Intact Financial Corporation

Good morning, ladies and gentlemen, and welcome to the Impact Financial Corporation Q1 2025 Results Conference Call. At this time, all 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 May 7, 2025. And now I would like to turn the conference over to Jeff Kwan, Chief Investor Relations Officer. Please go ahead.

Thank you, Sylvie.

Hello, everyone, and thank you for joining the call to discuss our first quarter financial results. A link to the live webcast and materials for this call have been posted on our website at IntactFC.com under the Investors tab. Before we start, please refer to slide two for a disclaimer regarding the use of forward-looking statements, which form part of this morning's remarks. and slide three for a note on the use of non-GAAP financial measures and other terms used in this presentation. To discuss our results today, I have with me our CEO, Charles Brindamore, our CFO, Patrick Anderson, Patrick Barbeau, our Chief Operating Officer, and Guillaume Lamy, Senior Vice President, Personal Minds. We will begin with a pair of remarks followed by Q&A, and with that, I will turn the call over to Charles.

Thanks, Jeff. Good morning, everyone, and thanks for joining us.

The first quarter of this year reinforced our position of strength. We reported a 10% increase in net operating income per share, achieving $4.01 with strong contributions across the business. Our book value per share grew 4% from last quarter and 13% year over year. These results underscore the resilience of our platform and our ability to succeed both operationally and financially, even in an environment of market volatility and economic uncertainty. Topline growth was 3% in the quarter. This was attributable to continued momentum in purse lines, to both weight and solid increase in units, In commercial lines, growth was muted due to specific profitability actions we're taking in the U.S. and in the U.K. in particular. And we continue to see pressure in large accounts across all jurisdictions. That being said, rates remain in the mid-single digits in most lines. And while we maintain a focused approach on earnings growth, we're confident in our ability to achieve strong top-line growth. We have a really good action plan to ensure that we seize on all available opportunities. We expect growth to improve for the remainder of the year as remediation actions taper off and our actions kick in. Our combined ratio was solid at 91% despite 2.5 points of higher catastrophe losses this quarter. This highlights strong underlying results and healthy favorable prior year development across our businesses.

Now let me provide some color on each of our lines of business, starting with Canada. So first of all, premiums were up 11% this quarter.

