SPECIALTY Building a North American Leader

Transcription

1 SPECIALTY Building a North American Leader Thursday, September 20, 2018 Intact Financial Corporation (TSX: IFC)

2 Page 2 Table of Contents INTRODUCTION P. 5 NA SPECIALTY: STRUCTURED TO SUCCEED P. 8 US SPECIALTY: MARKET REVIEW & PROFITABILITY P. 16 US SPECIALTY : GROWTH & OPPORTUNITIES P. 21 NORTH AMERICAN SURETY SPECIALTY CLAIMS MANAGEMENT P. 27 P. 32 CANADA SPECIALTY P. 36 PROFITABILITY, SYNERGIES, & CAPITAL P. 40 CONCLUSION P. 46

3 Page 3 Opening FORWARD-LOOKING STATEMENTS Certain of the statements included in this presentation about the Company s current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments constitute forward-looking statements. The words may, will, would, should, could, expects, plans, intends, trends, indications, anticipates, believes, estimates, predicts, likely, potential or the negative or other variations of these words or other similar or comparable words or phrases, are intended to identify for ward-looking statements. This presentation contains forward-looking statements with respect to the acquisition (the Acquisition ) of OneBeacon Insurance Group, Ltd. ( OneBeacon ) and the integration and future plans relatin g to the Acquisition. Forward-looking statements are based on estimates and assumptions made by management based on management s experience and percep tion of historical trends, current conditions and expected future developments, as well as other factors that management believes are appropriate in the circumstances. Many factors could cause the Company s a ctual results, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the following factors: the Company s ability to implement its strategy or operate its business as management currently expects; its ability to accurately assess the risks associated with the insurance policies that the Company writes; unfavoura ble capital market developments or other factors which may affect the Company s investments, floating rate securities and funding obligations under its pension plans; the cyclical nature of the P&C insurance industry; management s ability to accurately predict future claims frequency and severity, including in the Ontario personal auto line of business, catastrophe losses caused by severe weather and other weather-related losses, as well as the impact of climate change; government regulations designed to protect policyholders and creditors rather than investors; litigation and regulatory actions; periodic negative publicity regarding the insurance industry; intense competition; the Company s reliance on brokers and third parties to sell its products to clients and provide services to the Company; the Company s ability to successfully pursue its acquisition strategy; the Compa ny s ability to execute its business strategy; the Company s ability to achieve synergies arising from successful integration plans relating to acquisitions; economic, financial, business and political conditions, as well a s their resulting effect on management's estimates and expectations in relation to accretion, equity IRR, net operating income per share, MCT, combined and debt-to-total capital ratio and the other metrics used in relation to the Acquisition; the terms and conditions of the Acquisition; the Company s participation in the Facility Association (a mandatory pooling arrangement among all industry participants) and similar mandated risk-sharing pools; terrorist attacks and ensuing events; the occurrence and frequency of catastrophe events, including a major earthquake; the Company s ability to maintain its financial strength and issuer credit ratings; the Company s access to debt and equity financing; the Company's ability to compete for large commercial business; the Company s ability to alleviate risk through reinsurance; the Company s ability to successfully manage credit risk (including credit risk related to the financial health of reinsurers); the Company s ability to contain fraud and/or abuse; the Company s reliance on information technology and telecommunications systems and potential failure of or disruption to those systems, including evolving cybersecurity risk; the impact of developments in technology on the Company s products and distribution; the Company s dependence on and ability to retain key employees; chang es in laws or regulations; general economic, financial and political conditions; the Company s dependence on the results of operations of its subsidiaries and the ability of the Company s subsidiaries to pay dividends; the volatility of the stock market and other factors affecting the trading prices of the Company s securities; the Company s ability to hedge exposures to fluctuations in foreign exchange rates; future sales of a substantial number of its common shares; changes in applicable tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof. All of the forward-looking statements included in this presentation and the quarterly earnings press release dated July 31, 2018, are qualified by these cautionary statements and those made in the section entitled Risk management (Sections 19-24) of our MD&A for the year ended December 31, These factors are not intended to represent a complete list of the factors that could affect the Company. These factors should, however, be considered carefully. Although the forward-looking statements are based upon what management believes to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward-looking statements. When relying on forward-looking statements to make decisions, investors should ensure the preceding information is carefully considered. Undue reliance should not be placed on forward-looking statements made herein. The Company and management have no intention and undertake no obligation to update or revise any forw ard-looking statements, whether as a result of new information, future events or otherwise, except as required by law. All dollar figures in Canadian dollars, except as otherwise noted

