Definity Financial Corporation

Good morning, ladies and gentlemen, and welcome to the DFINITY Financial Corporation second quarter of 2025 Financial Results Conference Call and Webcast. At this time, all participant lines are in the listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Friday, August 1st, 2025. And I would like to turn the conference over to Dennis Westphal, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining us on the call today. A link to our live webcast and background information for the call is posted on our website at definity.com under the Investors tab. As a reminder, the slide presentation contains a disclaimer on forward-looking statements, which also applies to our discussion on the conference call. Joining me on the call today are Rowan Saunders, President and CEO, Philip Mather, EVP and CFO, Paul 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 Fabian will also be available to answer your questions. With that, I will ask Rowan to please begin his remarks.

Thanks, Dennis, and good morning. The second quarter of 2025 was an exciting one for DFINITY as we announced an agreement to acquire Travelers Canada, a true milestone for our company, and our next step in building a Canadian champion. The addition of Travelers Canada will allow us to surpass our strategic goal of becoming a top five P&C insurer in Canada, and we believe it will generate significant shareholder value through scale benefits and enterprise synergies. leading to an enhanced return profile for the combined business. I will provide an update on this acquisition later in the call. In the meantime, we remain focused on delivering the targeted performance of our existing business and clear progress was made during Q2 on all three of our organic operating ROE levers, as you can see on slide five. We have achieved a break-even level of performance from Sonnet and are well on track to deliver the targeted improvements from expenses by the end of 2026. In addition, we are well positioned to achieve the targeted claims improvements by the end of 2027 and expect to implement Guidewire for property and casualty claims on time and on budget in the fourth quarter. Beyond this, we've said we'd require inorganic growth, which would allow us to deploy our excess capital and introduce leverage into the balance sheet. That is exactly what the traveler's transaction will enable us to do. We can now optimize our previously unlevered balance sheet through the strategic deployment of excess capital and utilization of financial leverage capacity. which we expect will enhance our run rate operating ROE by over 200 basis points. So if I put that all together, I'm confident DFINITY is well on the pathway to a target of sustainable mid-teen operating ROE post-integration. Now turning to the results from the second quarter on slide six, we again delivered on our objectives. with gross written premiums up 9.1% from a year ago, adjusted for our exited line, and a better than target combined ratio of 92.9%. A healthy level of underrunning income More than $50 million in net investment income and a seasonally strong contribution from our insurance broker platform resulted in operating net income of $98.9 million, or 84 cents per share. We ended the second quarter with book value per share of $31.39, up 19.9% from a year ago. inclusive of our private placements of common shares to fund part of the traveler's transaction, as well as continued solid financial results. We generated an operating return on equity of 9.6% over the past 12 months, despite the active catastrophe experienced from Q3 2024, which continues to weigh on operating ROE. Turning to the industry outlook on slide seven, we expect conditions in auto lines to remain firm as insurers aim to keep pace with the combined impact of lost cost trends, ongoing regulatory constraints in Alberta, and uncertainty related to the extent and impact of potential U.S. tariffs and retaliatory actions. We expect market conditions and personal property to also remain firm over the next 12 months. particularly following last year's record level of industry catastrophe losses and the move to higher reinsurance attachment points. In commercial insurance, while we expect overall market conditions to remain attractive, we are continuing to see that some commercial segments have become more competitive. We expect overall pricing in commercial insurance to keep pace with lost cost trends, which have normalized since their post-pandemic peak to low to mid single digits. Slide 8 shows our key financial targets for 2025. As you can see, both top line growth and underlying profitability are at or better than target midway through the year. While I have already expressed the confidence we have in the pathway to an improved operating ROE in the coming years, Despite the drag from higher equity levels, we continue to expect to deliver an operating ROE of 10% plus in 2025. Slide 9 illustrates the composition of our national broker platform. Deal activity continued in the quarter, including a strategic acquisition in Nova Scotia, marking our first location in Atlantic Canada. Our progress with M&A activity and solid organic growth has enabled us to close in on our target for at least $1.5 billion of managed premiums by the end of next year. We continue to view our national broker platform as a vehicle to diversify and strengthen the earnings profile of the business. And with that, I'll turn the call over to our CFO, Phil Mather.

