Definity Financial Corporation

Good morning, ladies and gentlemen, and welcome to the DFINITY Financial Corporation 4th Quarter 2024 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Friday, February 14, 2025. I would now like to turn the conference over to Mr. Dennis Westphal, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone.

Thanks for joining us on the call today. A link to our live webcast and background information for the call is posted on our website at definity.com under the Investors tab. As a reminder, the slide presentation contains a disclaimer on forward-looking statements, which also applies to our discussion on the conference call. Joining me on the call today are Rowan Saunders, President and CEO, Philip Mother, EVP and CFO, Paul McDonald, EVP of Personal Insurance and Digital Channels, and Fabian Rickenberger, EVP of Commercial Insurance and Insurance Operations. We'll start with formal remarks from Rowan and Phil, followed by a Q&A session, during which Paul and Fabi will also be available to answer your questions. With that, I will ask Rowan to begin his remarks.

Thanks, Dennis, and good morning, everyone. We reported fourth quarter results last night that capped off a strong performance for 2024. In a year where the industry faced historic levels of losses from catastrophes, the resilience of our people and business model enabled DFINITY to deliver on its commitment to be there for our customers while generating robust results for shareholders. We reported record full-year operating earnings per share of $2.66, an increase of nearly 25% over 2023. We again met or exceeded all financial targets for 2024 with top-line growth of 11.1%, a full-year combined ratio of 94.5%, and an operating ROE of 10.6%. The strong operating performance coupled with the return of restricted cash of $150 million drove a 17.6% increase in book value per share in 2024. Turning to slide six, it's now been just over three years since we completed our landmark IPO. In that time, We've been able to grow premiums by $1.2 billion, which moved our market position from number eight to number six, successfully deliver consistent underlying profits despite challenging conditions, grow book value per share by over 40%, and increase our quarterly dividends per share by 50%. We have also successfully deployed more than $1 billion of capital in that time, Over $800 million of that went into the strategic growth of our broker platform, a platform that now represents the 10th largest P&C insurance broker in Canada. Finally, we've distributed $200 million in shareholder dividends since IPO, and that's before a most recent increase of more than 17%. I'm extremely proud of this exceptional track record and look forward with confidence to what we will accomplish together with our employees and broker partners. Turning to the fourth quarter on slide seven, strong underwriting income together with growing contributions from our insurance broker platform and net investment income combined to generate record operating net income of $110.4 million or 95 cents per share. Our Q4 combined ratio of 90.3% reflected the broad-based strength of the business, with particularly strong results in personal property. For the full year, our overall combined ratio was robust at 94.5%, despite record levels of industry cap losses. From a top-line perspective, we continued to leverage our strong broker proposition and digital platforms to drive solid overall premium growth of 11.1% in 2024, ending the year with premiums approaching $4.5 billion. In the fourth quarter, underlying growth of 9% was driven by auto rate and unit count increases, continued rate increases in property, and strong retention and rate achievement in commercial insurance, in what remains an attractive market overall. On a reported basis, growth of 7.4% reflected the impact of the exit of Sonnet's Alberta personal auto business, which we classify as an exited line. Given the loss-making nature of Sonnet's Alberta auto book, withdrawing our business there enabled the consolidated Sonnet business to generate a profitable underlying performance in the quarter. The negative drag on profitability from Sonnet is now behind us. Being positioned to generate a modest underlying profit in 2025 is not the end goal, but it is an important milestone. Thank you to the teams involved for their tremendous efforts. I'm confident that we can profitably scale the business in the years to come, creating further value for DFINITY. Turning to the industry outlook on slide eight, we believe the operating environment is one that remains conducive to sustaining firm markets overall. We expect conditions and order lines to remain firm as insurers aim to keep pace with the combined impact of ongoing cost pressures, regulatory constraints in Alberta, and uncertainty related to the extent and impact of potential US tariffs and retaliatory actions. We also expect market conditions and personal property to remain firm over the next 12 months, particularly following last year's record of close to $9 billion in industry catastrophe losses. While we expect overall commercialized market conditions to remain attractive, we are seeing some commercial segments have become more competitive. Overall, we expect the industry's return on equity to be close to its long-run average of 10% in 2025. Slide 9 illustrates our key financial metrics. As you can see, we met or beat each metric in 2024. We are confident that we have the growth platforms to outpace the market over time and will continue to protect and improve company profitability along the way. We have several organic levers being pulled aimed at improving operating results in the near term. As such, we are targeting to deliver a sub 95% annual combined ratio over the cycle. We believe this will enable us to continue driving our operating ROE higher within our guidance range. So recognizing that the challenging weather events from the third quarter of 24 will weigh on this metric until the second half of 25. Slide 10 illustrates the composition of our national broker platform. We've made great progress in the past few years to develop it into a vehicle to diversify and strengthen the earnings profile of the business with repeatable distribution income that complements our underrunning operations. We expect continued M&A activity and the organic growth momentum of the business to result in at least $1.5 billion of managed premiums by the end of 2026. That's earlier than we originally anticipated. We continued our growth trajectory with several additional acquisitions last year, which enabled us to achieve our objective for 2024 operating income from this part of the business, despite lower contingent profit expectations. In 2024, our national broker platform generated $76 billion of operating income. We expect to increase this by approximately 15% in 2025, with a similar 70-30 split between distribution income and commission offset. And with that, I'll turn the call over to our CFO, Phil Mather, to go through results in more detail. Thanks, Rowan.

