Intact Financial's (IFCZF) CEO Charles Brindamour on Q2 2016 Results - Earnings Call Transcript

| About: Intact Financial (IFCZF)

Intact Financial Corp (OTCPK:IFCZF) Q2 2016 Earnings Conference Call July 27, 2016 11:00 AM ET

Executives

Samantha Cheung - Vice President, Investor Relations

Charles Brindamour - Chief Executive Officer

Louis Marcotte - Chief Financial Officer

Darren Godfrey - Senior Vice President, Personal Lines

Alain Lessard - Senior Vice President, Commercial Lines

Patrick Barbeau - Senior Vice President, Claims

Analysts

Kai Pan - Morgan Stanley

John Aiken - Barclays

Geoff Kwan - RBC Capital Markets

Meny Grauman - Cormark Securities

Doug Young - Desjardins Capital

Tom MacKinnon - BMO Capital

Paul Holden - CIBC

Brian Meredith - UBS

Operator

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Intact Financial Corp. Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Thank you. Samantha Cheung, VP of Investor Relations, you may begin your conference.

Samantha Cheung

Thanks, Chris and good morning everyone. Thank you for joining our call today. A link to a live webcast and background information for the call is posted on our website at www.intactfc.com under the Investor Relations tab. As a reminder, the slide presentation contains a disclaimer on forward-looking statements, which also apply to our discussion on this conference call.

Joining me today are Charles Brindamour, CEO; Louis Marcotte, CFO; Darren Godfrey, SVP, Personal Lines; and Alain Lessard, SVP of Commercial Lines; and Patrick Barbeau, SVP of Claims. We will begin with prepared remarks, followed by a question-and-answer session.

With that, I would like to turn the call to Charles to begin his remarks.

Charles Brindamour

Good morning. Thanks, Samantha and welcome to Darren who is new in his role. And Patrick, whom many of you have heard before or met before in these calls, where he was SVP Personal Lines before and he is now SVP Claims and that’s very consistent with our view that we should move talent in the organization and develop people accordingly and so I want to welcome these folks into their new roles for this morning’s call.

Before we get in the second quarter’s result, let me first make a few comments about the Fort McMurray wildfires. This is the costliest insured catastrophe in Canadian history and the impact on the residents and their families will certainly be long-lasting. Our folks in Alberta have gone above and beyond to respond to our customers, and we have to recognize that the recovery effort will take years. As of today, most automobile claims have been closed. Solutions for the rebuilding of homes are underway, and we’re working with our commercial clients to put them back in business. We’re fully committed to getting our customers back on track and we will be on the ground for as long as it takes.

We announced this morning second quarter net operating income of $0.83 per share, despite absorbing the $0.97 per share loss from the Fort McMurray wildfires. These results clearly show the resilience of our platform. Our top line grew 5% in the quarter as new products, digital experiences and distribution initiatives paid off, particularly in personal lines. On the commercial side, growth was dampened by the impact of the weaker Alberta economy. We delivered an underwriting profit of $16 million in the quarter, with a combined ratio of 99.2%, which includes 8.8 points of losses from Fort McMurray. If we exclude the impact of Fort McMurray, the combined ratio would have been 90.4%, with strong results in property lines and commercial auto, but results below expectation in personal auto. Our operating ROE was healthy at 14.6%, particularly in light of our strong capital position and the impact of the wildfires. We ended the quarter with $857 million of excess capital and our book value per share grew 3% year-over-year to $40.57.

In terms of outperformance, we beat the industry’s ROE by 620 basis points at the end of the first quarter. Our underwriting results largely drove this outperformance. In short, while our troops continue to work very hard to help our customers recover from the wildfire I am pleased to see the resilience of our platform in dealing with the costliest natural disaster in Canadian history.

Let’s now look at our results by line of business. So, personal auto grew 6%, thanks to our growth initiatives, which include our telematics offer, our quick quote engine as well as a number of branding and distribution activities. The combined ratio deteriorated by 6.1 points to 96.4%, excluding Fort McMurray, driven by mild increases in frequency and severity, flat earned rates and lower prior year development. Rate increases have been effective in Alberta since April 1 and additional ones have been approved in Ontario. I expect these rate actions combined with our claims strategy will offset recent cost pressures.

When it comes to the industry outlook for auto, we continue to anticipate low single-digit growth in the coming 12 months. In general, given a rational competitive environment, we anticipate that claims cost inflation across the land will lead to moderate rate increases. In Ontario, most of the remaining reforms were implemented on June 1. In personal property, we grew our premiums by 9% as rate increases and growth initiatives were deployed in firm market conditions. New products, such as our Lifestyle Advantage and our Enhanced Water Damage Package, had been very well received by customers.

Our combined ratio of 82%, excluding 24.7 points of losses from the Fort McMurray wildfires, benefited from lower claims frequency and the effectiveness of our profitability actions. I am particularly pleased to see that our year-to-date combined ratio of 94.7% even after Fort McMurray is consistent with our desire to operate this business sub-95% even in bad times.

In terms of industry outlook, we expect firm market conditions in this line of business with mid to upper single-digit growth over the next 12 months. Commercial P&C premiums declined 1% year-over-year as rate increases were offset by headwinds from a slowing Alberta economy. This line delivered a combined ratio of 87.5%, excluding 10.7 points of Fort McMurray losses. The underlying current accident year loss ratio improved 11 points from last year mainly due to lower large losses, profitability actions and better weather in the Atlantic. Commercial auto premiums grew 2% in the quarter as the impact of corrective measures, including rate increases were partially offset by economic conditions in Alberta. The combined ratio improved substantially to 88.5% excluding Fort McMurray, thanks to favorable prior year development and the effectiveness of our actions. That said, we are continuing with our corrective measures aiming for a sustainable low 90s combined ratio.