Thanks, Rowan. I'll begin on slide 11 with personal auto. Gross written premiums were up 9.6% in the second quarter of 2025, excluding the premiums of our exit lines from both periods, driven by an upper single-digit increase in written rates and unit count growth. To maintain target profitability, an additional five points of rate for both Sonnet and Vine in Ontario was implemented, effective in late May for new business. While these actions may temporarily affect competitiveness, they strengthen our positioning as market dynamics evolve. For the remainder of 2025, growth is expected to moderate to mid-single digits, reflecting the outsized impact for portfolio transfers in mid-2024, our proactive rate actions, and ongoing underwriting discipline. Personal auto produced a combined ratio of 94.2% in the quarter, one point better than a year ago. The performance reflects enhanced profitability in Sonnet and an improvement in the core accident-year claims ratio, which continues to benefit from higher earned rates. We expect personal autos to generate a mid-90s combined ratio in 2025. While we continue to believe the potential impact from tariffs will be manageable, we are continuously monitoring the situation and are ready to take additional actions as necessary to protect our profitability. Turning to personal property on slide 12, growth of 7.1% in Q2 benefited from continued firm market conditions driving increases in average written premiums. This was partially offset by ongoing active management of our portfolio to address volatility and risk concentration in regions with a higher propensity for climate-related peril events. We expect this line to grow at a mid to upper single-digit pace for the full year given the conditions prevalent in the industry. We reported a combined ratio of 94.3% in Q2, up from the very benign second quarter of 2024, which saw only minimal cut losses. The increase in catastrophe losses was partially offset by a decrease in the expense ratio and the core accident year claims ratio. We continue to target the sub-95% combined ratio for the personal property line of business in 2025. Slide 13 outlines the highlights in the quarter for our commercial business. Our strong execution delivered 10% growth in gross written premiums versus the prior year, despite industry growth moderating from recent quarters. Our results was driven by targeted growth across strategic segments with strong retention and rate achievement in our core segments and further expansion of our small business and specialty capabilities. Industry loss trends have normalized since the post pandemic peak to low to mid single digits, which has been reflected in growth at the industry level. We expect that we can continue to deliver growth at roughly twice the pace of the industry, which should translate into high single digit growth in 2025. Commercial lines continue to benefit from our focus on underwriting execution and rate adequacy, with a strong combined ratio of 89.6% in the second quarter of 2025. The combined ratio is higher than last year's very strong 86.6%, driven by a return to more normalized loss frequency and weather, partially offset by a decrease in the expense ratio. The decrease in catastrophe losses and the corresponding increase in the core accident year claims ratio was primarily impacted by the change in definition for a single claim loss in 2025. We continue to operate our commercial insurance business with the intent to sustainably deliver an annual combined ratio in the low 90s. Turning to slide 14, consolidated premiums increased 9.1%, adjusting for exited lines. The disciplined nature of our growth through our underwriting expertise, pricing strategies, and product expansion along with the continued focus on expense management, resulted in the second quarter combined ratio of 92.9%, up from last year, largely due to high catastrophe losses and the benign non-cap weather from the second quarter of 2024. Our expense ratio of 29.7% was nearly half a point better than the prior year, benefiting from the investments we've made to improve productivity, along with our disciplined expense management. As Rowan mentioned, our second quarter operating expense ratio of 11.5% is already at the level where we expect to end the year. As you can see on slide 15, our net investment income increased marginally in the second quarter due to an increase in interest income driven by higher holdings of bonds, partially offset by lower dividend income as we reduced our common equity holdings in the first quarter of 2025. Given the anticipated contribution of proceeds from our private placements of common shares, we now expect net investment income of approximately $205 million in 2025. Focusing on distribution income, the seasonally strong second quarter contribution of $21.9 million reflects both the ongoing inorganic expansion of the platform and continued strong organic commission growth across the business. As we mentioned on past calls, the full impact from our national broker platform also includes a benefit to consolidated expenses in the form of a commission offset. In aggregate, we've raised our expectations for 2025 growth to 20% over last year's $76 million before finance costs, taxes, and minority interests. We continue to expect it to have a roughly 70-30 split between distribution income and commission offsets. As you can see on slide 16, our robust financial position was further strengthened by the net proceeds from our concurrent private placements of common shares as we raise funds in advance of the deal close. The increase in financial capacity was due primarily to our private placements, a change in our leverage capacity calculation to 30% to better reflect anticipated leverage levels to the travelers transaction, and capital generated from operating net income. These were partially offset by ongoing deployment of capital for broker acquisitions and disciplined deployment of capital to support our organic growth and dividend priorities. Slide 17 shows recent capital management actions primarily related to the financing of the travelers transaction. With the private placements complete, we will next turn our attention to bond issuances this fall. We also continue to finance our broker acquisitions, which remains a key area for capital deployment in the quarters ahead, and we were pleased to receive a DPRS upgrade on our trends from stable to positive. With that, I will turn the call back over to Rowan.