I'll begin on slide 12 with personal auto. For the full year, top line growth of 12.7% reflected the beneficial impact of portfolio transfers, as well as our improved competitive position after having been an early mover on rates in 2023. This past fall, we took further rates and segmentation actions, which tempered underlying growth somewhat in the fourth quarter, coming in at 9.6%. This is largely in line with our expectations. As you know, we removed Sonnet's personal auto business in Alberta from our operating results. Classifying this book as an exited line impacted growth in auto by 4.1 points in the fourth quarter. Looking to 2025, we expect the full year pace of growth to remain in the upper single digits, but we expect it to exhibit volatility from quarter to quarter particularly given the large portfolio transfers that bolstered growth in the first half of 2024. Personal Auto reported a solid combined ratio of 96.1% in the quarter, largely consistent with a year ago. The full year result of 96.7% was 1.6 points better than 2023. The performance reflects an improvement in the core accident year claims ratio driven by higher earned rates, stabilized loss cost trends, and the improved sonnet performance. For 2025, we expect to continue to deliver a mid-90s combined ratio in personal auto, with the reminder that the first quarter of the year typically experiences higher combined ratios due to winter seasonality. Turning to personal property on slide 13, premiums increased 6.2% in the fourth quarter, benefiting from continued firm market conditions driving increases in average written premiums. This was partially offset by ongoing actions to address risk concentration in regions with a higher propensity for parallel events. We expect this line to grow at an upper single digit pace in 2025, given the firm pricing conditions prevalent in the industry. Focusing on the bottom line, the personal property combined ratio was strong at 82.8% in the fourth quarter, despite more than seven points of catastrophe losses driven by flooding in BC. The increase in catastrophe losses was partially offset by higher favorable claims development, an improvement in the core accident year claims ratio, and a decrease in the expense ratio. For the year, the personal property combined ratio improved due to higher favorable claims development and a decrease in the expense ratio. Our focus on disciplined underwriting and proactive rate actions enabled us to deliver on our mid-90s objective in 2024, this line of business, despite 15.7 points of catastrophe losses. Overall, we're targeting a sub-95 combined ratio for the personal property line of business in 2025. Slide 14 outlines the highlights in the quarter for our commercial business, as double-digit growth in commercial lines continued, with gross written premiums of 10.7% versus the prior year. Our strong results in commercial insurance reflect attractive market conditions, our underwriting capabilities, and a comprehensive value proposition that is well supported by our broker partners across Canada. In small business, our SME pathway capability continues to allow our broker partners to quote and bind over 50% of their business in an automated and digital manner. In specialty, our D&O, E&O, surety, and large account capabilities are also benefiting from strong momentum, a result of the comprehensive underwriting and risk management capabilities we now have in place. While the large account segment has become more competitive, We continue to cover the lost trends in our commercial portfolio with appropriate pricing and underwriting strategies, which supports our objective for low 90s combined ratios. We expect that we can maintain our pace of growth at twice the industry growth rate, which should translate into approximately 10% growth in 2025. For the year, the commercial lines combined ratio was also strong at 89.4%, compared to 88.8% in 2023. The modest increase was driven by high catastrophe losses and lower favorable claims development, largely offset by