This was a function of both rate actions and a 2% increase in units. As profitability remains challenging for the industry, in particular in Alberta, we expect hard market conditions to persist over the next 12 months. Our combined ratio of 97.5 included a four-point impact from severe winter conditions, which was higher than seasonal expectations for a first quarter. Overall, the combined ratio remained in line with our full-year sub-95 guidance. In personal property, premiums were up 9%, driven by red actions and unit growth. We continue to expect hard market conditions to persist, given the impact of severe weather activity over the last couple of years. And despite challenging winter conditions, we delivered an 88.9% combined ratio in the quarter. Again, in Canada, in commercial lines, premium growth was 1%, reflecting mid-single-digit rates in those lines. There was a three-point drag primarily from business mix, as well as continued competition in large accounts. Given the constructive market conditions, we expect industry growth in the mid-single-digit range over the next 12 months. The combiner issue continued to be very strong at 81.2%. This reflects our underwriting discipline with a four-point improvement in the underlying current year loss ratio from last year. Moving now to our UKI business. This quarter saw a 4% decrease in premiums. The remediation actions in the direct line portfolio impacted our top line by approximately three points, while competition in large account space continued. Given the current market conditions, we expect industry premium growth in the mid-single digit over the next 12 months. And as mentioned earlier, we expect that the remedial action on direct line will taper off in the coming months. The underlying performance of the business in the U.K. is generally in line with expectations. The combined ratio of 97.6 includes elevated cuts and large losses in the quarter. Overall, the U.K. and I business remains well positioned to evolve the combined ratio towards 90% in 2026, really in line with the trajectory we started to see in 24th. In the U.S., premiums decreased 3%, which included a 5-point impact from the non-renewal of one large account. In aggregate, rate of momentum was in the mid-single digit across the majority of lines. Our remediation work on a few verticals will continue to taper in 2025, which will reduce the top-line drag. From an industry perspective, we expect premium growth to continue to be in the mid to high single-digit level over the next 12 months. Combined ratio in the U.S. was strong at 86.8%. The portfolio is positioned to be less exposed to weather-related catch risks, as was evidenced by losses related to the L.A. wildfires, which were 10 million in the quarter. So going forward, we expect to continue delivering a low 90s or even better performance. Let me now highlight the progress on some of our key strategic initiatives. First, building scale and distribution to further expand our leadership position in Canada is an important pillar of our game plan. BrokerLink in the quarter established itself as a coast-to-coast player by making its first acquisition in British Columbia. With over 200 locations nationwide, BrokerLink is well on its way to reaching its near-term objective of $5 billion of premiums by the end of 2025. As part of our journey to become the leading commercial lines insurer in the UK&I, we announced that RSA, NIG, and FarmWeb will rebrand as Intact Insurance by the end of this year. This is the natural next step in the evolution of our UK&I business. We're thrilled to associate the Intact brand with the excellent progress our teams in the UK&I have achieved. Additionally, being a global leader in pricing and risk selection is key to our success. As part of our pricing sophisticated efforts, we implemented new proprietary advanced models in the U.S. during the quarter. Roughly a third of the U.S. premium now leverage these advanced models. These efforts support GSL's ambition of sustaining a sub-90s combined ratio. And then to be one of the most respected companies, we need to be a leader in building resilient communities. That means reducing our carbon footprint and doubling down on climate adaptation. I'm pleased to report that our emissions are down 23% today, on our way to 50% down by 2030. We also doubled our commitment to municipal climate resiliency grants. You can find a lot more in our social impact report. As a business, we anticipate and plan for uncertainty, and our consistent outperformance stands as a testament to this. We stress test many scenarios, ranging from tariffs to broader geopolitical tension, and we manage our business accordingly. From a financial and operational standpoint, not only can we weather the big storms, but we're also really well positioned to play offense in this environment. We're proud of our track record over the past decade and are well positioned to achieve a net operating income per share growth of 10% annually over time and to outperform the industry ROE by at least 500 basis points every year. Well, then I'll turn the call over to our new CFO, Ken Anderson.

Thanks, Charles, and good morning, everyone. We start the year on a strong footing with net operating income per share of $4.01 in the first quarter, an increase of 10% from last year. Each of our operating performance drivers, underwriting, investment, and distribution income were up year over year. This drove an operating ROE of 16.5% over the last 12 months, despite a few points of drag from higher-than-expected catastrophe losses. And our balance sheet remained strong and resilient, with $3.1 billion of total capital margin at the end of the quarter. Let me provide some color on first quarter underwriting results. The overall underlying current accident year loss ratio improved to 60.3% year over year. This reflects strong performance in commercial lines in Canada and the U.S. In personal lines, the ratio remained solid despite severe winter conditions in the quarter. And in the UK&I, year-over-year improvements in our DLG portfolio were more than offset by increased large loss activity in our specialty business. Moving to catastrophes, we reported 244 million of losses in the first quarter. Higher than expected caps in the UK&I were mainly due to two named storms. and the cap ratio in the U.S. was driven by a few large commercial fires. We continue to expect approximately $1.2 billion of annual catastrophe losses, with approximately one-third anticipated in each of Q2 and Q3. Favorable prior year development was strong at 6.9%, reflecting continued prudent reserving across all segments of the business. This strength was particularly evident in commercial lines, which represented two-thirds of the total in the quarter. Also, nearly one point was from favorable development on prior year catastrophe losses. Q1 tends to be the quarter that has more favorable PYD, as all claims development is from the previous years. We've mentioned before that we reserve cautiously, and the combination of current accident year and PYD is the best way to assess the evolution of the underlying performance of the business. On that measure, the year-over-year improvement overall was 1.5 points. The consolidated expense ratio of 33.5% improved by one point from last year and was in line with our full-year expectations to operate in the 33% to 34% range. Operating net investment income increased 9% from last year to $415 million, driven by a higher book yield, which is now in line with our reinvestment yield at 3.9%. On a sequential basis, the $17 million increase in investment income was due to non-recurring distributions of $9 million and, in part, favorable currency movements. Based on current markets, we still expect investment income of approximately $1.6 billion for the full year. Distribution income increased by 17% to $117 million, driven by organic growth, higher margins, and our ongoing broker consolidation activities. We expect distribution income growth of approximately 10% for the rest of the year, with some fluctuations from quarter to quarter. As Charles mentioned, we announced the rebranding of RSA to Impact Insurance, a major milestone for our UK&I operations. We will report the accelerated depreciation of the RSA and NIG brand intangibles over the next 12 months in integration costs. Overall, we expect to see a reduction in full-year restructuring and integration costs compared to last year. Moving to our balance sheet. we continue to maintain a very strong financial position. We ended the first quarter with book value per share just over $96, up 4% quarter over quarter, and 13% year over year. Capital margin reached $3.1 billion at the end of the quarter, and our adjusted debt to total capital of 19.1% continues to be lower than our target, and 30 basis points lower than at the end of 2020. Our performance continued to demonstrate the strength and resilience of our platform, and we're energized by the opportunities ahead. Our balance sheet stability means we're ready to deal with any impacts from increased economic uncertainty, while also being ready to capitalize on growth opportunities as they arise. At our upcoming Investor Day on May 21st, we look forward to delving further into our game plan to grow organically, to strengthen our margins, and to effectively deploy capital. These are the key pillars of our objective to deliver 10% noise growth annually over time, while sustaining at least 500 basis points of annual ROE outperformance in the years ahead.