Thanks, Phil. Let me end with a few more thoughts on the Travelers Canada acquisition on slide 18. We believe this is a concrete demonstration of our commitment to build a Canadian champion in the still fragmented P&C insurance industry. We've been preparing for a transaction like this for years. I'm confident we have the resources, expertise, and talent to execute successfully. DFINITY's senior leadership team brings a wealth of experience and has deep knowledge and a proven track record in delivering successful integrations. Integration planning is well underway as we have already put in place a robust transition planning and governance structure. Since the announcement of the transaction, members of the senior leadership team and I have held nearly two dozen town halls with our employees and brokers, and the sentiment has been overwhelmingly positive. Our employees are excited at the prospect of our scaled capabilities and the expanded opportunities that they will bring. Our brokers are enthusiastic and are showing a clear interest in our enhanced product offering post-close. We expect the transaction to close in Q1 2026 following a receipt of customary regulatory approvals, and I'm very pleased to say that we have already received unconditional clearance from the Competition Bureau. On the insurance side, we continue to be actively engaged with OSFI providing them with the information they need to fully assess the transaction. In conclusion, the acquisition of Travelers Canada will enhance and strengthen our mix of business, increase the breadth of our product offering, and provide access to hard-to-source, high-performing talent. The deal is financially compelling with attractive economics and will allow for the achievement of an optimized capital structure that we expect will sustainably support enhanced returns for shareholders in the years to come. And with that, I'll turn the call back over to Dennis to begin the Q&A.

Thanks, Rowan. With that, we are now ready to take questions.

Thank you. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touch-tone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, we ask that you please lift the handset first before pressing any keys. Please go ahead and press star one now if you do have any questions. And your first question will be from Paul Holden, at CIBC. Please go ahead, Paul.

Thank you. Good morning. First question I'm going to ask is just sort of on the updated expectations for commercial lines and the industry growth downshifting a bit. Is that intensified competition? Is it broadening out to more lines of business or is it simply just more intense competition within sort of those large accounts you've referred to previously.

Good morning, Paul, and thanks for the question. I'll have Fabi give us some more insight into that, but I think a view we'd like to share in commercial lines is it's really a continuation of what we've been seeing. And if you look back over the last couple of years coming out of COVID, there was a lot of inflation. and lost cost trends which is really the primary driver that is now normalizing and slowing and therefore when you're rate adequate and the industry has been in a firm market for a number of years the required rate changes really reflect the ongoing lost costs. So I think, you know, that is the main kind of message, but clearly it varies by segment and there's a lot more nuance to that. So Fab, would you like to just add a bit of color to that?

Yes, thank you, Ron. So maybe kind of adding three or four additional insights to your question, Paul, and thank you for that. I think the first one is that indeed we have seen more competition in the large account space, but I would say that overall, the commercial insurance segment overall is still very attractive for us. We are very pleased with the results that we have achieved in that segment in Q2. You've seen that we have a rate of 10% that is market leading, and obviously we are very pleased with the combined ratio of 89.6 that we posted in Q2. Our frontline teams are doing a really good job in executing our business plans. And as a result of that, the underlying profitability that we have in our commercial portfolio remains very sound. I think what I'd like to point out to you as well, and I mentioned that in earlier calls as well, is that if you look at our growth rate of 10%, what is important to note is is that about half of that growth rate is being generated with rate and inflation adjustments. And that gives us a great deal of confidence that we continue to cover the loss trend that we have in our portfolio. And with that, we are very confident that we'll be able to sustain the combined ratio in that 90% range. The other point I will draw out as well, and I mentioned that before as well, is that we continue to benefit from our commercial portfolio being heavily skewed to the lower end of the commercial marketplace in terms of account size and limits. And that gives us just a very good opportunity to mitigate the impact of pricing, leveraging the strong digital capabilities that we've built in that segment. And then maybe one of the last points I want to share with you, coming back to your question in terms of industry dynamics in commercial insurance, we have more competition in the large account space for sure. But the amount of business that you're writing in large accounts... a very small portion of our overall commercial portfolio. And our frontline underwriters are very disciplined. And if the margin recreation doesn't make sense for us in one of those large account renewables, we are guiding them to letting those accounts go. And again, because the... makeup of those large accounts in our portfolio is so small. We don't really see the impact of that increased competition in our portfolio. So overall, I would say that we view the commercial segment very attractive. We are confident that we can grow our commercial portfolio at twice that industry growth rate without compromising our profitability goals as a result of the strong underwriting and capabilities that we've built in small business, middle market, and specialties. And with the strong support from our brokers, again, we're confident that we'll be generating growth rates in that higher single-digit range and sustain our profitability in that 90% combined ratio range.

Okay. That's a very helpful answer. I think that's really the key issue. Can you continue to gain market share but by at the same time maintaining your target margin. So clearly your answer says yes. So that's very good. Thanks. Second question, you have a really good slide on the broker platform. I think it's slide 10, highlighting you're now the 10th largest PNC insurance broker in Canada. I guess kind of two questions related to that. One is like, as you get bigger, does it help with the acquisition accretion in any way, i.e., Is there more opportunity for synergies? And then two, are there other kind of scale benefits associated with the broker business, sort of more on an operational basis?