4 Page 4 Opening DISCLAIMER This Presentation does not constitute or form part of any offer for sale or solicitation of any offer to buy or subscribe for any securities nor shall it or any part of it form the basis of or be relied on in connection with, or act as any inducement to enter into, any contract or commitment whatsoever. The information contained in this Presentation concerning the Company does not purport to be all-inclusive or to contain all the information that a prospective purchaser or investor may desire to have in evaluating whether or not to make an investment in the Company. The information is qualified entirely by reference to the Company s publicly disclosed information. No representation or warranty, express or implied, is made or given by or on behalf of the Company or any of its the directors, officers or employees as to the accuracy, completeness or fairness of the information or opinions contained in this Presentation and no responsibility or liability is accepted by any person for such information or opinions. In furnishing this Presentation, the Company does not undertake or agree to any obligation to provide the attendees with access to any additional information or t o update this Presentation or to correct any inaccuracies in, or omissions from, this Presentation that may become apparent. The information and opinions contained in this Presentation are provided as at the date of this Presentation. The contents of this Presentation are not to be construed as legal, financial or tax advice. Each prospective purchaser should contact his, her or its own legal adviser, independent financial adviser or tax adviser for legal, financial or tax advice. The Company uses both International Financial Reporting Standards ( IFRS ) and certain non-ifrs measures to assess performance. Non-IFRS measures do not have any standardized meaning prescribed by IFRS and are unlikely to be comparable to any similar measures presented by other companies. Management analyzes performance based on underwriting ratios such as combined, expense, loss and claims ratios, MCT, RBC and debt-to-total capital, as well as other non-ifrs financial measures, namely DPW, Underlying current year loss ratio, Underwriting expenses, NOI, NOIPS, OROE, ROE, AROE, Non-operating results, AEPS, Total capital margin, Cash flow available for investment activities, and Market-based yield. These measures and other insurance related terms are defined in the Company s glossary available on the Intact Financial Corporation web site at in the Investors section. Additional information about the Company, including the Annual Information Form, may be found online on SEDAR at

5 Page 5 Canadian Specialty Business Introduction

6 Page 6 Introduction What we are aiming to achieve 3 out of 4 customers are our advocates 3 out of 4 customers actively engage with us digitally Our customers are our advocates Our people are engaged Be a best employer Be a destination for top talent and experts Achieve combined ratio in the low 90s Generate $3 billion in annual DPW Our Specialty Solutions business is a leader in N.A. Our company is one of the most respected Exceed industry ROE by 5 points Grow NOIPS 10% yearly over time

7 Page 7 Introduction Import OneBeacon s expertise and expand product offering in Canada Building a N.A. Specialty Leader Experienced Management Deep expertise Distribution Network Technology Large scalable platform Broad Distribution Sustainable and Profitable growth Attract top talent Strong performance in Specialty Operational Excellence & Capabilities Leverage Intact s underwriting and claims capabilities

8 Page 8 Canadian Specialty Business North American Specialty: Market Review & Profitability

9 Page 9 North American Specialty What is Specialty? A service oriented culture requires dedicated employees committed to building the relationships that dictate success. 20% higher employee engagement score than the national average Customer Expertise A strong relationship with our customers allows us to not only better assess their needs, but better assess and address their risks. 77% average annual policy retention A detailed understanding of the segments and industries we serve is necessary to develop superior quality products Engagement defined by Aon Hew itt as: The state of emotional and intellectual involvement that motivates employees to do their best w ork. Customer Experience Product Expertise 25+ Years business unit leader average experience