a chance to participate in the Q&A, we would ask that you limit yourself to two questions per person. You can certainly re-queue for follow-ups, and we'll do our best to accommodate if there's time at the end. So, Sylvie, we're ready to take questions now.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your touch-tone phone. You will hear a prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by 2. And if you're on the speakerphone, please lift the hands up first before pressing any keys. Please go ahead and press star 1 now if you have any questions. First, we will hear from Tom McKinnon at BMO Capital. Please go ahead.

Yeah, thanks very much. Just a question with respect to the favorable prior year development. I think you've talked about 2% to 4% of net premium earns as being longer-term guidance. I think you've reiterated that you probably run towards the high end of that. If we look at the Q3 and Q4 of last year, you were probably running in the high fives, and now 6.9% in the first quarter, albeit there's some seasonality, as you pointed out, with respect to commercial lines. I mean, do you continue to guide towards the high end of that two to four, and what's driving that? Thanks.

Great question, Tom.

Ken, why don't you maybe unpack the favorable development, which is really strong, and then I'll take the guidance point after. Yeah, so you're right, Tom.

Q1 was favorable 6.9%, you know, a couple of elements, I guess. Firstly, as you said, Q1 tends to be more favorable than other quarters. All the development is coming from prior years. We did have about one point of development from, you know, the significant prior year cap losses in 2017. 2023 and 2024. I would say in Q1, PYD was healthy across all geographies, but I would point out in particular Canada commercial where it was minus 13%. Worth noting, though, that in Canada commercial, the five-year average on PYD in Q1 is 9%, so whilst elevated, not extremely so. I would say overall, you know, we're still guiding at the higher end of the 2 to 4 range. That reflects, I guess, a cautious approach that we're taking in the current accident year as well, and that goes back to what I said earlier about looking at overall current accident year and PYD to sort of assess underlying performance.

Yeah, and I think, Tom, to your question on guidance, 2 to 4 percent, You know, we're challenging ourselves as to whether that guidance shouldn't be updated, and we'll talk about that at the investor day, which I'm sure you'll attend in a few weeks from now. I think, you know, post-COVID, we took a cautious stance in terms of the guidance itself so that you guys have a good long-term perspective. And I have to say that there's strength across the operation, probably a bit beyond what we anticipated, and we'll challenge ourselves on the guidance. I don't expect any meaningful or real substantial change there, but your observation, I think, is dead on.

Okay, and a quick follow-up. Just on what you have called corporate and other expenses, The line kind of jumps around quite a bit. If I look over the first, second, and third quarter of last year, it was 28, then 60, then 39, and then 49. And now it's 27 in this quarter. Is there seasonality to this thing? I mean, this is just more of a modeling question. What would make that jump around? Should we look at the same pattern from last year?