Well, I would say the answer is yes. I mean, I think that if you just reflect back on the journey we've been on, right, you know, this is only a few years ago that we've done this. We've now deployed a little under a billion dollars into the channel. As you've noted, we're a top 10 player. We're growing quite quickly. We've done about 20 transactions, another six this year. And what we're now seeing is that there is benefits of scale. And I think as the business grows and it standardizes its technologies and some of the back office functions, there absolutely is upside in terms of the margin. Now, the margins, the evidences that come out of a distribution channel are very attractive and very stable. It's why we like it. They are attractive and they're very, as I said, predictable. I think that whole segment has gone through quite a lot of change in the last couple of years, but it is attractive. And I think that there are a couple of different models out there for roll-ups or for consolidations. The model that we have under the McDougall's group is a little unique. If you remember, it's unique in terms of We keep the entrepreneurs engaged. They keep equity in the business. And as they do roll-ups, they have a lot of value they can bring to their quiet companies, such as more market access, more specialization and capabilities. And so we've kind of seen revenue synergies as commonplace. Companies we acquire increase the organic growth rate. And, of course, we've seen kind of cost synergies. So I think that scale play that you referred to will continue. And I think just a kind of final comment for me is like we like this. It's been a very good investment for us and deployment of capital. As you can see, Phil made the comment that we've increased our guidance. you know, this year. We've done more acquisitions. The organic growth rate is strong. So we've, you know, we've increased gardens from 15% growth to 20% growth. And I can tell you the pipeline's still pretty full for us. So, you know, that should play out well for the next several years.

Very good.

Okay. I'll leave it to those two questions. Thanks for your time.

Thank you.

Next question will be from Mario Mendonca at TD Securities. Please go ahead, Mario.

Good morning. The comments around personal auto and sort of downshifting a little bit the growth outlook, you're obviously referring to direct rent and premium, but the growth in net earn premium has obviously been a lot stronger for the last three quarters. So what I'm trying to get at is, How much longer would you expect the growth in net earned premium to really outpace direct work improvement?

Presumably at some point those two converge, and I'm just trying to figure out when that might be.

Thanks very much, Paul.

Yeah, you're right, and this is really a reflection of the lag in the industry between the trend that we're seeing and the written rate that we're taking. As the rate starts to catch the trend and we're essentially near that point now, you would expect to see those elements converge, as you've rightly pointed out. That, of course, assumes a fairly stable environment moving forward while the inflationary trend has normalized or moved toward normal at that mid single digit range. we're still seeing some uncertainty. One element, for example, is theft. Theft has improved, your question, but still a little bit elevated relative to pre-pandemic levels. And then, of course, as Rowan said in his opening remarks, there's still the uncertainty around the tariff environment moving forward. So I think what you would expect to see in a stable environment is that convergence. But as you will see, Markets take rate at different times. We don't all take rate on the same day. So there's always a bit of volatility quarter to quarter as one market may take a rate and another then responds a little bit later. In our particular case, we have taken five points of rate in our largest portfolio in Ontario, as Phil has indicated. And as we've shown in previous years, when we move ahead of the market like that, we tend to see a bit of a moderation in our pattern as the rest of the market then catches up and then we gain that competitiveness thereafter.

Thank you.

Thank you. Next question will be from Bart Ziawski at RBC Capital Markets.

Please go ahead, Bart.

Hi, good morning. Thanks for taking the question. I just wanted to follow up on the distribution income. noted on the raised guidance, but when I look at the growth rates, you're tracking at the guidance 20% already. You had 27% strong growth in Q2. You're continuing the acquisition. Is there something in the guidance that you're seeing more cautious that keeps you at the 20% or is there upside to that going forward?

Yeah, no, I think we're obviously very pleased with the first quarter that's come through.

And if you look at the underlying factors that are driving that outperformance in the first half of the year, it's the strong acquisition activity and it's the very positive underlying growth. that's come through. We have a bit of a true-up that always happens in the first half around CPCs as you make the estimates and what comes through there and we have a contribution that came through in the first half. But generally speaking, I'd say no. We're very positive that 20% is the bottom end of our view. We're pretty comfortable that's going to go forward. And in particular, if you look at the acquisition activity that's happened in the second quarter, that's obviously only just occurred and therefore we'll see some pickup going forward. So no, I think... If you look at the underlying themes, the continuous, it's good contribution from that acquisition activity and it's the good positive underlying growth on an organic basis that we're seeing in the operations.

So, you know, a continuation of the same themes, I think, is what we're predicting for the rest of the year.

Okay, great. Thanks. And then just on the one question on travelers acquisition. So is there an opportunity for you to port Guidewire into travelers and get claims transformation benefits there? I know organically you're expecting one to two points, but is that a possibility in terms of using Guidewire within travelers' business?

So on our side, this is Robbie answering a question. So as you know from our closures, we are in the middle of a major claims transformation to contribute that 1% to 2% already expansion range. Last year, we put our own auto claims onto Guidewire, and that's complete. And our auto line of business has about half of our claims count. And this year, we are in the middle of completing our claims transformation. transformation to Guidewire by kind of transforming our P&C business. And we do expect that P&C transformation will be done by the end of the year. And with that, we can insource kind of the travel claims onto a fully end-to-end platform installed claims guide via platform on our side and that will allow us to drive additional benefits. And the main benefits from a guide via transformation is a better customer experience, better indemnity control, better fraud prevention, a better opportunity to leverage AI capabilities going forward as well. So we feel that the platform that we've built on our side will help us extracting the benefits that we put into the business case when we made the travelers acquisition.

