Published in Insurance and Finance Newsletter No. 9, February 2012... Feature Insurance Company: An Interview with Charles Brindamour, CEO, Intact Financial Corporation... by Etti Baranoff Intact Financial Corporation is Canada s largest provider of home, auto and business insurance with approximately C$6.5 billion in direct premiums written and a market share of more than 16 per cent. Its products are distributed through a nationwide network of insurance brokers or sold directly to consumers through call centres and the Internet. Its 10,000 employees offer its products and services through Intact Insurance, belairdirect, GP Car and Home and Novex Group Insurance. Over the years, Intact became the main consolidator of the highly fragmented P&C industry in Canada, acquiring leading positions in the markets in which it operates. Three years ago, the company, then a subsidiary of ING Group, became an independent and widelyheld Canadian company and changed its name from ING Canada to Intact Financial Corporation. Today, Intact market capitalisation is in excess of C$7 billion. I talked with Charles Brindamour, CEO of Intact, during the last General Assembly of The Geneva Association in Rio de Janeiro, Brazil, in May 2011. We continued the conversation while in London for the Insurance and Finance Seminar in December 2011 (which is featured later in this Newsletter). Mr Brindamour shared with us the history of his company, its strategies moving forward and the reasons behind its success. While he describes his company as prudent in its approaches, the sense about this enterprise is that of a young, exciting and innovative venture. As a supplement about the Canadian market, the Insurance Bureau of Canada kindly submitted an article describing the P&C market (following the interview). Q: Being an insurance company that originated over 200 years ago, what are the main highlights in your history that you would like to share with our readers? Intact has a long and proud Canadian history. We trace our roots in Canada back more than 200 years to the incorporation in 1809 of the Halifax Fire Insurance Association later to become the Halifax Insurance Company making us one of the country s oldest, continuous companies. The post-war years marked an important period in the history of the company, as tens of thousands of Europeans war brides, displaced persons, people looking for a better life emigrated to Canada. They included a large number of Dutch, many of whom fondly remembered Canada s role in the liberation of their nation. In the late 1950s, Amsterdam-based Nationale-Nederlanden, then one of the largest insurance companies in their former homeland, acquired the Halifax Insurance Company to serve them in their new country. In the late 1970s, Nationale-Nederlanden acquired three other well-known regional insurers in Canada: Commerce Group and Belair in Quebec, and Western Union in Alberta. In 1991, Nationale-Nederlanden merged with NMB Postbank to create ING Group, one of the first bancassurance groups in the world. As its business in Canada continued to grow, the Canadian insurance companies that had been operating as separated entities were brought together in 1993 under the umbrella of ING Canada. The growth of the company continued with the acquisition of a number of insurance companies, most notably Guardian s Canadian P&C business in 1998, Zurich s Canadian home, auto and small and medium business insurance portfolios in 2001, and in 2004,
Allianz Canada. 2004 was also a milestone year for the company when institutional and retail investors acquired 30 per cent ownership through an initial public offering. However, 2009 marked the beginning of a historic new era for the company as institutional and retail investors acquired ING Group s remaining ownership in the company, creating Intact Financial Corporation, a proudly Canadian and independent company. In the fall of 2011, Intact consolidated its leadership position by acquiring AXA s Canadian operations, which was then the sixth largest P&C insurer in Canada. Q: What are the highlights of the financial performance of Intact Financial Corporation in the past three to five years? The main highlight of our financial performance over the years is the fact that we have consistently outperformed the industry. Over the last 10 years, for instance, our combined ratio was on average lower than the Canadian industry by nearly four percentage points and our return on equity higher by nearly eight percentage points. More recently, in 2010, we outperformed the industry s combined ratio by more than 10 points and the ROE by nearly 12 points. With a ROE of more than 17 per cent in the first nine months of 2011 and a combined ratio of approximately 95 per cent, we will continue to outperform the industry by a large margin, once final results for the year 2011 are available. This superior performance has allowed us to maintain a very strong balance sheet throughout the years, as well as provide 18 per cent total return to our shareholders in the past year, and 65 per cent in the past two years. We were also able to return C$1.1 billion to our shareholders in the last two years through share repurchases and redeploy excess capital for the AXA Canada acquisition, which will generate an Internal Rate of Return (IRR) of more than 20 per cent and contribute an additional 15 per cent to our Net Operating Income Per Share (NOIPS) in the mid-term. Q: Why have you been so successful? Our successes can be attributed to a number of factors, the most important being the significant scale advantage we have gained over the years as a result of our growth and acquisition strategy. We have always believed that scale is a critical success factor in the fragmented Canadian P&C insurance industry, and with C$6.5 billion in premiums, we are twice as big as our main competitor in the Canadian industry. Our scale advantage has provided us with the largest private database of claims history in Canada and the ability to invest significant resources in sophisticated pricing and underwriting tools and algorithms. With billions of different pricing cells, we can offer each Canadian consumer unique premiums based on their risk profiles and the protection they require. These tools, combined with a disciplined approach to pricing and underwriting and prudent reserving practices, have been a key factor of our successes over the years. And thanks to our scale, we have been able to leverage our size to build the most efficient and customer-friendly in-house claims organisation. Another significant contributor to our successes has been our ability to adapt to ever-evolving consumer needs and purchasing habits. We have developed a successful multichannel strategy whereby we sell our products through approximately 80 per cent of the brokerages across the country, as well as directly to consumers through call centres and the Internet. In fact, we were the first insurer in North America to sell its products through the web and we are in the process of transferring the knowledge we acquired in the direct channel to insurance brokers. But all this would not have been possible without maintaining a strong financial position and excess capital, or without redeploying our own capital prudently. These actions have allowed us to take advantage of the opportunities that arise in the industry and financial cycles, both in good and bad times. In fact, it is interesting to note that the most momentous developments of our short history as an independent company have taken place while financial markets were the most volatile. 2