Yeah, I wouldn't point to anything unusual, Tom. It can be a bit of lumpiness from accounting adjustments, but it's not an overall significant number.

You may have some quarter-to-quarter volatility in it. Okay, thanks.

Thank you. Next question will be from Paul Holden at CIBC. Please go ahead.

Okay, thanks. Good morning. I'm going to ask a follow-up question on the PYD. So just going back to the reserve triangles you provide annually, I notice some large favorable development associated with the 2019 to 2022 years. So wondering if you're still benefiting from those accident years or not, and if you are, you know, remind us on why there is abnormally high favorable development associated with those years.

Yeah. I think just keep in mind that that the average duration of reserves is between two and three years depending on the jurisdiction in which you're looking at across the platform. We tend to have a short tail book even in the U.S., and I would say that those early years would have much less of an impact now given the duration of the portfolio. Okay.

That makes sense. Just had to check. And then, Charles, you made a number of comments regarding sort of the normalization or tailing off of remediation actions across the various commercial lines. Maybe you can give us a better sense of sort of when that premium growth should gravitate more towards the mid-single-digit growth range. And I'll quickly on maybe each of sort of Canada, U.K., and U.S. I imagine the timings are a little bit different across each, but some sense of timing on that would be helpful. Thank you.

Yeah. High level, Paul, I expect that you'll see a buildup between now and year end. And that is a function, you know, one big drag is the direct line integration, which is a drag of close to four points. And that can provide a bit of color there. And then in the U.S., you have a couple of points that come from remedial action in three verticals specifically entertainment, environment, and financial services. And that should taper off as well in the second half of this year.

Dan, I don't know if you want to add to that. Well, on the direct line specifically, we've said it before, but just reiterating, we picked up about £100 million more premium in that acquisition than we anticipated. coming into our platform and the remediation activity has been going on for a few quarters and continues in Q1 and into Q2 and that's why as Charles said towards the second half of the year we should start to see some of that remediation taper off in terms of growth so to the drag that we're seeing in Q4, Q1, and likely at this in Q2.

Q2 indeed. And I think, Paul, you know, beyond the remediation, What else is building up? And I would say that from a growth point of view, I would zoom in on five areas where we've doubled down in the recent months, you know, given some of the pressure to make sure that the growth trajectory takes advantage of what we have in the toolbox. The speed at which we're deploying sophisticated pricing tools, in particular in the US and in the UK, means that where performance is well beyond our targets, we can reinvest some margin in the right areas. Second, broker relationships and distribution. Big area of upside. We're adding new brokers in the UK and in the US. We're going deeper in those broker relationships. In fact, we're seeing the number of submissions pick up across the board, including here in Canada. And we're also investing in distribution. Third, Through technology and operational improvement, we're quoting more of those submissions than we did so last year. That's in part why the new business generation is actually quite strong. If you look at Canada, for instance, where the issue, as I mentioned, is mix. That's not remediation. It's just where we have the greatest success. Fourth, we're upping our game from a service proposition to broker across all jurisdictions to really create a distance with other insurers and that includes deploying technology in the field. And fifth, We're expanding our vertical set and leveraging our global network, in particular in global specialty lines. And, you know, when you stack up that game plan with a market that is constructive in which we have a lot of room to grow, I think, you know, we should see in the second half of this year an improvement in the trajectory of the commercial lines growth.

I understand. That's clear. Thank you. Thanks for your time. Thank you.

Next question will be from John Aiken at Jefferies. Please go ahead. Good morning.

It was an excellent explanation, Charles. I just wanted to carry on the commercial side. In each of the three various geographies, you did talk about mid-single-digit rate growth across the platform, and basically your guidance for the industry seems reasonably positive, particularly in the U.S., But I wanted to ask you about the level of confidence you have in terms of that guidance, and I guess more importantly, what are you hearing from your commercial clients about their outlook for the economy and basically the instability that we're seeing out there?

Yeah. I think the environment, I would say, overall is constructive.

it's at the larger end of commercial line that you're seeing a fair bit of pressure, that is market pressure per se, and we see that in all jurisdictions. Otherwise, you know, fairly constructive. Your question really is about economic impact and what we see from our customers. And fair to say that in the past couple of months, in the first quarter, we have seen some changes. I don't think they're a major issue in terms of top line at this stage, but in some segments, I'll give you an example. Multifamily dwelling, that market is down meaningfully in the U.S., for instance.