And, Bart, the only thing I would, you know, add to that, when we announced, you know, the $100 million of synergies that we expect to come out of the travelers, you know, integration, I mean, we really there were referring to the cost synergies. And so as Fabi talks about, you know, when we move the business onto our platforms, and that would be, you know, the guidewire platform, Vine and Personal Lines, for example, and for small commercial, but also the claims, you know, what that doesn't capture is any potential indemnity improvements, which we think will likely occur in certain product lines as well. So, you know, The bottom line is that's all tracking well. We thought about that in our due diligence, in our valuation, and in picking the synergies. But the synergy targets we share in the market are really the kind of cost efficiency targets, and that would occur partly by better technology moving them onto our digital platforms. But what it doesn't address is the potential benefit of further indemnity savings. So the big point there is that it is important for us to convert onto our platforms and Guidewire claims you pointed out, but the other benefits apply to other product lines as well.

Great. That's helpful. Thanks, guys.

Thank you. Next question will be from Lamar Passard at Cormark. Please go ahead, Lamar.

Yeah, thanks. I just want to come back to distribution, specifically your slide 9 there. I'm wondering if you could talk about the pace of broker M&A now that you're absorbing the traveler's deal. You're showing here that you're at $1.3 billion in premiums. You've added $160 million in the first half of 2025. I think in the context of that $1.5 billion target by the end of 2026, it would suggest a slowdown in broker consolidation. Is that what's in the plan here? Is that because of the traveler's deal? Maybe you could provide some color on that.

Yeah, thank you for that. Look, I think the two points I would make, firstly, the traveler's acquisition will not have an impact on building out our broker platform. This really is. part of the business that is standalone and not impacted by the traveler's acquisition. So we have the funds to keep investing in our broker platform, and we have the management capability to keep that platform building and integrating as they go. So travelers won't impact that. I think the other point I would make there is that We haven't yet updated the guidance that you talk about the $1.5 billion at the end of 2026. But given the success we've had year to date, that certainly is looking like a very conservative estimate to us. And I think all we would say is that we really are very comfortable in tracking towards that target. but that don't read into the fact that we're slowing down our activities. I mean, I think that the broker platform continues to grow very well organically. And as I mentioned in my comments, there are significant opportunities in the pipeline. So that should continue.

Thanks. That's very clear. That's all for me.

Thank you. Next question will be from Brian Meredith at UBS. Please go ahead, Brian.

Yeah, thanks, Rowan. Just to follow on with the traveler's acquisition and distribution, I'm just curious, you know, travelers are very committed to the broker-independent agency distribution system in the U.S. As we look at this acquisition and your conversations with distribution, you know, have any of the agents that travelers did business with or brokers experienced expressed any concern on channel conflict or something. Maybe they liked being with travelers because they didn't have the broker presence.

Thanks for that question, Brian. And the quick answer to that one is no, there is no concern. I mean, I think that, you know, what we have been able to do in the last, you know, couple of months is we've engaged, you know, obviously with town halls, with our employees, with travelers' employees, and with brokers. And I'd remind you that the vast majority of travelers' brokers also represent DFINITY. So there is a natural overlap. And in the discussions that we've had, whether they're in town halls or the one-on-ones with the largest brokers, they're quite frankly delighted about this acquisition. And they are really pleased that DFINITY is the acquirer. They see that this will add capabilities to us and some further product lines. But we've got a high degree of confidence that the channel conflict is not an issue. They're pretty used to it in the marketplace. You know, this is something that may be unique, vertical integration into broker channel in Canada. But it's not, you know, it's unique to the Canadian business. And they seem pretty comfortable. So we're not really worried about that at all, Brian. It's, in fact, been the opposite. I think the the feedback we've got from brokers that represent both organizations has actually been extremely positive. Great. That's really helpful.

And then second question, I'm just curious, down here in the U.S., auto claims frequency continues to be quite favorable. Are you seeing anything similar in Canada? Go ahead, Paul.

Thanks, Brian. We are seeing sort of normal frequency trends seasonally adjusted. So Q2 tends to be usually a bit of a better quarter for auto claims. And so we're seeing that the board. The one area in frequency that we're seeing a marked improvement year over year is in the theft space, as I mentioned earlier. While theft is still elevated relative to pre-pandemic, that's really more on the severity side of the equation, whereas the actual theft percentages have seen a pretty significant slowdown due to the actions of the government and the industry combined. Now, I don't want to give you the impression that it's not an issue anymore. It continues to be an issue, but we've priced for that throughout. But yeah, normal levels of frequency throughout, no issues to speak of.

Great, thanks. If I could squeeze one more just quickly in here, Rowan. MGAs have become incredibly popular down here. In the US, I'm just curious, do you use much MGA in your own business and kind of thoughts on the MGAs?