10 Page 10 North American Specialty Optimized Organizational Structure Mike Miller * Lines under Jeff Richardson Dennis Crosby Pete Weightman Paul Brehm France St-Louis Accident & Health Environmental * Surety Chad Anderson D&O / E&O / Fidelity Farm Corporate Underwriting Claims Financial Institutions Financial Services * Entertainment * Niche Omega Specialty Actuarial Government Risks * Inland Marine Healthcare Management Liability Dewar Technology * Programs Trucking Specialty Auto Canada Systems & Projects Corporate Affairs Support Functions (Marketing & Communications, Legal, Finance, HR, IT, Reserves, and Reinsurance) Specialty Property * Ocean Marine United States North American

11 Page 11 North American Specialty Evolution of a Specialty Platform Built a portfolio of profitable U.S. specialty businesses Opportunistically disposed low-margin and legacy lines Canadian Specialty Solutions Combined with profitable IFC business to create a N. American platform 2017 Long Term Dewar Ocean Marine Healthcare Mgmt. Liability Specialty Prop. Technology Inland Marine Financial Serv Accident Govt. Risks Entertainment Disposed Commercial and Personal Lines Disposed Legacy Runoff Exposures Environmental Surety Financial Inst. 2,500 2,000 1,500 1, Q18 TTM Specialty DPW (in C$ Millions)

12 Page 12 North American Specialty Taking the Next Step Market Leader Drive Results Opportunity N. American Expertise Low-90 s U.S. Combined C$3 Billion DPW Highly respected in the marketplace Destination for top-notch talent Best-in-class service Outperform financially Sizable core of highperforming BUs Invest in and grow strong performers Execute on U.S. profitability plans Top quartile N. A. Specialty Insurer Leverage deep distribution partnerships Expand geographic footprint Invest in new specialty markets Top quartile N. A. Specialty Market

13 Page 13 North American Specialty Building a Market Leader What We Said Shared philosophy: employees are THE competitive advantage IFC s capabilities in data, claims, and digital deployed in support of the U.S. operations enhances potential OB bolsters IFC s existing Canadian business with new products and capabilities What We ve Done Created North American Surety and Ocean Marine teams Canadian claims and actuarial personnel brought on to the U.S. platform Technology and Entertainment products successfully rolled out in Canada Complementary expertise positions us to drive cross-market synergies Cross Border Desk launched, bolstering distribution relationships

14 Page 14 North American Specialty Reaching the Top Quartile U.S. CANADA Entertainment 6% Mgmt. Liability 6% Inland Marine 6% Surety 7% All Other (4 BUs) 16% Gvmt. Risks 7% C$1.5 billion DPW Dewar 7% Accident 14% Healthcare 7% Technology 12% Ocean Marine 12% High Single Digit Growth YTD in profitable BUs targeted for expansion Low Double Digit Decline YTD in BUs with profitability plans in place D&O / E&O 5% Niche 8% Program 12% Omega 5% Trucking 14% Marine 4% C$0.7 billion DPW Specialty Auto (Sharing Econ) 20% Surety 16% Farm 16% NOTE: 2018 pro forma trailing 12 months (TTM) estimated Initial Growth Focus Profitability Plans in Place

15 Page 15 North American Specialty Key Takeaways Building a market leader our people are the competitive advantage On target to deliver a low-90 s U.S. combined ratio within months Taking advantage of new opportunities C$3 billion DPW in 2020

16 Page 16 Canadian Specialty Business United States Specialty

17 Market Concentration Page 17 U.S. Specialty Business Understanding the Specialty Market Specialty Commercial High = $10B DPW Unique lines of business requiring deep expertise Handful of lines with fairly homogenous products Target Market Concentrated market: few competitors with requisite knowledge Competitive market: process and scale required for success Inland Marine, $21.3B Surety, $5.9B A&H, $4.7B OL - CM, $21.3B Consistent, longterm profitability Uneven profitability with little margin for error Ocean Marine, $3.4B Med. Prof., $9.3B Work Comp, $58.6B 90.5% 10-Yr Average CR 95.3% 10-Yr Average CR Comm. Auto, $33.1B Low 60% 70% 80% 90% 100% 110% 120% 130% 10-Year Average Combined Ratio Combined ratio and market concentration data from S&P Global Market Intelligence (in US$).