Transportation lines of business, we're seeing a bit of a...

flow down as well, and so we're starting to see at the economic level some changes indeed, and as this becomes more ingrained, we'll report on that in the next quarter. So far, we're seeing some signs, but nothing major. Now, keep in mind, when you look at our business in relationship with the economy, On retentions, like in purse lines, you need to be insured. And so top line and purse lines is not really sensitive to economic changes. And retention is very strong. Same thing in commercial lines, really, especially in the SME and mid-market space. The economic pressure you see at the higher end of commercial lines, but then people need to insure themselves. In commercial automobiles, you'll see sometimes a bit more variation because it's easier to put a fleet on the block, so to speak, and reduce the amount of insurance you give. But otherwise, people keep insuring themselves, and retentions remain very strong across all our markets in the low 90s, upper 80s, depending on where you look.

Thanks, Charles. I appreciate the call. Thank you.

Next question would be from James Doyne at National Bank Financial. Please go ahead.

Good morning, James. Good morning.

Just wanted to touch on something a bigger picture just in terms of the regulatory environment. Can you give us an updated picture in terms of what your conversations are with either provincial regulators or federal regulators as it relates to the regulatory environment, and are there any potential risks, or is this a non-story at this stage?

I guess if we start macro and we look at the uncertainty that exist in the economy at the moment, in markets to a certain extent. You know, my observation would be that credential regulators are on the front foot. They're engaged in a constructive dialogue. And Quite frankly, I'm impressed by the engagement. People will understand where the risks are coming from and how to protect the system. So it's really not a concern. On the contrary, I think that prudential regulators are very proactive and more dynamic than what we've seen historically. That's the first thing. It's true here in Canada, and I think it's true in other jurisdictions, U.S., U.K., where we operate as well. Second, one layer down, good news with the intact business is that all insurance is not regulated. It doesn't need to be because it's super competitive. Commercial lines is not regulated. It doesn't need to be because it is super competitive. Personal automobile, as you know, is regulated. Maybe we can share a perspective there. And I would put personal automobile in two buckets. Alberta, which is a problem and has been a problem for some time. And then the rest of Canada, because we don't do personal automobile outside Canada. And I'll ask Guillaume, who deals with regulators or interacts with regulators on an ongoing basis, to share his perspective about the country and maybe say a thing or two about Alberta.

Thanks, Charles. So, broadly speaking, the regulatory environment and personal auto regulators are really moving towards protecting consumers and fair treatment of consumers, which is very aligned with our way of operating. I think from a rate regulation perspective, this is even becoming more and more flexible in some markets. So I think the trend overall there is positive. If I focus maybe quickly on Alberta, so I have... As we have alluded to in previous earnings calls, there is core pressure in the Alberta market. I think industry profitability is deteriorating. We've seen recently some competitors showing increased signing of capacity issue above and beyond what we've seen last year. It's clear that the current situation is not viable, and while the recent increase in rate cap relieves some pressure, there's still pressure building up in the industry. So we believe it's very important for the government to allow the industry to get back to rate adequacy. on both new business and renewals before the reform by eliminating the existing rate cap in place. Otherwise, capacity will keep deteriorating, which is not a good outcome for anyone, consumers, government, or insurers. On the reform itself, I think we're fully supporting. Reform is addressing the right issues from a fundamental perspective and certainly a major step in the right direction, but we think there's still actions that need to be done before we get to that reform. Yeah.