As a general rule or comment, I would say that there is a difference in MGAs and MGUs between Canada and the US. And in the US, there seems to be more managing digital underwriters and less of that in Canada. We're less comfortable It does mean we don't use MGAs, but it's generally something we're less comfortable with. We would prefer to keep the underlying pen, as they say, and manage our own capital. But we have seen some growth in that segment. It's not something... is a priority for us in terms of distributing through. We have a broad and capable distribution network, and so we feel we can access the segments that we really focus on quite capably without a high dependency on MGAs.

Helpful. Thank you. If I may, in my experience, I worked in the States for eight years as well. You use MGAs for two main reasons, either because you don't have the distribution reach or because you don't have the technical expertise to write the business that you want to write. and based on the scale that we have based on down driving expertise that we failed based on the reach that we have in the distribution space coast to coast we really don't have a need to reach our end customers through mg perks and as well mentioned we can sustain the growth numbers with the broker distribution networks that we've in place helpful thank you thank you

Next question will be from James Lloyd at National Bank Financial. Please go ahead, James.

Thank you. First question is on the Sonnet. I was just wondering if you could dig into the growth rate that you're getting out of the Sonnet platform today now that it's sort of turned into a profitable venture, excluding Alberta, of course, and what level of profitability – are you achieving out of Sonica at this stage? Is it sort of in line with the prior expectations of similar combined ratio to the broader personal auto portfolio with lower expenses, higher loss ratio? Or how is that trending just in the last few quarters here now that we have it in profit?

Let me just start before I give that to Paul. And just to remind us of the strategy, I mean, we think... But the direct-to-consumer and the digital channel is certainly a growth opportunity in the years to come. It was really important for us to scale up Sonnet and get that to break even. And we achieved that late last year, and that continues. So I think that's something we're very pleased about. We did also guide that as we changed the model and tightened up and put the right pricing approaches into, you know, we would slow their growth further. for a period of time to just be sure that it's working as intended that we can retain and acquire the right quality customers and then look to kind of gradually increasing growth you know in the quarters ahead so that's the kind of strategy i think your point about you know the margins we do think over time That product or that channel will have the same capability and contribution as the broker channel, but only after scaling it. As we move into more growth in the coming quarters, we're not going to be running that at a sub-95%. It's still going to be high 90s. The reason for that is new business is more expensive than a mature portfolio as you scale up. But the main message that we wanted to show is, does this model work? We're comfortable it does. Can we acquire and retain profitable customers and then kind of gradually grow that in the quarters ahead? Is the strategy, and yes, it will ultimately at scale have at least the same contribution as we get to the broker model. So that's our thesis, and that's what we're moving forward. Anything you want to add, Paul, in terms of the kind of shorter-term strategy?

Yeah, just a couple of additional points. So as we've previously called out, we were very focused on that break-even positioning, and we were deliberately reducing our growth rate to accommodate that to make sure that we had room for the targeted segmentation actions and make sure that our rate was earning through the portfolio. This quarter, we've returned to modest growth, which is positive, and that's really what we were aiming to achieve. And as Rowan says, moving forward in the near term, we'll continue to focus on some moderate growth. We don't want to have outsized growth yet. Again, because as Rowan said, we're targeting a high 90s overall core, and we want to make sure that we're sensitive to the macroeconomic environment. So we have some positive segmentation activity flowing through that portfolio, which is giving us positive momentum in the segments that we're targeting. And so we'll continue to look at that on a province-by-province and line-by-line basis. And one other comment, too. around the profitability you asked, around the makeup of profitability versus expense ratio as an example. So in the near to medium term, we expect the expense ratio to continue being better than our broker portfolio. Of course, we don't have a commission structure on that. That expense ratio benefit should increase over time as we scale the business because many of the expenses on that direct side are more fixed in nature. And so that does give us scale benefits as we move forward. The one variable expense in there that can be significant and can be quite variable is a marketing investment. And that depends a lot on what is being bid on in the marketplace by competing organizations. And so depending on what's happening in the economic environment, the advertising environment, that can move around a bit to bit. But for now, obviously, with the exit of Sonnet Alberta, that reduced some of our top line. But moving forward, we continue to focus quite heavily on investing in this, but also using this as a real innovating mechanism for some of the rest of our business.

Great.

Second question, just on the shift in the property mix. And so, I guess... you know, avoiding some of the more catastrophe-exposed areas of the country. You know, is that shift mostly done at this stage? Have you implemented everything that you would like to achieve? And then, I mean, it's not necessarily the most active weather quarter, but is there anything you can speak to that, you know, gives confidence in the success of those shifts geographically to avoid... potentially higher claims costs.