18 Page 18 U.S. Specialty Business U.S. Specialty Market Pricing Environment Other E&O/D&O Market Observations Inland Marine Workers Comp Estimated 2Q18 Exposure by Coverage Accident Pricing environment remains competitive; modest upward trends continuing Coupled with the current favorable economic environment, we expect low-to-mid singledigit industry growth in the coming year Consolidation continues to create opportunities and challenges Property General Liability Comm. Auto Ocean Marine Key Competitors Specialty segments of large commercial P&C Mid-sized specialty focused insurers Unfavourable Favourable Source: Council of Insurance Agents and Brokers

19 CV CV Page 19 U.S. Specialty Business Driving to the Low-90s Entertainment 6% Mgmt. Liability 6% Inland Marine 6% All Other (4 BUs) 16% C$1.5 billion DPW Accident 14% Technology 12% Ocean Marine 12% Eliminated non-performing lines Four BUs with ongoing profitability plans Appetite/exposure management, get rate, maximize underwriting efficiency Claims Eff. In-house claims legal team Indemnity control program Increased internalization U/W Actions Surety 7% Gvmt. Risks 7% Dewar 7% Healthcare 7% Leverage platform scalability top line growth without change in cost structure Realize transaction synergies Expense Mgmt. NOTE: 2018 pro forma trailing 12 months (TTM) estimated

20 Page 20 U.S. Specialty Business Life of a Profitability Plan Understand Trends Collaboration is key actuarial, claims, and underwriting Eye towards loss costs, social/legal environment, and mix of business Identify businesses trending in the wrong direction Develop a Plan of Attack Isolate underperforming segments class of business, industry, account size, geography BUs know markets best identify a realistic plan Actuarial quantifies impact and consults on feasibility Execute and Evolve Plan is agreed upon by all parties BU, senior management, actuarial Detailed progress tracked monthly Ongoing candid conversations about viability evolution of action items

21 Page 21 Canadian Specialty Business United States Specialty: Growth & Opportunities

22 Page 22 U.S. Specialty Business Growing Opportunistically Strong Distribution Model Key relationships at the BU level Established partnerships = profitable, sticky business Broader Footprint Geographic expansion Tangential products and customer groups Emerging Specialties Sharing economy Gig economy IFC Opportunity Take advantage of increased visibility and financial strength of IFC Leverage established relationships

23 Page 23 U.S. Specialty Business Strong Distribution Model Long-term relationships with distribution partners ensure access to profitable, sticky business >70% of premium from relationships >10 years Specialized, long-term partnerships ~150 median relationships for each BU Targeted, selective distribution approach managed at the BU level allows for valueadd face-to-face level relationships Partnerships with like-minded specialists ensure alignment in customer interactions and limit concentration risks with larger distributors <15% of premium from Big 3 producers

24 Page 24 U.S. Specialty Business Broader Footprint Opportunity Shrinking market capacity Established OneBeacon presence Specialty Property Primary & Buffer Strategy New team with necessary expertise Prudent use of capacity Execution 70% buffer / 30% primary Target classes of business

25 Page 25 U.S. Specialty Business IFC Opportunity Employees and Capabilities Develop Partnerships Take advantage of existing U/W talent Identify industry leaders Broker Visibility Leverage IFC s 2,800 relationships Product Rollout in Canada Differentiate via Service Specialty expertise wins in all markets Technology Entertainment Marine

26 Scaled, 2000 = 100 Page 26 U.S. Specialty Business Emerging Specialties Sharing Economy Traditional Employment Alternative / "Gig" Employment Source: IRS