With respect to the outlook for commercial lines, while experiencing meaningful pressure in Alberta, the market conditions across the land are still conducive to rate increases, which should lead to low single-digit growth in the coming years. So as you can see, it’s been a busy quarter and our operations have responded very well. But I am also pleased with the progress we are making on our strategic initiatives. On June 28, the Superintendent of Alberta approved our new ridesharing insurance policy, the first of its kind in Canada. Our commercial policy with Uber became effective July 1 in that province.

A few days later, the insurance regulator in Ontario approved a similar solution. These steps are a clear sign of our leadership position in the sharing economy. On the claims front, we received very good feedback following the launch of the Intact Service Centre in Calgary earlier this year. We recently launched our second service center in Ottawa and we expect Montréal and Toronto in late ‘16 to early ‘17. And finally, I would like to congratulate our teams at belairdirect, who ranked the highest in consumer satisfaction amongst home insurers in Atlantic, Ontario and Québec according to J.D. Power’s latest survey.

So in conclusion, we have had a challenging quarter, but I am happy with our performance, both financial and operational. We absorbed the worst cat in Canadian history and yet remain profitable with a very strong balance sheet. Our growth initiatives are paying off and our driving solid top line growth. Our property lines are performing well, commercial auto improved substantially, but we have some work to do on personal auto. In addition, we have seen material progress on our strategic initiatives, particularly with regards to the sharing economy. So, we are confident that our strategy will continue to help us outperform the industry’s ROE by at least 500 basis points and grow our net operating income per share by 10% per year over time. Our focus on providing our customers with an experience that’s second to none and our drive to be a top employer, coupled with our financial strength, places us in a very good position to benefit from this environment in which we compete.

With that, I will turn the call over to our CFO, Louis Marcotte.

Louis Marcotte

Thanks Charles. Good morning, everyone. Although our company was hit by the costliest disaster in Canadian history during the quarter, our operations generated $114 million in net operating income after absorbing $127 million in net losses from Fort McMurray. Our operating ROE was 14.6%, while we maintained a very strong capital position with $857 million of total excess capital. Our operations are clearly showing the resilience, both in terms of earnings generation and capital strength.

A few comments on Fort Mac, we reported gross losses from the wildfires at $409 million, approximately 10% of the total industry losses as reported by IBC. This is consistent with our estimated market share in the city. If we exclude losses from Fort McMurray, other cat losses amounted to $18 million, a level similar to Q2 of last year. We reinstated all years of the reinsurance that were used in the quarter such that our coverage remains the same for the balance of the year. The reinstatement premiums amounted to $27 million. And it is important to note, we will record it as a reduction of earned premiums, therefore impacting our underwriting ratios.

Moving on to operations, on expenses, nearly half of the 1 point increase in expense ratio in the quarter to 31.7% is due to the impact of the reinstatement premiums I mentioned earlier. The remainder of the increase was primarily due to higher commissions, taxes and variable compensation. Our investment portfolio continues to deliver consistent investment income, unchanged from last year at $104 million. Although average net investments increased 3% to $13.2 billion from mark to market gains and cash flows generated from operations, this benefit was offset by a lower reinvestment yield. We continue to expect a mild erosion of net investment income going forward.

Net distribution earnings grew 26% in the quarter to $43 million due to improved profitability of our brokerages and additions to our broker network. We invested another $66 million in our distribution network in Q2 and continue to expect 10% growth in net distribution income for the full year. We reported net investment gains in the quarter of $28 million, a sharp reversal from last year’s losses of $29 million. Favorable equity markets led to realized gains on our equity portfolio and declining yields led to gains on the fixed income portfolio. Impairment losses of $13 million in the quarter were $2 million lower than last year. Our effective tax rate was 16.9% in Q2, lower than usual due to the greater proportion of non-taxable dividend income relative to underwriting income. In summary, we reported quarterly EPS of $0.67, which was $0.80 lower than last year. Excluding the $0.97 impact from Fort McMurray wildfires, EPS grew 12% year-over-year on stronger underwriting and distribution results. Our investment portfolio and distribution activities provide stable earnings when underwriting results are challenged, adding to the resilience of our platform.

Finally a few comments on our financial position, our balance sheet remains very strong. Our MCT stands at 212%, after reflecting the 8 point impact from Fort McMurray, which was offset in part by 4 points from the phase-in of the MCT guidelines and from favorable capital markets. Our total excess capital amounted to $857 million at the end of the quarter, while our debt to total capital ratio was 19.3%. Our investment portfolio’s unrealized gain position increased materially from Q1 to $150 million with contributions from all asset classes. We executed on our buyback during the quarter, purchasing some 140,000 shares for a total cash outlay of $12 million. Between the launch of the program and the end of Q2, we have spent $32 million on the buyback with an average price per share of $87.19.