Yeah, a couple of points I'll bring on that. So the bulk of our activity around depopulation to avoid cat losses in certain peril zones, I'd say, is behind us. That being said, I want to highlight that this is an ongoing activity. This isn't a point-in-time activity. As we've said before, we use models, peril models, wildfire models, flood models, for example, and those models constantly get updated as the environment and climate changes. So we go through a continuous process of updating our models, updating the science, and then organizing our distribution around where we want to write business. So that should be return much more to a normal optimization approach. The second thing I'd like to say is that certain perils, winter storms and severe convective storms, for example, are not conducive to updated models in the industry. And so these are areas where we have to work at leveraging what is available and our expertise to try and minimize exposure to that. That's not always the easiest thing. It is an ongoing exercise that we continue to make and invest through data and analytics. And then maybe the third point I'd make is you mentioned really around the property portfolio with regard to peril management. But I'd also like to highlight that we are taking significant steps to improve the mix of our business as well to reduce volatility and improve long-term retention and profitability. And so as an example, even though in this quarter, the majority on the overall basis, the majority of our growth came from rate underlying that we've actually had positive unit growth in areas like homeowners and condo, which are better, more profitable, longer sustainment categories and are associated with multi-policies because we often have an associated auto with them. And we've deliberately moderated our growth in the tenant and rental space. So even within that, there's an ongoing improvement in the mix to optimize our overall portfolio, portfolio to help hit our overall targets and to maintain that sub-95 direction.

Jamie, I mean, I guess the way I think about this is that you've got to be really good at managing cat exposure. I mean, that trend is pretty clear. And I think that we've demonstrated that ability to do so. So as Paul was saying, the team has really worked on that cat management. They have developed very sophisticated underwriting and models. And the benefit we have is we have the Vine platform that can actually take that to the front of the business. And so that agility gives us confidence to keep growing. I think that the rate that we're getting today is essentially all of the growth. There really hasn't been any unit count growth to speak of, and it's been pricing. As we look forward, whilst there's still ongoing optimization that Paul talks about, we'll be expecting not just rate but more unit count growth as we continue to outperform the industry in combined ratio as well. So that's the line of business we like. We feel very good about it. The market is certainly a firm to hard market, and that will be a source of our growth in the coming years.

Great. Thank you very much.

Thank you. Next question will be from Tom McKinnon at BMO Capital. Please go ahead, Tom.

Yeah, thanks. Just a question again here on the distribution income and outlook there. Shouldn't the organic growth and distribution income, shouldn't that just be a function of industry premium growth or at least for the bulk of it and then perhaps a function to some extent of your own premium growth, given that some of this business is placed with you as well. Is that the way we should be thinking about the organic growth in distribution income?

Yeah, I think that's right. I think that the way we think about this business is the platform is proven to be strong at organic growth. And so that means that they and their producers build their revenue. That's a combination of their renewal portfolio as well as new business wins. And as they introduce more sales practices into the businesses that they acquire and have more product to offer that helps them organically grow. So I think the way you think about that is there is largely influenced by the industry growth rates as well as the profitability. Some brokers are more profitable and therefore enjoy higher CPCs. And they have more weight and clout as a top 10 underwriter than others in the marketplace and can benefit from higher commission yields from insurers. And then the next piece of that is the bigger the broker gets, the network, both from organic growth plus what they acquire, because DFINITY is one of the leading insurance companies in their stable of insurers, we grow as well. And that's the second part of the equation that Phil talked about, where distribution income gets benefited by a commission offset as they continue to grow with ourselves. So when you just step back, this has traditionally been a platform of brokers that grow in the upper single digit organically. That continues. And then on top of that, they're adding size and scale by acquisitions.

We are very pleased with the organic growth rates that we have in our broker network, as Ron mentioned, and we are very selective in terms of who we are inviting to be part of the network and many brokers. that have joined us over the last three, four years have long standing roots in their regional communities so that the retention numbers are very strong both in PI and CI. We have low 90s retention numbers and in PI we are focusing on driving growth with VIP customers and group and are making very good success have very good traction in that regard. And on the commercial side, we are leveraging underwriting skill sets from one block to another, and we are seeing an uptick in that organic growth rate as well. So overall, that is coming through with what we would think is above average organic growth. And in addition to that, every year we're having an additional EBITDA margin benefit from scaling the back office operations as well. So the returns of our investments are very much trending in line with the business cases that we put together when we deployed our capital.

And so if the 15% growth you see in 2024, nearly half of that is EBITDA. is acquisition related and the other half would be organic. Do you fund some of the growth that McDougal would be doing through acquisitions or how does that influence your distribution income? Someone's got to pay to buy these things.

Yeah, so Tom, in terms of the individual deals, oftentimes we'll provide funding through intercompany loan structures or the broker platform may draw on the debt facilities that we already have there. So actually, if you look at the debt draw that's on the balance sheet right now, a lot of that is actually associated, in fact, all of it's associated with the broker platform. But what we also see that happens quite often is that the brokers that are being acquired often have an appetite to roll over equity through that transaction as well. So what you also see happen is not the entire amount is monetized through exits, quite often we'll see, you know, 25%, 30% rollover their equity into the McDougall platform. So we tend to see pretty good uptick on that. And if you look at the overall ownership that we have in the broker platform, it's hovered between the, you know, 22%, 28% range. It moves around as new acquisitions come through. And as principals depart, quite often existing shareholders at McDougall will pick that up So it's really a blended approach, but yes, we do have intercompany debt structures with the broker platform, and they also draw on the external funding.