improvements in both the core accident year claims ratio and the expense ratio. Remember that prior year development in 2023 benefited from a release of COVID-19 related provisions in the second quarter of the year, which improved the full year combined ratio by 1.2 percentage points. Putting this all together on slide 15, we generated record operating net income of $110.4 million in the fourth quarter, reflecting strong underwriting income together with growing contributions from our insurance broker platform and net investment income. Our consolidated underwriting income improved by $10 million in the quarter and more than $67 million for the year. This is remarkable considering the significant catastrophe losses that impacted our industry during the year. Our strategic approach to accumulation management, product design, and the excellent performance of our catastrophe response teams enabled us to experience well below our expected market share of industry losses, particularly in Alberta. The increase in interest income in the quarter was driven by higher holdings of bonds. For the year, interest income also increased due to higher fixed income yields proactively captured within the portfolio throughout the prior year. The level of net investment income in 2025 is currently expected to be largely unchanged from 2024 as market yields have fallen below book yields. In the near term, growth is more likely to be driven by new cash deployment into the portfolio rather than incremental yield capture. This modest outlook reflects our preference to deploy capital into high-yielding investments in distribution and organic growth initiatives and the drive of reinvestment yields. Distribution income in the fourth quarter increased by $2.6 million year-over-year, driven primarily by the contributions from acquisitions combined with solid underlying organic growth. For the year, distribution income of $54.4 million was right in line with our expectation, despite lower contingent profit commissions. As Rowan indicated, we expect results from this business to grow approximately 15% in 2025. Turning to slide 16, our outperformance versus the market in 2024 from a relative catastrophe loss perspective certainly aided our ability to successfully renew our reinsurance program for 2025. While our attachment points increased modestly from $60 million to $75 million, the program's upper limits remained unchanged. The full placement of our catastrophe coverage between our attachment point and $180 million in 2025 helps mitigate the potential impacts from large events. When we consider the impact of co-participation and reinstatement premiums, the net impact of $100 million catastrophe loss today is essentially unchanged from 2024, despite the growth in our insurance business. Given this, we opted not to renew the multi-year aggregate treaty as we have successfully navigated the increase in our attachment points over the past few years while managing volatility. Slide 17 illustrates the continued strengthening of our financial position in 2024. Our 17.6% increase in book value per share to $29.13 was primarily due to strong operating performance and the return of restricted cash of $150 million, partially offset by our dividend distributions for the year. As you can see on slide 18, our financial position is robust. with nearly $1.7 billion of financial capacity. Our capital priorities remain unchanged, with the primary focus being in support of our organic growth strategy. We're also proud of our track record of consistent dividend growth, including the 17.2% quarterly increase announced last night. We have a clear objective to build Affinity into one of the five largest P&C insurers in Canada. This requires inorganic growth, which could include both insurance carriers and distributors. The optimization of our balance sheet through integrated acquisitions would ultimately enable us to move our targeted operating ROE range into the teams. With that, I will turn the call back over to Rowan for some final remarks.