I think, James, we want to grow in personal automobile, and it's a very competitive marketplace, but... The industry is losing money, not just in Alberta, in aggregate across Canada. And I think regulators understand that, and in many jurisdictions they're focused on the root cause of costs. So I think overall it's a constructive environment. I think home insurance, you know, is the other area. where we're spending time with government officials to make sure that the focus on the root cause of the cost pressure in home insurance, you know, they understand and act upon. And what is that? Well, the root cause of the cost pressure is the changes in weather patterns. And it becomes an issue when you build in the wrong place, when you build with the wrong standards when you don't invest in infrastructure. And these are the areas we engage with cities, provinces, and the federal government. And I think there's a general recognition that the governments on those three levers need to do more. And now it's not just in fact, or the industry who says that, which we've been saying for 10 years, but I think citizens are actually putting pressure on governments to do that. And so constructive dialogue there. So back on auto, I would say I don't see a major risk, but Alberta... Even though the cap is higher and you have a reform in the pipeline for 2027, we're a bit worried for the market about the trajectory over the next two years. That's why we're working very closely with the government of Alberta to make sure that they have options and solutions if the pressure was building before the date of the reforms themselves.

And then going back to your prepared remarks, you had mentioned that you were well-positioned to take a more aggressive stance in this current environment. Just wondering if you can elaborate on perhaps what you meant by that more aggressive posture. I'm not using your exact words there, but that was kind of the tone that I... that I took away from that last comment from you.

Yes, aggressive is not part of our lexicon, but being able to play offense in a tough environment is certainly part of our notice operandi. So I'll ask maybe Ken to share a perspective on that. how we've stress-tested the organization and why we think not only defensively we're in a strong position, but why we think we can play offense.

Yeah, so... James, you know, we've stress tested a range of scenarios in the current climate and, you know, very well positioned to navigate, I would say, a wide range of economic outcomes. We've mentioned the 3.1 billion of capital margin debt to capital at close to 19% at the end of the quarter. I'll also point out the investment portfolio is very well diversified. Common equities are about 10% of the portfolio. Over 80% of our debt securities are rated A or better, and the currency exposure to U.S. and GBP also provides a hedge against any Canadian dollar weakening. So overall, our business is very resilient and resilient. From the modeling we've done, even in quite severe downside economic scenarios like a prolonged trade war, you know, we're very much in a position to play offense and capture growth opportunities. And I think that's what Charles was referring to. And I would go further and just say, you know, in extreme tail risk scenarios that go beyond economic impacts, for example, you know, tension, You know, we have a toolbox of actions available that we can activate, you know, to mitigate any impact. So very well positioned, you know, defensively, but equally in a... capital very strong at the end of the quarter, and I would say, you know, building up as we move forward. Yeah.

So, Pierre, you change our thought process here is to seek opportunities as there's uncertainty building up in the

Thank you. Next question will be from Doug Young at Desjardins. Please go ahead. Good morning. Maybe a two-part question on the UK operation.

You know, one, you know, expenses were elevated this quarter, but they seem to jump around a little bit. So I don't know if there is anything abnormal in the expenses this quarter, if this is kind of a new run rate or if But the expense and expense ratio. And then you talked about higher large losses in the UK and I specialty lines business. Now, is this related to DLG or RSA? Maybe you can flesh that out a little bit.

I'll take the second part first, Doug, and then come back to expenses. You know, 97.6 combined ratio in the quarter, two elements to point out, the elevated cap losses, three points from those storms. But then, yes, two points, I would say, of elevated large losses. They're in the London market, the specialty lines side of the business, so not related to to the direct line operations. And just, you know, again, large losses can be a bit lumpy. And, you know, we had an elevated quarter and, as I say, isolated in the specialty line side of the UK&I business. That, as I said, brings the run rate to the 92, 93 range, which is, you know, where we would expect to be right now. Then in terms of the expense ratio, overall at an IFC level, one point improvement versus last year. But in the UK and I, the 37.5%, you know, I would say was in line with our expectations, but is about 1.8 points higher year over year. I'd say there's three elements to that. Firstly, we're increasing our IT investments as we build the platform towards being that leading commercial lines platform in the UK. We'll say, secondly, we have some costs related to the personal lines exits where systems are not fully decommissioned, and I would say, lastly, there's a bit of top-line pressure from a top line point of view over the last few quarters that impacts the earned expense ratio a little. So if we were to look forward, we would expect the expense ratio in that 37% zone as we move forward in the mid-term. And I would say all of this, as I said, in line with expectations and based into our view that we should be evolving the UK and I business towards that 90% expense ratio. Combined ratio.

Sorry, combined ratio by the end. Okay, thank you.