Okay, and one final quick one. What percentage of the business that these brokers write get placed with DFINITY? Is it like 30%? Are you trying to get more of that or less of that? And are there any regulatory issues around that?

No, Tom, I think the point we make there, so first we don't disclose that and not disclosure is what it is. The way I would describe that is that we expect the national broker platform to act as an independent broker and as such they have multiple and many markets that they deal with. If DFINITY is the right product at the right price it gets placed with DFINITY. If somebody else has a better product at a better price it gets placed there. We make the distribution income. So I think that's our model and we go forward with that. That being said, If you just step back at the overall market, we are a top three insurance company in Canada, behind just two others in terms of the intermediated part of the business. And we are large with many of our brokers. And so we'd be a leading underwriter in the national broker platform as well, along with a couple of the major insurers.

Wouldn't that percentage be around 30% given the commission offset is 30%?

Not necessarily.

The commission offset would include CPC structures on the profitability of the business. It can have different rates depending on the commercial lines and personal property, personal auto mix. So it can be variable through the different constituting parts and then also just the degree of profitability that we're seeing coming out of that program as well.

Maybe just... Just giving you more insight on your question, looking at our value creation plan for our broker network, that the main drivers are organic growth, CPC, and override expansion, and March and EBITDA expansion, and that drives growth. The majority of the value creation plans, we are working very closely with our broker partners to help them grow their business as much as they can. The trading relationships that we have with them are very much in line with Rowan's point. It's one of our independent brokers and the trading relationship has the least impact on the overall value creation plan, our capital deployment into the network. Again, this is why we are so happy that their OKR is above market average, and that helps us generating those good returns.

All right. Thank you very much for the color. Appreciate it. Thanks.

Thank you. Next question will be from Stephen Boland at Raymond James.

Please go ahead, Stephen.

Sorry. Thanks. Now that you've spent more time with travelers, I just want to, you know, when the deal was announced, you provided their split of premiums. Is there any changes to that mix, meaning, like, have you advised them that certain lines of business or geographies, which you're doing right now with your own book, has it got to that level of, you know, say, pre-integration that, you know, you're advising them what lines or customers that you want to be with or don't want to be with?

Thanks. Yeah, thanks, David, for the question. And, you know, it's Well, I think it's important to kind of recognize that the deal, you know, hasn't closed and we're targeting closing in Q1. So as of that, we operate as two competitive organizations. And so we're engaged in integration planning, but not at all in terms of, you know, managing and influencing, you know, their portfolio. They operate today as they did, delivering their business plan as an independent and a competitor. I think the other point I would just kind of add on the travelers is that, look, it's going really well. I mean, I think we know the business. We know, obviously, to my due diligence, what a great strategic fit it is going to be. The integration planning of both organizations is well underway, so we can get this over the line and start integration early next year. We were delighted that there's been good progress on the regulatory front. We already have clearance from the Competition Bureau, and we're well engaged with OSFI to allow the Minister of Finance to make the approval at the right time. So all of that's kind of progressing very well, but we're not engaged on anything to do that has to do with influencing the organization and the portfolio. Okay. That's it for me. Thanks very much.

Thank you. At this time, we have no other questions registered. I will turn the call back over to Dennis Westphal.

Thank you. Roland, before we close the call, do you have any final thoughts you'd like to give? Leave us one today.

Well, I think just hopefully we've kind of shared some key messages through the Q&A, which I thought were excellent. And to me, a couple of points we're hoping comes through. One is the strong growth is going to continue in all lines of business, and that's both rate and unit share. I think we've talked about the market conditions, which remain very favorable as far as we could see. We were delighted with our sub-93 combined ratio in the quarter. And I think the important message there is that in all lines, our margins are holding or actually improving. A lot of questions around distribution. I mean, we're really pleased about the ability to keep guidance moving up and we're ahead of where we thought we would be in terms of achieving our $1.5 billion target. And the main thing that And I think it comes back to the investor day where we talked about the three operating levers. Sonnet's in a good position. Operating expenses are actually ahead of where we thought they would be. And as Fabi mentioned, the claims transformation is well on track or slightly ahead. So those are going well. This gives us a lot of confidence in our guidance, but also gives us confidence and excitement to welcome the Travelers Organization into next year. That's certainly going to be quite a transformational opportunity for DFIDITY. So we think we're in great shape. Thank you. Okay, thanks.

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 August 8th and a transcript will be made available on our website. Please note that our third quarter results for 2025 will be released on November 6th. That concludes our conference call for today. Thank you and have a great one.

Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.