Thanks, Phil. As we enter our fourth year as a proudly Canadian public company, we've once again been recognized by Great Place to Work Institute for a couple of awards. Late last year, we were recognized as one of the best workplaces in Ontario. More recently, I'm happy to say that my team was identified as one of Canada's most trusted executive teams. These awards reinforce what I witness at DFINITY on a daily basis. Leaders and individual contributors alike making deep connections to drive business results within the context of our company's purpose-driven culture. I'm also incredibly proud to announce that DFINITY has recently become a United Nations Women's Empowerment Signatory. This signals our strong commitment to advancing gender equality in the workplace. DFINITY is the first P&C insurer in Canada to become such a signatory. We have an excellent team in place and support of broker partners to continue building on our track record of success. Having already shown a remarkable level of resilience through a global pandemic to the subsequent supply chain disruptions leading to rampant inflation to consecutive years of elevated losses from catastrophe weather events. I'm extremely proud of the capabilities we've built and the achievements we've reached together. We have a proven business model, an experienced team, and a strong balance sheet, all of which give me great confidence that we'll be successfully able to navigate the uncertainties that lie ahead. And with that, I'll turn the call back over to Dennis to begin the Q&A session.

Thanks, Rowan.

With that, we are now ready to take questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask the question, please press star then the number one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask the question and we'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Tom McKinnon from BMO Capital Markets. Your line is open.

Yeah, thanks very much. Good morning. Question with respect to distribution income. I believe it's kind of $12 million in the quarter. It seemed to be a little bit lower sequentially than what we had seen in the last couple of quarters on perhaps elevated expenses. Is there seasonality with respect to this? Just some clarification there, thanks.

Yeah, thanks, Tom. It's Phil here. I think what we saw in the quarter was a couple of things. One, you get a little bit of seasonality in Q4. It's not as pronounced as the first quarter, just from a premium level. And then secondly, the expenses were up just a couple of million dollars. That was really just timing of recognition of expenses throughout the year. It caused a little bit of noise in the quarter, but actually we were kind of bang on line with the underlying expectations. And then when you play that out across the entire year, very comfortable with the 76 million that was generated, kind of bang in line with expectations despite the CPC. So there's just a little bit of timing noise of a couple of million bucks of just timing of when the expenses were recognized.

And I think, Tom, maybe just to add to that, I think that we are very pleased with this investment. As you know, we've deployed over $800 million. We've built this into a top 10 broker. And we see a very good pipeline here. So the team has done really, really well. We were quite active last year with about eight transactions done. And as Phil said, you know, that's the contribution of the earnings. And we think between their organic growth and some M&A, you know, there's another 15% guidance and an increase in distribution income, you know, next year. So we're very pleased with this. And as you said, there's a little bit of seasonality impact, but it's something that's looking very good from our perspective.

Okay, great. Thanks.

Our next question comes from the line of Lamar Persaud from Cormac. Your line is open.

Yeah, thanks. Several changes to the reinsurance program, which you guys highlighted, higher attachment point, but then full coverage to the $180 million. And then above that, it looks like higher retention rate. And then you no longer have the ad cover. So lots of changes there. Can you help me understand what 2024 CAT losses would have been under the 2025 reinsurance program? Like, would I be right in assuming... that CAT losses would have been higher under the 2025 program?

Thanks, Lamar. Yeah, the only difference that you would have seen between 2024 and 2025 was just the utilization of the aggregate. So in 24, we did utilize the ag cover for that last year to the extent of a $25 million recovery. But we also had to pay for that, obviously. So if you look at the overall net impact on the underwriting results for the year, it's probably half of that impact or less. So You'd get a cat loss increase for the utilization of the ag, but obviously we wouldn't have had the premium cost associated with it. And the actual attachment points weren't breached on any of the events last year. And that was really driven by the very effective cat loss management that we had through that year. So it was actually a very good outcome for us from those individual catastrophe losses. So really, it's just the existence of the aggregate that would have created the difference.

Okay, that's helpful. Okay, and then just kind of building on that, can you help me understand why you guys didn't raise the cat loss guidance above 4.5% of premiums? I would have thought that maybe that would be moving higher just given increasing frequency and severity of cat losses and the changes to the current reinsurance program. Maybe it could be due to you guys being more cautious in certain cat-affected regions or something like that. Just some thoughts on keeping the cat loss guidance?