And then secondly, I mean, you've talked a lot about increased competition in the large cap or large commercial market. It's in Canada, it's in the U.S., now it's in the U.K. I was hoping you could delve into a little bit what's driving this. And is this starting to creep into the mid-cap or SME business? And, you know, if no, why not? It's just Where I'm going is it feels like more capital is going after the commercial businesses and whether it's external capital or whatnot. And, you know, could this lead to a bit of a plateau in the market cycle and growth over the midterm here? So that's where kind of I'm going at this.

Yeah.

I'll ask Patrick to share his perspective, and then I'll provide a bit of color there. Doug, if I look at the lines of business in particular, where there's been softer lines, it's clearly in larger accounts.

So if I look in Canada, you think about the larger accounts starting to see some pressure also in what we call mid-market, and then in specialty property that we call large property schedules. Big buildings is where we see more competition. In the U.S., it is some of the larger accounts as well, but some specific lines, like we talked about, Finpo or DNO, ENO, Fiber, as well as specialty property. And in the U.K., it's really more in the specialty lines that we see more pressure on rates.

So overall, Doug, it's a continuation of the large commercial lines customers from what we've been talking about last year. The difference, I would say, is we're seeing competition pick up in large property schedule as well, more so than three, four months ago, but still at the large end of commercial lines customers. Then your question is, you know, can this come downward? And I guess if you look at our experience over, you know, many years, and you've followed our company for many years, you know that the SME and mid-market space is not as volatile, so to speak, as the large commercial lines space. So there's pressure at the top end of mid-market, but I would observe that retentions are pretty strong across the board. Those are ratios down a bit in a world where rates are pretty healthy, but this translates for us in particular in the Canadian context into a mixed shift. In other words, Our success is greater with smaller customers and smaller mid-market, which is a three-point headwind, but not really a headwind to the bottom line. On the contrary, I would say. And this is a pattern we've seen. historically over decades. So I'm not really concerned to see the sort of competitive pressure at the top end migrate downward right down to the SME account.

Appreciate the comment. Thank you.

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

Good morning. Charles and Ken, in response to James' question about playing offense, I think Ken, you gave us a good explanation of why intact is in the position to play offense, but I thought what you were going to address is what does playing offense mean to intact? Can you talk about what actions would constitute intact playing offense?

Yeah.

Yeah, just to put things in perspective, the capital generation of the organization is really strong. There's the north of $3 billion buffer. You look at the operating ROE 16.5, you have north of two points of excess cap. Okay, so that gives you a sense of capital generation. What does it mean in practice? First... It means that we're on the front foot from a growth point of view, and we're doubling down on investing in the service we provide to brokers. In other words, we're not playing defense in terms of the investments we're making. Second, it means double down on the investments we're making in technology and accelerating the roadmaps that we have. Third, and maybe more importantly when it comes to actual capital deployment, because the first two things, not so much capital, but rather using our resources effectively, it means acquisition. And so what that means in practice for us, Mario, is that we would love to deploy capital in the Canadian marketplace. in the U.S. marketplace, both from a manufacturing and from a distribution point of view. Despite the fact that you hear, you know, there's a lot of uncertainty, people are on the sideline, that's not the mindset we're in, and we wouldn't be prepared to deploy, you know, meaningful capital to consolidate our positions. The UK is performing well. We're really happy with the performance that the team is generating out there. We're in the middle of integrating the direct line acquisition, and I'd be reluctant to add one big boulder to what these guys have to do, but I have to say, Mario, that I'm quite interested to grow our footprint in the commercialized space in the UK. It's a great market. It's bigger than Canada. Lots of similarities. And where we find opportunities because of the uncertainty right now, we're ready to go for it.

I have a question. The USMCA, apparently, not apparently, what I've been reading is that auto parts that are compliant with USMCA will be exempt from tariffs. When I read that, I immediately thought, I guess this is good news. This is not something you should intact or other P&C providers have to worry about. How do you interpret that information?

Is that unambiguously positive or is there a wrinkle there? It's positive.

I'll let Patrick share his perspective. We've given you a bit of a quantification last quarter about the impact of the North American trade war. If we look at the overall impact today of... all the things that are on the table, whether in effect or not, just to help you frame what it is. And then we'll talk a bit about the indirect impact as well. But so, Patrick, why don't you show your perspective?