Finally, to optimize our buyback strategy, we entered into an automatic purchase program to facilitate purchases at all times even during blackout periods. Our capital deployment strategy remains unchanged. And while our priority is to invest in growth opportunities, buying back shares at time when the market price may not fully reflect intrinsic value is a responsible use of our capital. In conclusion, with strong underlying results in property lines and substantial improvements in commercial auto, we are focusing our efforts on improving results in personal auto with similar discipline and energy. Our earnings have proven the resilience, thanks to the strength of our insurance operations, our focus on innovation, the growing role of distribution and the great work that our in-house investment team is doing. We continue to believe consolidation in the domestic P&C industry will continue, both in manufacturing and distribution and we will continue to be active participants. We have strong balance sheet and a talented team. We are ready to tackle opportunities as they arise.

With that, I will return the call to Samantha.

Samantha Cheung

Thank you, Louis. Chris, we are now ready to take your questions. In order to give everyone the chance to participate, kindly limit your questions to two per person and if there is time, you may login again.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Kai Pan with Morgan Stanley. Your line is open.

Kai Pan

Good morning and thank you. So first question is on the property insurance, you have mentioned about 9% premium increase, how much of that – if you can breakdown between rate versus exposure, what’s roughly the breakdown?

Charles Brindamour

Good morning. Darren, do you want to take this one, so we are talking written premiums.

Darren Godfrey

Yes. So obviously, as you mentioned our direct premium written increased by 9.3% in the quarter, of that 7.7% was due to increasing written units. On top of that, obviously we have got some amount of insurance inflation, some rate actions still flowing through the book and a slight mix change, downward mix change, that’s driving the overall plus 9% increase in direct premium written.

Charles Brindamour

Yes. Between some insured increases and rates, you have about 6 points and the mix is 4 points the other way and that is explained by different speed up growth by jurisdiction but also potentially faster speed of growth in condos and apartments, which have lower average premiums.

Kai Pan

Okay. So my question is really given what’s happening in unfortunate events that have largest losses in Canadian history, so do you see further increase, you see – these rate increase, will that be just going even higher from current levels or it’s just simply stay current now but for a longer period of time?

Charles Brindamour

I think it’s important to talk about the industry when we talk about the outlook versus our own sort of rate direction. But I will let Darren give his perspective on the industry’s outlook.

Darren Godfrey

Yes. I mean it’s unclear at this point in terms of the longer term impact from the Fort Mac standpoint. Obviously, with respect to reinsurance renewal, there is still time to tell on that one. However, I think it’s fair to say that we expect that this event may extend the firm conditions that we are seeing currently in personal property. Again, timing wise, it’s not exactly clear right now, but definitely we think that the rate increases that we see in the industry and the growth that we see in the industry, we expect to continue in the short to medium-term.

Charles Brindamour

Yes. I think that’s right. It is a firm environment and therefore this adds to a firm environment. And interest rates have not gone up in the last quarter. So I think the conditions are therefore a potential expansion of firmer conditions in that line.

Kai Pan

Thank you. My second question on personal auto side, you mentioned about the mild frequency and severity increase, are these sort of like within your expectation or is this price and could you talk a little bit more about it and any pricing action you are taking? Thanks.

Charles Brindamour

Yes. Why don’t I ask Darren to shed a bit of light on that frequency and severity bumps in the quarter and maybe then rate direction?

Darren Godfrey

Sure, absolutely. Thanks, Charles. So, from a frequency standpoint in the quarter, largely driven by two weather events, i.e., snow event in April in Ontario followed by a similar sort of event on the May long weekend in Alberta. Both of those drove frequency higher. If we were to exclude those two particular events, frequency was actually relatively flat in the quarter when comparing Q2 of ‘16 back to Q2 of ‘15. In terms of the severity itself, there is a couple of things at play there. One is actually tied back to the increase in frequency that I just talked about. So, due to the increase in frequency in Alberta and Ontario, there was a change in mix change in the number of claims by province. Obviously, Alberta and Ontario tend to have a higher severity due to the product features in the auto product in those two provinces. So, as we got more claims in those two provinces that drove then the national severity higher as well. We also experienced a bit of a blip in the Atlantic from a severity standpoint, again, some context here. Obviously, as you kind of remember back in Q2 of 2015, we were still experiencing that the tough winter in the Atlantic, which drove exceptional increase in claims being reported, but smaller than claims. So, that essentially drove the lowest severity back in Q2 of 2015. Now, as we look into Q2 of 2016, we are backing more of a normal pattern, consistent with our 5-year average. So, that’s actually driving an increase in severity in the Atlantic. So, it really is the Atlantic impact, but also a change in the mix between Alberta, Ontario and the other provinces in the country.

Charles Brindamour

Before we go into the future rate direction, I guess when we looked at the severity this quarter, there was not a jump in a province that was a cause for concern. It was rather a mix by province that led to an increase in the average severity across the land and therefore not necessarily reinforcing the inflation trend that we have observed in the previous quarters.

Darren Godfrey

So from a rate standpoint, we were pretty much flat in the quarter. We had some reductions, obviously in Ontario being offset by increases in other provinces. So, as we look at the various different provinces, we have rates increasing in Alberta. We have just applied and received approval for a rate increase in Ontario. We have rate increases flowing through in the Atlantic and probably for the first time in many years, some rate activity in Quebec as well, too. So, that’s all in reflection in terms of some of the claims inflation that we are seeing in the past. And we feel as if that those actions together with the underwriting actions and claims actions will address some of that inflation that was seen in past quarters.

Kai Pan

Thank you very much.

Charles Brindamour

Yes, that’s exactly right. Thanks, Darren.