Yeah, Lamar, the first kind of comment I'd make there is that, you know, obviously when we think about 2024, I mean, this was a real historic year in terms of cat losses around nine or so billion dollars. And one message would be we're not expecting that to continue. We don't see this as the new normal. I think the second part of this is that DFINITY has quite significantly outperformed on this exposure. So when you think about our natural market share, our cap losses last year were about 50% of what our natural market share is. And on the one hand, that shows that there's a lot of resilience in the portfolio. Personal property still made an underrated profit. The company in the record cat year delivered a sub-95%. But also because there's so many actions that are underway and moving forward. And so when we think about that guidance, we do expect a larger dollar. But don't forget the business is bigger and there's a lot of activity. And maybe it's worth, you know, Paul, just... Do you add a little bit of color to the types of activities that we're driving to manage that?

Yeah, absolutely. And just to emphasize what Rowan said about performance. So as a proof point, Alberta represented almost half of all of the cat claims in the industry last year. And in Alberta, we have about 3% property market share and 4.7% auto market share. But when you look at our market share of the cats, We only had a one and a half market share of the hailstorm and only a 1% market share of the Jasper wildfire. So when you couple together what Rowan said about naturally we're going to be growing so the dollar figure gets bigger, plus all of the activities that we've taken to address our concentration and peril risk, I think we're in a very strong position to support our cat loadings for next year. And I'll also remind you, even with a 95th percentile experience like we had last year, as Rowan said, we still came in with a profit-making line. So we're quite comfortable.

The only extra piece I'd add to that is that if you look at the classification of cat losses, we made a small definitional change. where we now include individual losses above $5 million for 2025 onwards within the category. That's primarily just driven by the increased scaling of our business overall, natural inflation, and then just the increased capabilities that we have in the commercial business. So a $3 million loss for us today, we would not consider that to be out of the ordinary. in any state if you'd left the three million alone the four and a half would have probably been five percent so you will see a small rebalancing between uh traditional losses and cat losses for that small definitional change but very respectful of the scaling up of the business and the increased capabilities within commercial lines thank you very much um if i could just squeeze one final one in here i want to come back to your slide 10 where you guys highlight

your broker acquisitions from 2022 to 2024 because it does kind of paint the picture of what I'm getting at. 2022, 2023, you're more active on the premiums acquired because you have to build up the platform, which makes sense. 2024, the focus looks like it was more on tuck-in acquisitions because obviously lower premiums acquired here. Would it be fair to suggest that the focus for M&A for DFINITY is shifting more towards insurance carrier acquisitions rather than broker acquisitions? Yeah, I'll just leave it there.

Yeah, look, I think that what was important on the broker platform for us was initially to get some really strong, high-performing, large anchor brokers. And so in the earlier years, you saw some larger transactions being done. They now are, in effect, in a programmatic way doing a roll-up. And so I think that there is more numbers of smaller transactions that have been done. That doesn't mean we wouldn't be open for another larger broker transaction. We would. but what you're seeing is exactly that. So I think that's why there's a greater number of the lower value of acquired business in the broker platform. And of course, those are even more synergistic and create more value as they put onto the McDougall's platform. So that's that. But I wouldn't agree with your point that, look, we are thinking about transactions for... carriers as well as brokers. We're happy with how the broker distribution has gone. It's now moving forward quite nicely. And clearly, as we think about deploying the excess capital that we have, looking for carriers, it makes total sense for us. As we've said in the past, we think our thesis is the world's getting more complicated. Size, scale is increasingly important, and we think there'll be more opportunities ahead. As we've reminded people, we've built a platform for a bigger business. We think that an in-market acquisition would be very synergistic for ourselves. So, you know, it's not that we wouldn't continue investing in the broker channel, but definitely our attention is on the carrier side.

Thanks. That's it for me.

Our next question comes from the line of Mario Mendonca from TD Securities. Your line is open.

Good morning. Rowan, this might be a little touchy, but we are getting close to that four-year period, the end of November being the end of the demutualization protection, and the conversation is coming up more frequently. What I want to ask is, is there anything in the governance agreements with the original cornerstone investors that would make it difficult for a potential bidder for DFINITY, if that's in fact where this heads later on this year?

