capital to consolidate our positions.
The U.K. is performing well. We're really happy with the performance that the team is generating out there. We're in the middle of integrating the Direct Line acquisition. And I'd be reluctant to add one big boulder to what these guys have to do. But I have to say, Mario, that I'm quite interested to grow our footprint in the Commercial Line space in the U.K. It's a great market. It's bigger than Canada, lots of similarities. And where we find opportunities because of the uncertainty right now, we're ready to go for it.
It's a different type of question. The USMCA, apparently -- not apparently what I've been reading is that auto parts that are compliant with USMCA will be exempt from tariffs. When I read that I immediately thought I guess this is good news. This is not something you should -- Intact or other P&C providers have to worry about. How do you interpret that information? Is that unambiguously positive? Or is there a wrinkle there?
It's positive. I'll let Patrick share his perspective. We've given you a bit of a quantification last quarter about the impact of the North American trade war, if we look at the overall impact today of all the things that are on the table, whether an effect or not, just to help you frame what it is, and then we'll talk a bit about the indirect impact as well. But -- so Patrick, why don't you share your perspective?
First, Mario you're right. The USMCA element on parts means that there's very little tariffs right now applied on parts coming into Canada. Last quarter, we mentioned that in auto, in aggregate, 13% of our loss cost could be exposed to tariffs that included the parts where there is no impact for now. But since there was additional announcements more globally on tariffs. We've made the same analysis on all the -- whole portfolio of IFC. And to give you an idea, IFC globally for $1 of claims cost, it's about $0.07 that could be exposed to tariffs.
This includes imports from the U.S. to Canada, from the U.S. to the U.K., but also imports in the U.S. from many countries. However, the current tariffs apply to a very small portion of these imports and the impact on our combined ratio is very negligible. To be precise, the current tariffs announced or implemented, there's only about 0.05% of combined ratio or 5 basis points of combined ratio, what is already in there.
So if we take the tariffs that have been announced or are in effect, and you apply that to the 7%, we're talking about 5 basis points if we do nothing. So that's good news, I would say. I think the thing that we need to keep in mind is that there are tariffs on steel and aluminum. And so you need to ask yourself within the raw material that goes into those parts that are not tariffed, how much pressure can there be in the system? And I think you've done a bit of work on that, Patrick.
Yes. We've made quite a few scenarios. These indirect impacts are a bit harder to predict. It could also have some effect, as an example, on market values and the used car market for some models, if the demand was shifting from brand new cars to these used cars. We've made a few -- quite a few scenarios actually. And overall, we don't see -- even if we see significant indirect impact, we don't see an impact on the total combined ratio of more than 0.5 point and to Charles mentioned earlier, that's before any mitigating action that we could take on rates, risk selection, supply chain, et cetera.
So overall, Mario, I'd say, good news. One needs to keep an eye on the indirect impacts, but we feel pretty good about where we are now, and that contributes to us being on the front foot back to your first question.
Our last question comes from Lemar Persaud at Cormark.
I want to come back to this discussion around PYD. At what point do you say maybe you're being too conservative in underwriting such that you're turning down otherwise profitable business? Or is it -- is the answer that there's just so much uncertainty right now that you're comfortable running well above the 2% to 4% range, at the moment, like just some thoughts on that.
We're always making sure that we optimize between elasticity in the market and how above our target rates of return we might be operated. And you take the risks into account, we're on the front foot. It's unclear to me -- it's not clear to me that we're being overly cautious in the environment in which we operate. What would be my perspective. I don't know if any of my colleagues have a bit of color.
Just reiterate the point around looking at current accident year and PYD together gives probably the better reflection. And that's how we think about it when we're pricing.
Yes. I think it's a great point. Ken. And retention, pretty strong across the board. New business generation is pretty strong across the board. If you make abstraction of where we do remediation and frankly, at the larger end of Commercial Lines, the sort of behavior you see in the marketplace, we need to leave margin beyond what we think is reasonable to grow in that segment. So we have tools in the field to be very surgical to make sure that where we use margin there's plenty of margin to use, and that will move the needle on retention. Otherwise, we're not bothering. Do you have anything to add, Guillaume?
No, I'd say from a pure pricing perspective, we know where there's conservatism in our reserving position, and we're taking that into account to have our best view in pricing. So I think that's kind of baked in our price point that are in the marketplace.
And then if I could just ask for another, just a point of clarification, maybe quickly here. When you say there's 5 basis points of combined ratio, you're talking about 5 basis points of combined ratio from tariffs at the total company level, not just personal auto? Just a point of clarification.
Correct. It's not -- by the way, it's not 50 basis points, it's 5 basis points with the tariffs as they are either announced or enforced today, and that assumes we do nothing.
Thank you. Ladies and gentlemen, this is all the time we have today. I would like to turn the call back over to Geoff Kwan.
Thank you, 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 section. Of note, our 2025 second quarter results are scheduled to be released after market close on Tuesday, July the 29th, with an earnings call starting at 11:00 a.m. Eastern the following day. Thank you again, and this concludes our call.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.