Operator

The next question is from John Aiken with Barclays. Your line is open.

John Aiken

Good morning. The improvement on the underwriting income that we saw on the commercial auto, it does look like net claims are coming down. Net earned premiums have been, call it, reasonably stable over the last four quarters. Are we seeing some stabilization in terms of the frequency and severity that you had seen in the past quarters or is this actually some tangible impact of the, I guess, the actions that you have taken over the last sort of while?

Charles Brindamour

Alain, why don’t you sort of breakdown what happened in the quarter and give a sense of direction?

Alain Lessard

Yes. So well, like I say, 90% combined ratio in the quarter, we are very pleased with that. But like we said, we look at this line of business on a 12-month basis. So, we are going to continue our action, because we are not there to our 90% objective yet. So, we are continuing on the action and the corrective measure we are taking. Relatively, in terms of severity and frequency, that was relatively stable over the line. We have got a bit less large losses in the quarter, but for the – and we are coming back in a certain week to a much more normal prior year development. We had in 2015 positive prior year development and now we are more back to a more normal in the 3% zone. And like we mentioned last year, we were affected by the exchange rates correction on the reserves. That being said, our plan just started this year in terms of corrective measures. So the part that is earned and that you will see on the average premium that will take time. We still have a very little portion of that plan that is earned and we are continuing to take the corrective measure. It’s going to take probably 9 to 15 months to get that to see we have earned everything on the plan and the corrective measure we stated and put in place.

Charles Brindamour

Yes. I think the direction is good. Very pleased might be an overstatement. I think we are pleased with where this landed. One of the things that I like to look at to get a sense of direction is the difference between the average rate written in the quarter versus the average rate earned in the quarter. And so we have earned in the quarter 2.3% rate increase in commercial auto and we have written in the quarter about 4.5% rate increases. And so this gives you a sense that there is rate momentum building. Now, this is just the average. Obviously, the plan that Alain has put in place with our teams across the land are not average rate increases, they are actually very targeted. And so the impact of very targeted action do not translate into what you see in the average rate. You actually get a better pickup than that, because you risk select as you do that. So, I think encouraging direction in the second quarter, lot of focus still on the commercial auto action plan, even greater focus, I think in trucking which is an area in need of greater correction and looking good, I think for the next 12 to 18 months.

John Aiken

I apologize if this was actually in the formal commentary, but what has the impact been from the pricing actions on the number of units within commercial auto?

Alain Lessard

There is probably – the units in commercial auto are down by about 3%, okay, but it’s like very – when we look at units in commercial auto, things can vary a lot between premium and unit. We have policies out there that are at basically $500 or $600 and we have other policies and programs that can be in multi-million dollars. So, the price action, I would say, we would have to decompose everything between IRCA fleet trucking to see the exact impact. There is some impact on the price action coming from the action we are taking, but it’s very – like we say, we follow that mostly on the premium side, because there is too much volatility premium by premium and action in the way we recurred also policies.

Charles Brindamour

I think what we think about this is fleets tend to cloud the unit count from quarter to quarter, but when Alain talks about a 3% drop in unit in the quarter, it’s important to keep in mind that Alberta’s drop in units would have been double that in the quarter and therefore it’s fairly significant driver of that number.

John Aiken

Understood. Thanks. I will re-queue.

Operator

The next question is from Geoff Kwan with RBC Capital Markets. Your line is open.

Geoff Kwan

Hi, good morning. Just I have a question on the ridesharing initiative you have got in Alberta and Ontario. Just how to kind of think about the impact on premiums? And then also similar to that, is it fair to kind of think that this is something you are looking to do when – as other provinces rollout similar programs?

Charles Brindamour

Yes. I think that anywhere where private enterprise is allowed to operate, which is unfortunately not in every province, we will be happy to look at solutions like that, because Canadians are embracing those sort of services and we want to be a facilitator of that product. I will let Alain talk about sense of quantum or how we are thinking about that. Go ahead, Alain.

Alain Lessard

Okay. So, I think our policy, like we said earlier in the call is really a one single policy that will cover basically all Uber driver and passenger. It’s basically on kilometers. It’s not a price based on units or car or things like this. It’s really based on the amount of kilometers driven by the Uber driver and that will be recorded not as of one policy, one premium for the full year earned over 12 months. It will be recorded every month as we receive kilometers from Uber and reports on that part. So this is how we cover. So it will be earned as it will be written. I think that’s important to understand. It’s very early. The amount of premium will be very much affected by the popularity of the ride sharing and how much people are using Uber. So it’s very early to tell how much premium we will look at that. We will be in a better position to report on that at the next quarter. But we expect that will be material in terms of when we look at the commercial auto volume next quarter.

Geoff Kwan

Sorry, I think it will be material, right, as opposed to not material?

Charles Brindamour

Yes. I think that when we look at opportunities like that, there is a long-term angle and there is a short-term angle. And as we have talked about before, we think that sharing economy is a heavy trend that is taking place now and that will have big influence on our industry over the long run. And that’s why we tried to be on that trend fast and that’s why we are partnering with these folks. There is a business opportunity in the short-term. It will start to materialize in the third quarter. I think we ought to think about this in tens of millions of dollars for now. And when we get more visibility at the end of the first – the third quarter, I will give you a better picture of where that is headed.

Geoff Kwan

Okay. Thanks. And just the other question I had was this push that you guys are making within the specialty lines, just wanted to get a sense on how you are thinking about like targets that you would like to achieve and kind of what – within what timeframe are you thinking about that?