Look, Mary, I think a couple of points there would be, if I just step back to the big context, is the whole reason for DFINITY going through demutualization, becoming a public company, was so we could be a leading P&C company in Canada. I think if you look at the progress in the last three years, we're definitely demonstrating that opportunity. We're very pleased of what we've built. Margins are good. Revenue is up significantly. And the team, quite frankly, sees big opportunities ahead. So really, our focus is is about building value going forward there. We do have some cornerstone investors, and those agreements that we have are actually publicly filed. So that's available to be looked at. But essentially, there's good commitment and confidence from them about the long term. That's why they invested into us, and they are long-term partners. They are very supportive of the plans that we've got. And I mean, with respect to, you know, any kind of speculation and questions, I mean, anything that is speculating could be distracting for us. And given that any steps in this direction are actually not even legally permitted for the better part of another year or so, you know, once we're out of the protection period, we obviously can't control choices others may make. But when we go back to the comment I just made, you know, we're running the business, making the investments to outperform the industry, create significant impact. value and we plan on doing this for years to come. So that's really what our focus is and we believe that our Cornerstone investors are very supportive of that plan.

Sort of unrelated but somewhat related question is, when the company demetralized, it was very clear what the objective was to grow through acquisition. That's what the stock was for. That's what the continuance was for.

nothing's really happened on the carrier front how do you feel today are you any closer to getting a deal done today than you were say two years ago yeah i mean i think mario you know all we could kind of reiterate there is that you know number one we think the environment is moving towards one where there will be more transactions done you know we had this very unusual phase over the last couple of years with covert and then you know as we had that inflationary period outside of COVID. But I think the fundamentals of you need size, you need scale, you've got to deliver for your brokers, you've got to have the technology in place to outperform, all of that creates, I think, a marketplace that leads us down the consolidation path. So do I think that... 25 is going to be more conducive than 24. Yes, I do. And I think 24 was a bit more than 23. Obviously, time will tell. And that is a priority for us. And in the meantime, we're very pleased with our significant ability to keep generating significant amounts of capital. I think in the comments we started with, we've already deployed a billion dollars of capital over the last And we built even more excess capital. So, you know, our story was always we're a capital deployment story and a growth story. And we still believe that.

Again, if you would like to ask the question, please press start and the number one on your telephone keypad. Our next question comes from the line of Paul Holden from CIBC. Your line is open.

Yeah, thank you. Just a couple of questions for you. First one, with respect to personal property and exiting higher peril risk, how far along would you say you are in that process?

Thanks for your questions, Paul here. We are significantly along the way of optimizing our portfolio. Of course, that changes as we gain portfolios through portfolio acquisitions or rollover activities. And so you may recall, we have a very significant one in 2023. And so it takes a while to work through that portfolio. So as we continue to add more portfolios, we'll continue to optimize as we go. But we're well positioned. I think our results show that we're well positioned to address the issues in the marketplace. We're certainly looking at it on a peril by peril basis. So we're very focused on the differing needs of wildfire exposure versus flood exposure, for example. And we're going to continue focusing on that by upgrading our analytics capabilities, by adding more modeling to that. And these models used to be updated every few years. And we're finding now that even once a year is likely insufficient to keep pace with the changing climate conditions. So we're comfortable where we are right now. We have taken most of our growth last year, AWP or rate growth, because we've been systematically removing volatile risk from the bottom of the portfolio and replacing it with high quality, less volatile risk at the top. And then moving forward, we feel that we can start growing unit growth year over year, quarter over quarter. Of course, we'll keep evaluating based upon what happens in the marketplace, but we look to be in a good place to gain some unit growth moving forward.

Okay. So that sounds like obviously then you're heading an environment where premium growth sort of lagged rate increases because you're willingly giving up some units and now that's actually flipping the other way around as you head into 2025.

It's a bit of both. We were taking unit and break for some time, but as we started seeing the impacts of climate change industry-wide and particularly in our jurisdictions in Canada, we were, as I mentioned about a year ago, we were very focused and prudent on making sure that we were avoiding unnecessary loss. And then even throughout the year, halfway through the year when the catastrophes really started impacting our portfolio, Our systems and capabilities allowed us to respond very, very quickly and take additional action ahead of the market to help prune volatility out of the portfolio. So again, we're very pleased with our ability to respond to this. And I would again highlight, despite $9 billion worth of cat losses for the industry, we're very pleased with the way the year came in for us.