Of course, Mario, you're right. You know, this USMCA element on parts means that there's very little tariffs right now applied on parts. coming into Canada. Last quarter, we mentioned that in auto and aggregate, 13% of our lost costs could be exposed to tariffs. That included the parts where there's no impact from now. But since there was additional announcements more globally on tariffs, we've made the same analysis on the whole portfolio of IFC. And to give you an idea, IFC globally for $1 of claims costs, it's about $0.07 that could be exposed to tariffs. This includes imports from the US to Canada, from the US to the UK, but also imports in the US from any countries. However, the current tariffs apply to a very small portion of these imports and the impact on our combined ratio is very negligible. To be precise, the current tariffs announced or implemented is only about 0.05% of combined ratio or five basis points of combined ratio, what is already in there.

So if we take the tariffs that have been announced or are in effect, And you apply that to the 7%. We're talking about five basis points if we do nothing. So that's good news, I would say. I think the thing that we need to keep in mind is that there are tariffs on steel and aluminum. And so you need to ask yourself... You know, within the raw material that goes into those parts that are not tariffed, how much pressure can there be in the system? And I think we've got a bit of work on that, Patrick.

Yeah, we've made quite a few scenarios. These indirect impacts are a bit harder to predict. It could also have... some effect, as an example, on market values and the used car market for some models if, you know, the demand was shifting from brand new cars to these used cars. We've made quite a few scenarios, actually, and overall we don't see, even if we see ratio of more than half a point. And to Charles' mention earlier, that's before any mitigating action that we could take on rates, risk selection, supply chain, et cetera.

Yeah. So overall, Mario, I'd say good news. One needs to keep an eye on the indirect impacts, but we feel pretty good about where we are now, and that contributes to us being on the front foot. Back to your first question.

Thank you. Our last question comes from Lamar Persaud at Cromark. Please go ahead.

Yeah, thanks. I want to come back to this discussion around PYD. At what point do you say maybe you're being too conservative in underwriting such that you're turning down otherwise profitable business? Or is the answer that there's just so much uncertainty right now that you're comfortable running well above the 2% to 4% range? at the moment like this. Some thoughts on that.

We're, you know, always making sure that we optimize between elasticity in the market and, you know, how above our target price of return we might be operating.

And you take the risks into account. We're on the front foot. It's not clear to me that we're being overly cautious in the environment in which we operate, would be my perspective.

I don't know if any of my colleagues have a bit of color. I'll just reiterate the point around looking. at current accident year and PYD together gives probably the better reflection, and that's how we think about it when we're pricing. Yes, I think it's a great point, Ken.

And, you know, retention, pretty strong across the board. New business generation is pretty strong across the board. you know, if you make an abstraction of where we do remediation. And frankly, at the larger end of commercial lines, the sort of behavior you see in the marketplace You know, we need to leave margin beyond what we think is reasonable to grow in that segment. So we have tools in the field to be very surgical to make sure that when we use margin, there's plenty of margin to use, and that'll move the needle on retention. Otherwise, we're not bothering.

Do you have anything to add, Guillaume?

We know where there's conservatism in our reserving position, and we're taking that into account to have our best view in pricing. So I think that's kind of baked in our price point that are in the marketplace.

So thanks. And then if I could just offer another, you know, just a point of clarification maybe quickly here. When you say there's five basis points of combined ratio, you're talking about five basis points of combined ratio from tariffs at the total company level, not just personal auto, just a point of clarification? Correct. Correct.

By the way, it's not 50 basis points. It's five basis points with the tariffs as they are either announced or enforced today, and that assumes we do nothing.

Perfect. Thank you. Thank you. Ladies and gentlemen, this is all the time we have today.

I would like to turn the call back over to Jeff Kwan.

Thank you, everyone, for joining us today. Following the call, a telephone replay will be available for one week, and the webcast will be archived on our website for one year. A transcript will also be available on our website in the financial report section. note, our 2025 second quarter results are scheduled to be released after market close on Tuesday, July the 29th, with an earnings call starting at 11 a.m. Eastern the following day. Thank you again, and this concludes our call.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.