Charles Brindamour

Yes. So specialty lines is an area where we are underrepresented and – at the industry level. And so this has been, I would say a meaningful drag on our aggregate out-performance. As you know, we think about out-performance line-by-line product-by-product, but this is a segment that’s been, for us generating sub-90s combined ratio 5 years in a row basically. So I think we have decided to reorganize to gain more exposure to that segment, better organize ourselves to build on the expertise that has delivered a strong track record in the past and have folks who wake up in the morning and think about specialty lines. And that’s what this new division is all about. And I think we want to make sure that brokers across the land know that we are a top player and we have top people in that space. And so that I think is the main idea here. And the idea, I think is to own a bigger if not a much bigger portion of the underwriting profit pool that exists in that space. So I will let you add some color, Alain.

Alain Lessard

Yes. I think it’s important to also understand that we are not starting from zero. It’s not like we are a non-player in specialty lines. We are starting with the volume right now when we look at all the lines we define at specialty lines of anywhere between $650 million to $700 million. We have an aspirational goal to get to eventually $1 billion, but I think the first aspect is really to leverage what we have, because when we look at our specialty lines across the country, our representation and our presence is very, very different province by provinces. So our first goal is to make sure that whatever is available in terms of expertise, product in one province is also available everywhere. So we will leverage the expertise that we have across Canada and build on that expertise by adding people, recruiting expert in those lines, adding products and build like Charles said, the broker and client awareness of that. And it’s also important to think that we are going to do that with the same rigor and discipline we have done and we have applied to our regular business to maintain our combined ratio of sub-90s going forward.

Charles Brindamour

Yes. I think success will be judged by the portion of the underwriting profit pool that we will be able to grab in that space. And I think the additional focus on that division hopefully will help to improve our track record in that space.

Geoff Kwan

Okay, great. Thank you very much.

Operator

The next question is from Meny Grauman with Cormark Securities. Your line is open.

Meny Grauman

Hi, good morning. Just wanted to follow-up on the ridesharing, now that you have these programs in place and for when the customers in the car, but then also when the driver is waiting, is it sort of mission accomplished and you kind of have a product suite for this ride-sharing phenomenon or is there – I guess what I am asking, what’s the next step here, is there another challenge in this new area that you need to come up with the solution for or are you basically have dealt with this, I don’t know if you call it a problem or just a new development in your space?

Charles Brindamour

Well, I think it depends if your question is focused on Uber per se. But for us, the opportunity is much bigger than what’s been announced recently. I think the opportunity is how the sharing economy is basically changing insurance to a certain extent, not just in ride-sharing, but also in car sharing, in home sharing, in expertise sharing and our thought process is to lead with solutions as start-ups will come and basically broaden the sharing economy and Turo is a really good example of that, which is a great car sharing model that’s very popular in the U.S. and that started to operate in April. Here, in Canada, we are also partnering with them to find insurance solutions. So I think that the Uber solution is step one of many steps and what we think is a pretty broad range of opportunity. Specifically, with regards to Uber, Alain or Darren, I am not sure other than going to other jurisdictions what else there is.

Alain Lessard

Well, I think what we saw like – I think the first thing is automobile is very much regulated on the product side at the province level. So I think we have now a product available in Alberta, a product available in Ontario. I think there will be discussions in other jurisdiction to go in that same direction, so yet there is still work to do on that side. And I would say probably that was the biggest implementation, but the reality is these models will continue to evolve and this is like the first iteration of the product. I think we can expect some adjustment going forward as both us, the industry, the regulator, adapt and learn more about the sharing economy. But I would say the main trust was really getting the first product out.

Charles Brindamour

Thanks. Well, in all of this, I mean the traditional boundaries of personal versus commercial are being challenged. And telematics also is bringing a whole new set of ways to think about how to provide protection as people move from point A to point B. We lead in personnel, we lead in commercial, we lead in telematics, so we feel we are very well placed and at least on the automobile side of things, to find business opportunities as the world change.

Meny Grauman

Thanks for that. And if I could just ask a question related to the Fort McMurray wildfires, so the losses came in below the range that you initially published and I was wondering whether that is just a normal function of just you had an estimate and reality it doesn’t always just line up with an estimate especially early on or was there anything else that you would highlight maybe that was a more active response that mitigated some of the losses that you initially thought you would take related to that event?

Charles Brindamour

Yes. And I think just for folks to understand the pieces here, these fires emerged on Tuesday. We – you will recall at our first quarter earnings call on the Wednesday, we started to image through satellite the damage on Thursday, overlaid our exposure through geo-coding. On the Friday and Monday morning, we issued a press release that said, that we thought that this would be between $1 and $1.20 and I think three months into it – or 2.5 months into it, we are saying it’s actually $0.97. So that’s sort of the process. I will let Patrick give his perspective on why it’s $0.97.