And Paul, so I think, you know, we feel good about this line of business where we're at now. Number one, the market is firm to hard and there's strong pricing power that's going forward. So you've got pricing power, you've got indexation that's moving up. The team has found opportunities. And so when you look at that, I think we should be expecting more unit count growth along with strong pricing. That is well for us. And that's also one of the reasons why we've improved our guidance on personal property from mid 90s to low 90s. So we like this business.

Yeah, and I guess where I'm trying to get at with this is my understanding is pricing is probably going up somewhere between 10% and 15%, so low double digits, and obviously just trying to figure out how we should model premium growth for DFINITY next year. Is it going to be higher than that, lower than that, kind of like it was, but it sounds like somewhat higher maybe than, let's just call it 10%.

Yeah, we're high single digits is what we're targeting. And partially that's because we're in a strong starting position. So we don't necessarily have to take as much premium as some of our competitors. So that's the focus and then couple that with what I mentioned earlier around our segmentation. So what it allows us to do is get far more granular and therefore we wouldn't be pushing as much rate through on the very high quality business that we're targeting and we push a little bit more rate through on the more volatile business but of course you don't necessarily gain all that. So when you blend that out it ends up being more of a high single digit rate need for our portfolio. So that's what you can take moving forward. But again, we will adjust as the case requires us to.

Okay, got it. One more question then from me. Maybe on commercial lines, we have seen some softening of the market, if you will, or at least less favorable pricing conditions. Maybe just sort of talk about what you're seeing in the market. If you're having to change or alter growth ambitions at all, If you're willing to still, you know, grab market share, but maybe it's coming at a little bit lower margin than previously. Let me just, again, walk us through those competitive dynamics.

Yeah, thank you, Paul. This is Fabi Rickenberger answering your question. So big picture is that you're really pleased. with the performance that our commercial business has achieved last year. As you've seen from our disclosures, we grew by 13%, which is a market-leading number, and we posted a very strong combined ratio of 89%. So overall, very confident in our capabilities, very confident in our run rate, and we still do like the outlook. for commercial insurance, despite the fact, as you mentioned, that some segments have become more competitive. The last two or three quarters, large account business, large fleet business would be a couple of examples of that. But the confidence that we have is a function of the team that is in place, our operational capabilities, our underlying capabilities, and really understanding the underlying loss trends, literally down to an individual policy level. And what this means is that we are confident that we continue to cover the loss trends that we have in our portfolio. If you look at our Q4 disclosures, we grew by 10.7%, and about half of that number is due to rate and inflation adjustments. And again, that does cover the loss trends that we have in our portfolio, and that gives us confidence that we can sustain our guidance of combined ratios in the low 90s. To go a little bit deeper to answer your question more specifically, in that large account segment, we have seen more competition, more foreign capacity coming to Canada as well. But what really helps us is that our portfolio, which is now at 1.4 billion, is skewed to the lower end of commercial exposures and premium bands, about 85%. of our portfolio is in that lower premium brand of below 100,000. And that allows us to optimize rates and retention quite effectively in that part of our business. We have a strong digital and service propositions as well, which is mitigating the impact of price, very effective as well. So overall, that the rate that you're getting across the portfolio is still in the mid single-digit range. We are comfortable with the outlook for commercial. We have retention rates in the mid to high 80s, which we are comfortable with as well. And in line with Phil's comments up front, we do expect that we will be able to grow commercial insurance at twice the interest rate, growth rate, which we expect to come in around 5%. So we expect to be able to grow commercial insurance in that 10% range. And based on all the kibbles that we have, we feel that we can drive that level of growth without compromising on our margin position.

Okay. That's great. Helpful. I'll leave it there.

Thank you.

Our next question comes from the line of James Goyne from National Bank Financial. Your line is open.