27 Page 27 Canadian Specialty Business North American Surety

28 Page 28 North American Surety Where We re At Market Size IFC Market Share Industry CR * C$0.6 B ~20% ~75% C$8.0 B ~1.5% ~70% North American Surety C$8.6 B ~3% ~70% * Estimated 5-year combined ratio for respective P&C insurance industry from the NAIC and MSA Research

29 Page 29 North American Surety U.S. Surety: Establishing Strength Market-leading expertise and service have gained credibility in the market IFC ownership generating additional traction with producers Strong economy creating opportunities US$80M DPW +35.2% YoY Q18 TTM DPW to end of H trailing 12-months (TTM) in US$ millions

30 Page 30 North American Surety Canadian Surety: A Market Leader #1 Surety writer in Canada industry leader with room for growth Geographic Opportunity Ontario Product Opportunity Commercial

31 Page 31 North American Surety North American Surety: Building Together Canadian Contract N.A. Commercial Reinsurance Collateral Mgmt. Claims Handling Back Office International Online Platform U.S. Contract

32 Page 32 Canadian Specialty Business Claims Management

33 Page 33 Claims Management OneBeacon claims Our objective is to provide an outstanding customer experience with fair and equitable settlement Scale is not as important as expertise! Claims outperformance requires mastering different jurisdictions and understanding complexity of coverages Claims are grouped into 10 business segments, supported by strong technical expertise in 4 main areas; common teams handle high frequency and low severity files

34 Page 34 Claims Management Optimized organizational structure TECHNICAL & LARGE LOSSES LEGAL PROJECTS, SUPPORT, COMPLIANCE & QA FINANCE, DATA ANALYTICS, FRAUD & SUBRO Entertainment Environmental Accident & Health Financial Services Government Risks Inland Marine Ocean Marine Technology Professional Liability Health Care Auto Physical Damage, Auto Body Injury, Property, General Liability, Workers Compensation

35 Page 35 Claims Management Optimized legal claims team leveraging IFC s process In-house Legal counsel Starting with New York and California (total staff of 12) Assigning new files started in May 2018 Evaluation of repatriation of files from external firms in the coming months Indemnity Control Program Regular campaigns per line of business to identify opportunities to better control payouts (10 campaigns completed; action plan being developed) Internalization Hiring of claims handlers to enhance customer experience, better control of indemnity and reduce expense costs Internal Structure Coverage Analysis Extra-Contractual Litigation Claims Compliance/Regulation Staff Counsel

36 Page 36 Canadian Specialty Business Canadian Specialty

37 Net Earned Premium (C$ millions) Page 37 Canadian Specialty Business Canadian specialty lines portfolio 3-yr average Combined Ratio 92.4% Pre-AXA Programs Niche Surety Farm AXA E&O / D&O LH Trucking Omega Marine Equipment Expanded: o Niche o Programs o Surety o Farm JEVCO Speciality Auto Expanded: o Niche o Surety o Trucking National Specialty Lines Added SVP and VP with Corp team OneBeacon N.A. Structure Cross Border Technology Entertainment N.A. lines: o Surety o Technology o Marine Q218 TTM

38 Page 38 Canadian Specialty Business Canadian specialty lines portfolio P&C Foundation Niche Programs Farm Area of Focus Trucking D&O / E&O 5% Niche 8% Program 12% Omega 5% Trucking 14% Marine 4% C$0.7 billion DPW Surety 16% Specialty Auto (Sharing Econ) 20% Farm 16% Differentiators Brand Service Cross Border Competitors Traditional (large scale generalist P&C w/ specialty lines) International Overlapping Products with OneBeacon NOTE: 2018 pro forma trailing 12 months (TTM) estimated

39 Page 39 Canadian Specialty Business Financial Objectives and Growth Opportunities Market Share Growth Expand on 3% share of $1.4 billion E&O / D&O market Non-profit management liability product in 2017; public and private to come in 2018 $1 Billion Specialty Opportunity Add Talent More than 60 external hires since Jan Focused on E&O / D&O segment as well as business development New Partnerships Market-leading sharing economy expertise and products OneBeacon products rolled out in Canada Tech and Entertainment North American Opportunity >$200M Technology market & >$40M Entertainment market in Canada Cross-border desk open for North American customers Leverage US Commercial Surety expertise into Canada