Patrick Barbeau

Yes. Thank you. So you described it well, Charles. This is the process we use to come out – come up with the estimate of $1 to $1.20. From the – all these exercises, it was clear with the image, the area that were fully destroyed so the total losses were fairly easy. We had, obviously, the information on the cost to rebuild and that piece has stayed the same up to now. But obviously to get a total estimate, we need to make a few assumptions on other stuff like what’s the amount of contents, what portion of partial losses would be around the fully destroyed the area and it’s within those assumptions that when we were able to enter the site in June and expected all of those offices, we had a bit of savings compared to our initial estimate. So, it’s really into those other partial losses, how much. We have a bit of lower amounts of smoke damage that we estimated initially, the smoke damage was less than what we assumed. So, this is what has driven the estimate down. In terms of gains in how fast we responded. For sure, this exercise are bringing up satellite inventory using geocoding has allowed us to get the operations well prepared for the response, but also plan in advance the vendors and the capacity we need on the ground. So, we are at the point where most of the auto claims are closed and for sure, since you pay replacement cars during that process and also additional living expenses as you repair the houses, the faster you put our clients back on track also has savings for us.

Meny Grauman

Thank you.

Operator

The next question is from Doug Young with Desjardins Capital. Your line is open.

Charles Brindamour

Hi, Doug.

Doug Young

Good morning. So, I am going to go back to personal auto. And Charles, it sounded like you were disappointed in the results in the quarter. And then I looked at the response just around the frequency with the two weather events you kind of – I can wrap my mind around that. And on the severity, it sounds like its more mix related. So, I am wondering where the disappointment really ebbs from? Is there some pressure you are feeling in Alberta on the BI side and on Ontario on the accident benefit side or is there additional challenges or issues that you are struggling with in auto? And then can you – if there is, can you talk about it and what you are doing to kind of address it?

Charles Brindamour

Yes. Well, I think 96 is disappointing period. And whether it’s – you can explain it, whether it’s a trend, whether it’s mix issues, 96, it’s just not a great combined ratio in automobile insurance. And we sort of expressed it to you the way we see it. Disappointing is different from being concerned. And I think it’s a difference I would make. It’s not like we looked at the quarter and said, oh, my God, this is bad. I mean, that’s not it. It’s disappointing, because the absolute outcome is not as good as what we would like, but the trends we have observed in the country were not reinforced necessarily in the quarter, but we apply credibility to the trends that we have been observing for a few quarters or a year plus in some jurisdictions. And I think Darren alluded to that earlier, bodily injury inflation in Alberta, we have talked about that for sometime, we have taken actions both from a pricing and from a claims management point of view is certainly issue number one.

I think the Ontario environment that’s been in a rate reduction and a reform world for 4 years, there has been inflation building up in the system, which we need to tackle and same thing in the Maritimes. Quebec is slightly different. I mean Quebec has been a fairly stable cost environment in a rate decrease world. So I think we use inflation from coast-to-coast, but I think in Quebec, it is a question of restoring rates to a level that encompasses new investment income and the new environment. There has been a bit of physical damage inflation, I think in Quebec and no change really in the quarter. We are just acting on our plan in each of these jurisdictions, but disappointed with 96 period. I would like to ask Patrick to give a bit of perspective on some of the action plans, because yes, we talked about rates, but rate is not the only way to deal with inflation. And in fact, you do create an advantage when you over-index other than rates how to deal with inflation. So, why don’t you, Patrick, give us a perspective for some of the nature of the action plans that you have in mind.

Patrick Barbeau

Thank you. I will start with Ontario. You might recall that now 4 years ago, we have reshaped our claims operation to address some of the trends we are seeing in AB and BI and this was around making sure we had teams focused on the BI, so special handling units and we are looking at those cases and also on AB to make sure would keep the minor injury within the guidelines of the regulations. So, this has been very – or quite successful or effective in managing the claims inflation in Ontario. Since then with the trends we have observed in Alberta as well as in some of the Atlantic provinces we have exported those same approach in addressing. Because you might recall in Alberta, for example, are a couple of court decisions that allowed chronic pain to be used as a reason to bring claims outside of the minor injury cap, which has created more activity on the BI side. So, that’s certainly one source of the inflation that we see in Alberta. Since then, we have increased our staff level on the BI claims and maintain to be more proactive in handling those claims and keeping them within the minor injury regulation.

We have built our special handling team similar to what we had in Ontario and then talk protocols and guidelines to manage chronic pain, concussion, those types of claims and we have also increased the staffing for our surveillance activity. So, those are our examples of what we have done in BI and we are following the same path also for Atlantic. On the physical damage, there is also an important benefit that we capture because of our management of supply chain, leveraging our size and getting involved into the purchasing of parks, for example, are ways that we limit the inflation. And also, our new national claim system is another way to not only have gains on the expense side, but also in managing the indemnity control better, the indemnity, so all of that are contributors to tempering the inflation in auto.

Charles Brindamour

Good. Thanks, Patrick. And I think we talk about the rates that we have taken and what we expect at the industry level across the land. But I think segmentation is really important here. And maybe I can ask Darren, who has been, what, a month on the job now or two to talk about some of the way we leverage segmentation to tackle some of that inflation.

Darren Godfrey

No, absolutely, Charles. I mean – so when we talk about taking rate increases across the various different provinces, these are not flat rate increases for all customers. They are heavily segmented using further refinements in terms of the variables we have available. For example, UBI that we have introduced as well has bought about more segmentation power. So yes, we are driving rate increases across the portfolio, but through segmentation able to tilt our portfolio to further gain margin to help address some of the – and to combat some of the inflationary pressure that we are seeing. So, as we move forward, we are continuing to advance on segmentation. We are continuing to look at more data, more variables, greater techniques, in terms of to continue to refine our segmentation to really identify those inefficiencies in the marketplace that we can take advantage of.

Charles Brindamour

Thanks, Darren.