Yeah, thanks. First question is on the sub 95% combined ratio guide. So we did 94.5% in 2024. And if I take the CAT guidance of four and a half percent that, you know, versus the six and we'll say six and a half percent in 2024, there's two points of upside on that. on the combined ratio from 2024, everything else being equal. You did say, Phil, you said half a point was just the definitional change, so I get that. But where else could we see some drag on the combined ratio where this ends up kind of at a 94.5 again next year? Is it expense ratio ticking a bit higher with a stronger year? Is it PYD maybe slowing down a little bit? Where do we see some drag potential?

Thanks, Shane. I would say, yes, you've spotted the four and a half versus five classification piece, which is more definitional. But don't forget, obviously, we've taken a lot of rates in recent years to support the overall performance of the business. And as Paul has said, we've done a really good job kind of on that cap management side. The one piece I'd call out is the commission ratio is low right now because of contingent profit commissions. So the offset of the cap losses being two points above the historic expectations is that that has suppressed the contingent profit commission levels. in the last couple of years. And we'd normally see or expect a commission ratio nearer to kind of 15% versus what we're running at right now. So you've got to remember that we're not paying out as much as a result of that. Now, on the flip side, though... you'll see the operating expense ratio is moving really well. So one of the levers that we've been pulling is very much a focus on that level. We're just below 12% for the full year this year. We were over 13% a couple of years ago. And we're aiming to bring that back down to more like the 11.5% range. So you've got some puts and takes there that would offset. I think our ultimate goal is to hover the expense ratio around 30%. But the quality of the mix we'd like there is about half of it is in commission ratios. And the rest is OPEX and premium taxes. So I think you've got some puts and takes. around that level. And certainly what we'd be looking for is continued kind of iterative improvement, both in terms of the operating ROE, the drivers behind that, and the overall combined ratio. So we feel pretty confident going in there, and that's why we've moved that guidance down from the mid-90s to sub-95 core.

Yeah, so my takeaway from that is like sub-95, like a low 90s is not an aggressive scenario to see unfold, assuming a normalized cat year next year.

Yeah, I mean, certainly we're targeting to continue to improve. You know, we've seen on all the operating levers that we've been pulling, we're making good progress. You saw Sonnet had a good quarter in that positions as well. We're aiming for, you know, modest profitability within that business for next year. And, you know, if you look at the individual lines, we think we'll be sub 95 on property and in the low 90s on commercial lines. So you add it all together, I think we're confident we're continuing to make good progress. But you've got to remember, we've got the balance of, you know, the auto book and the sonnet aspect within that too. So continued iterative progress is our goal and that's reflected in our guidance to a lower level of core for sure.

Okay, great. And then last, just a quick thought on the dividend strategy going forward. Just refresh my memory. If it's targeting a certain payout ratio or grow with earnings, obviously a nice bump this year. Just wanted to get a little perspective on that again. Sure.

Yeah, so obviously we're very pleased with the progress that we've made since the IPO. The cumulative increase now over the three-year period is 50%. So obviously in each of the three years since we've gone public, we've had a double-digit increase grow into a pretty sizable increase right now. In terms of how we look at it, we don't have an explicit kind of guidance range we look at. We do look at a number of factors. For sure, the operational outlook is one of those. And obviously, we've got a lot of confidence that we're continuing to improve the performance of the company. We're continuing to drive that operating ROE upwards. And so that is definitely influencing our position. We know the capital generative capacity of the company is very strong. And we do look at the payout ratio, the operating payout ratio. And I'd say, you know, we're very comfortable with the increase we've made because we still feel we're probably near the lower end of that comfortable kind of operating payout range. We have been probably around 25% since we IPO'd. We still feel we're at, you know, a low comfort end there. So very pleased with the progress that we've made. It remains an important part of our capital deployment priorities. And it really is a strong reflection of the positive outlook we have going forward.

Yeah, I think the board considers this. I mean, one of the big drivers, you know, James, is just our confidence in the earnings growth for the business in the years ahead.

Understood. Thank you.

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There are no questions at this time. I would now like to turn the conference back to Mr. Dennis Westmore. Please go ahead.

Thank you, everyone, for participating today. The webcast will be archived on our website for one year. A telephone replay will be available at 2 p.m. today until February 21st, and a transcript will be made available on our website. Please note that our first quarter results for 2025 will be released on May 8th. That concludes our conference call.

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