40 Page 40 Canadian Specialty Business Profitability, Synergies & Capital

41 Page 41 Capital Management OneBeacon: Capital deployment at work Mid-single digit NOIPS accretion by end of 2019 Neutral to positive ROE accretion Immediately accretive to BVPS by 4.5% Transaction IRR >15% Value creation levers: Low 90 s Combined Ratio Growth Opportunities Investment Income Upside

42 Page 42 Capital Management Progress towards a sustainable low-90s combined ratio Recalibrate Business Unit Portfolio Exited weakest lines at closing Investing in strong core of industry leading lines of business Deploying new segmentation and pricing models in underperforming lines Claims Process Efficiency Importing proven IFC analytics and claims expertise to the U.S. platform Increasing internalization of claims legal handling Expense Management Leveraging platform scalability: top line growth without major shift in cost structure Realizing targeted transaction synergies

43 Page 43 Capital Management Expense synergies US$ 9M US$ 25M Combined reinsurance program fully integrated in 2018 De-listing and elimination of U.S. public company reporting Investment management internalization Technology savings 2017 Realized Q Run Rate Combining reinsurance programs Technology savings Shared services and company delisting Investment management internalization We have reached our US$25 million run rate target

44 Page 44 Capital Management Optimized North American investment portfolio $17 billion of investments - strategically managed OPTIMIZED ASSET ALLOCATION IMPROVED GEOGRAPHIC DIVERSIFICATION PRE OB TARGET POST OB TARGET CAD 70% FIXED INCOME 74% 76% PREFERRED SHARES COMMON SHARES 10% 8% 16% 16% USD 27% OTHER 3% High quality credit profile maintained

45 Page 45 Capital Management Strong capital position Greater diversification: Multi-jurisdiction, multi-currency Optimized structure: Ensuring accessibility of capital between jurisdictions Canada (MCT) U.S. (RBC) IFC capital margin ACQUISITION CAPACITY UP TO C$1B WITHOUT ISSUING EQUITY Regulatory capital ratios (RCRs) 201% 405% - Industry-wide supervisory minimum levels 150% 150% - Company action levels (CALs) 170% 200% - Capital above CALs (capital margin) Other regulated/unregulated entities IFC: Total capital margin 1,243 * As of June 30, 2018 (in $C millions) 1 Other regulated entities include Split Rock Insurance, Ltd. (Bermuda) and IB Reinsurance Inc. (Barbados) CANADA REMAINS THE PRIORITY FOR CAPITAL DEPLOYMENT

46 Page 46 Canadian Specialty Business Conclusion

47 Page 47 Conclusion OneBeacon: Building a North American Leader Progress to date Platform for Expansion 97.4% 95.3% 93.8% 36.9% 37.5% 36.8% Organic Growth 60.5% 57.8% 57.0% Q4-17 Q1-18 Q2-18 Margin Expansion Capital Deployment Claims Ratio Expense Ratio

48 Page 48 Conclusion Strategic priorities 02 Specialty platform profitability and growth IMPROVING OPERATING ENVIRONMENT CULTURE AND VALUES ALIGNED INCREASING OUR ROE OUTPERFORMANCE CONTINUED NOIPS GROWTH

49 Page 49 Contact Information Contact Information General Inquiries Intact Financial Corporation 700 University Avenue Toronto, ON M5G 0A1 1 (416) (toll-free in N.A.) info@intact.net Media Inquiries Stephanie Sorensen Director, External Communications 1 (416) stephanie.sorensen@intact.net Investor Relations Inquiries ir@intact.net 1 (416) (toll-free in N.A.) Ken Anderson VP Investor Relations & Treasurer 1 (855) ext kenneth.anderson@intact.net Neil Seneviratne Director, Investor Relations 1 (416) ext neil.seneviratne@intact.net