Doug Young

Perfect. Well – and maybe I will take a step back and go 10,000 feet up. Charles, you put up $0.83 and Fort Mac was $0.97, and so $1.80 and I know things will ebb and flow from quarter-to-quarter. But assuming there is no similar type of catastrophic event, is $1.80 on average what we can expect, again, I know quarter-to-quarter fluctuations happen, but is $1.80 a reasonable run-rate or is this kind of, in your view, was this a – if you back out Fort Mac, was this a particularly good quarter or is there upside?

Charles Brindamour

I think that I hate to speculate off a quarterly base, I will say this, I think the cat burden, excluding Fort Mac was probably lower than what we anticipated. So I think you ought to put that in your thought process. We put the spotlight on Fort Mac because this is the costliest natural disaster in the history of the industry. But the remaining cat load was slightly better than what we anticipated. Therefore, I would say caution multiplying or extrapolating the quarter. I think that there has been a favorable trend that were present in lines of business. But I would say our action plans have been paying off in the quarter. So for me, if you exclude Fort Mac, I wouldn’t say this was an extraordinary quarter. I think that things are moving in the direction that we are aiming for and we are disappointed with personal automobile.

Doug Young

Perfect. Thank you.

Operator

The next question is from Tom MacKinnon with BMO Capital. Your line is open.

Tom MacKinnon

Yes. Thanks very much. Two questions, just going on a little bit more on the Alberta BI claims pressures that we talked about a couple of quarters ago, can you give us an update as to anything that’s happened with respect to the regulatory front there or anything that you guys have done through rate hikes and other specific things to attain that and how far along we are in the process and just a little bit more color on the results there. And then just elaborate a little bit more on the service centers, the initiative you have here as you roll them out, how should we see that impacting the bottom line maybe in terms of claims cost or expense ratios or whatnot there? Thanks.

Charles Brindamour

Okay, alright. Let’s start with Alberta BI, I will ask Patrick to give you a perspective on this and if Darren wants to chime in and then on service centers, maybe you can take that one as well, Patrick.

Patrick Barbeau

Yes. So on BI, a lot of actions or discussions on the regulatory front in the quarter, but nothing that has been finalized in the sense that there is a number of regulations that are due for renewals. In fact, either or nine of them in the province and through IBC and discussions with regulators, we have identified which one we thought were more – potentially more rapidly help the situation on the BI inflation and those are the ones on which they are focusing right now to renew and bring improvements. But that will come more in the latter part of the year, probably effective in 20 – beginning of 2017. But it’s a good sign that they are opening up this discussion with the industry and we can provide support on how we think this will help the situation. So Minor Injury Guidelines is a – regulation is on top of that list, which is the main one that was challenged, as I said with some of the recent court decisions.

Charles Brindamour

Darren, do you want to add anything on this?

Darren Godfrey

No. I mean just it’s encouraging, but it’s very early days in terms of the process. I mean we have a deadline of the end of August to provide commentary back to the superintendent. So we are very active around the minor injury definition, prejudgment interest and a few other measures that we have discussed before. Obviously, then it needs to get through the political process after that state.

Charles Brindamour

Yes, I think the...

Tom MacKinnon

And the rate hikes you put in that business, are they – I know you talked about them before, just any kind of update on how far we are through in that process?

Charles Brindamour

Yes. I mean its 2 years in a row, by the way that we have been active on that file. So recap Darren, maybe for Tom of rate action in Alberta.

Darren Godfrey

Yes. So we took rate action back in April of 2015 and then we followed up in May of this year with another rate descent on top of that as well. We have probably pushed, I would say cumulative sort of 12 points, 13 points in the last couple of years. We are doing some other things in terms of looking to manage the quality of business, underwriting, etcetera to essentially look to bank further margin there as well. We will look to potentially take more rate increase as we need to on that line.

Charles Brindamour

Depending on how things pan out. I think that the folks in Alberta in government understand the issue well. I think we also have to understand that they have a lot of things to deal with. We also have to understand that there is a new government, in fact that’s been there for less than a year. So I think we are working with these guys to make sure that Albertans have a stable automobile insurance product. But we are not counting on that, to be honest. And therefore, we have been very proactive from a claims management point of view segmentation as well as pricing and we will keep doing that in the coming weeks and months if that trend persists. Why don’t we talk about service centers?

Patrick Barbeau

Yes. So as Charles said, we just opened our second one in Ottawa in July. Overall, the service centers, the main objective is to improve customer satisfaction and to – in the process because it reduces cycle time, it’s easier for clients, for convenience, one-stop process. Overall, from an economic perspective, there are gains when you reduce the cycle times. And because we have a streamline process also, we have gains on the indemnity itself. But overall, this is – at this point we look at it, the two would probably be about the same. So the additional cost of running the centers should be about in line with the savings we have on those indemnity, so not an overall gain on the bottom line, but clearly a lot of gains from the customer satisfaction.

Charles Brindamour

So that’s it. We are trying to up our game in terms of changing our customers get back on track when it comes to car insurance. Obviously, strategically speaking, our role with the supply chain is changing by having better control of where the repair process is sourced, where the parts are sourced and that’s I think anytime where the upside – the economic upside will be. But in the near-term, as we test our skills, the clear objective is to raise the bar in terms of what Canadians can get when they have an accident.

Tom MacKinnon

Thanks very much.

Operator

The next question is from Paul Holden with CIBC. Your line is open.

Paul Holden

Thank you. So first question is related to personal auto and what I want to ask in the context of all the information you provided on price increases and actions to mitigate cost inflation, you continued to increase the number of units at a pretty good clip, 5% year-over-year this quarter, so just wondering in addition to maybe what you have already said what makes you comfortable growing the number of units in that business at such a pace?

Charles Brindamour

Well, I think the – you have to keep in mind that, that growth is not rate driven. That growth is driven by distribution activities, that growth is driven by telematics, it’s driven by the fact that it’s easier to get a quote, it’s faster to get a quote from us, it’s driven by the fact that our direct platform is now present and established from coast-to-coast, we can pound from a response marketing point of view on that front. And that Intact Insurance also is promoting itself more into a greater extent. And I think that this, in my mind is a way to grow without using your margins basically and it’s a sustainable way to grow as opposed to reduce rate. Personal automobile is a really good business and the fact that we are disappointed with the Q2 result doesn’t mean that we don’t want to grow in that business. I don’t think we would sort of shortcut rating adequacy [ph] to grow, though. That’s not something we are prepared to do, that’s now how we run the business in general. And certainly, in a period where you have trends in the system, I think you need to find other ways to grow. But then price and manage your claims to tame that inflation and that’s exactly what we are doing.

Paul Holden

Got it. And then sort of similar question on personal property, if we look at the unit growth there, 8% year-over-year for the quarter, running ahead of personal auto and as we know, those two products are often sold together, but clearly better growth in personal property in terms of units. So, just wondering what’s driving that extra growth in that line of business?

Charles Brindamour

Darren, what’s your thought?

Darren Godfrey

Well, I think in addition to what Charles talked about in terms of investments in our marketing efforts, branding, etcetera, we are being very active from a product development standpoint, so – in this particular line of business, obviously, much recently with our Enhanced Water Damage Package. Good acceptance from the marketplace. It’s – that alone is driving some additional top line for us as well. But in terms of how broad our product suite and rounding out our product suite beyond homeowners has been very, very successful to-date and should continue in the short to medium term.

Charles Brindamour

Yes. And I think – I mean the thing one should not underestimate is the synergy that exists between our distribution activities and the success of Intact Insurance. And I think a highlight for me this quarter is the fact that our distribution business is doing very well, both from a top line and from a bottom line point of view and they are a big contributor to our growth to at least Intact Insurance’s growth in personal lines. So, maybe the way you can sort of talk about your observations in terms of our distribution operations both from a top and bottom line.

Louis Marcotte

Sure. So as you noticed, the quarter earnings were very generous in terms of the distribution earnings, so up nicely from last year and we attribute that both the improved property of the brokerages themselves that was most of the increase. And then the fact that we have added brokers over time, which is generating additional brokers. I did mention that we are – we have added or invested more in the quarter, $66 million in the network, which will eventually drive further earnings in the future as well as top line growth in the future. But between past acquisitions and the current brokerage and the fact that we are branding with our brokers as well is also having a positive impact on the top line. So, when you combine the growing network – the fact that we are branding with them that we are better integrated is supporting the growth that we are seeing in the unit accounts and personal lines particularly. So, it’s having a positive impact both top line and bottom line.

Paul Holden

Okay, thank you.

Operator

The final question is from Brian Meredith with UBS. Your line is open.

Brian Meredith

Yes, thanks. Just a couple of quick ones here. Charles, just back on personal property, just so I understand this, are you just trying to take advantage of the continuing firming rate environment to grow that business? Are you okay with your underlying profitability in the business right now or are you trying to continue to improve your underlying profitability?

Charles Brindamour

We are seeing that our current price point so to speak is leading to better retentions and this is a sign that the current environment is indeed firm. And to the extent that we can have a competitive offer out there and work on our average rate position, we will do it, and that’s what we’re doing. And I think as Darren explained, the top line movement earlier, I said there is about 6 points of some insured as well as rates. I mean, this is a sign of that. I think we are rolling out very good products at the moment that people are embracing and that we are very comfortable in terms of what it does from a rate adequacy position and very happy to sort of sell that much of that product as possible just because of what we think it does to the overall performance of that line of business. So, we are trying to be opportunistic in the marketplace that we think is conducive to gaining margin, because this is a business that we have gone from underperformance 5 years ago to about 4 points of outperformance now. There is uncertainty around or volatility around personal property. And I think it is a good business to have buffers to do well in bad times. And I think this quarter’s results reflect a little bit of that perspective we have had for a number of years now.

Brian Meredith

Great. A quick one for Louis, the Cornerstone acquisition, will that have much of an impact on distribution revenues?

Louis Marcotte

So that was a Q3 acquisition, BrokerLink completed that acquisition, so a very nice transaction. We don’t expect that will have a huge impact this year. It will start towards probably Q4, but I would say it will have a positive impact next year. So, it’s one of many in the plant. You might not notice itself, the impact of that transaction specifically, but it will certainly feed into the growth of distribution income next years.

Brian Meredith

Great, thank you.

Charles Brindamour

Thank you.

Operator

There are no further questions at this time. I will turn the call back to the presenters.

Samantha Cheung

Thank you all today for your participation. Following this call, a telephone replay will be available for a period of 1 week, while the webcast will be archived in our website for a period of 1 year. A transcript will also be available later in the day in our quarterly financial archive. Our third quarter 2016 results will be released on November 22. With that, thanks again and this concludes our call for today.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!