Q: One of these momentous developments was the recent acquisition of AXA Canada last fall. What led you to consider this acquisition? The acquisition of AXA Canada constituted for us the unique opportunity of combining the two best-inclass P&C insurers in the country. AXA Canada was not only the sixth largest insurer in the country but also an organisation that consistently outperformed the industry. As such, the strategic fit was most compelling. Not only has the acquisition strengthened our premiums by 40 per cent, it has also accelerated our growth profile by expanding our commercial lines offering and our geographic footprint in Canada. By bringing together the two companies, we have enhanced our risk selection and claims management capabilities and reinforced the expertise of our organisation and of its executive team. But just as importantly, the transaction was most compelling financially, as I mentioned before. Q: You announced the transaction in May of last year in the midst of a period of high volatility in the financial markets. How did you finance this C$2.6 billion acquisition? We financed the acquisition through a mix of our own excess capital and more than C$900 million through a public offering of common shares, which together represented about half of the cost of the acquisition. While we could have raised much more equity, we felt that securing long-term financing would be more beneficial due to its lower cost and would optimise our balance sheet. Our strategy was to proceed with different issues of preferred shares and medium-term notes, spreading the maturities over a period of time and reducing any potential liquidity risk, to better match our new liabilities with our long-term assets. The market s confidence in the stability of our company was also illustrated by our issuance of C$100 million of 50-year notes. By financing the acquisition in the way we did, we maintained our solid financial position, optimally deployed our excess capital, increased the book value per share and improved our ability to continue to outperform the industry s profitability. Q: What are the products sold by Intact? What is the market share of Intact in the various lines of insurance? Product and geographic mix Quebec, 30% Source: Intact. Intact: distribution by line of business Personal Property, 23% Personal Auto, 42% Ontario, 37% Commercial Auto, 8% Commercial P&C, 27% Intact: distribution by geography West, 27% Atlantic, 6% We offer a full suite of P&C insurance products for individuals and businesses and maintain a leading position in the country s largest markets namely Ontario, Quebec, Alberta and British Columbia as well as in Nova Scotia. Overall, we are the leader in Canada with a market share of approximately 16.5 per cent, twice the market share of the second largest insurer and nearly three times the market share of the next three players. In fact, we are the leading insurer in all the lines of business in which we are active. Personal auto represents approximately 45 per cent of our premiums, while personal property represents 22 per cent and commercial insurance slightly more than 30 per cent. Q: What are the distribution systems used? What are the main customer groups? All our products are distributed through a vast network of more than 2,000 brokerages, which make up about 80 per cent of all Canadian brokers. Sales through brokers represent about 90 per cent of our premiums, which is why we heavily invest in the brokerage channel and we own one of Canada s largest brokerages. Since we actively pursue a multi-distribution strategy, and given the demographic changes that are taking place in Canada, we have established two separate brands (belairdirect and GP Car and Home) that distribute our products directly to consumers either through call centres or the web. While we offer our products to all consumers, our segmentation approach mainly targets consumers who have demonstrated sound and disciplined financial behaviours. In commercial insurance, we focus our efforts on small and medium-sized businesses, where pricing is more rigorous and less impacted by the capital position of insurers. 3
Q: What are the unique attributes of being a Canadian insurer? (Special geographical differences? Weather-related risks?) One of the unique attributes of being a Canadian insurer is the diversity of the risks that we have to assume given the physical characteristics, geography and size of the country. Another attribute, which we may share with other countries, is the fragmentation of the regulatory regime. In Canada, the federal government is responsible for ensuring the financial stability of insurers, and as proven over the last few years, it has been quite successful. While the federal government assumes the leadership for maintaining the financial stability of the industry, market conduct issues are regulated by provincial and territorial governments. As a result, products, business processes and practices may vary from one province to another because of different regulatory frameworks. Each province offers its own challenges given the unique regulatory regime in place in each of them. From a risk perspective, each region of the country also offers its own challenges given varying natural and physical attributes. For instance, earthquakes may be an issue on the Canadian West Coast but not in most other provinces. Changing climate patterns may affect some regions more than others and issues related to flooding may vary from province to province. From a competitive point of view, there is no such thing as a single Canadian market. The Canadian P&C industry is very fragmented, and while there are companies that operate nationally, you may find a number of large regional players. As a result, your main competitors may vary from province to province. Finally, the strength of the various distribution networks varies by province, which means that in some regions your main competitors may be direct writers, while in others you have to compete mainly with insurers that offer their products through brokerages. Overall, even if our activities are focused on the Canadian market, we approach our activities like a multinational organisation with a number of affiliates or regional entities responsible for all facets of their operations, from risk selection and pricing to distribution strategies with brokerages. Q: Can you expand on the Enterprise Risk Management system that is currently in place? What are the internal controls and philosophy? We have a comprehensive risk management framework and internal control procedures designed to manage and monitor the various risks we are exposed to in order to protect our business, our clients, our shareholders and our employees. Our framework covers investment-related risks (market and credit risks and the use of derivatives), insurance-related risks (reserve adequacy, business cycle, catastrophes and climate change, reinsurance, business interruption, distribution, competition, underwriting ability, product and pricing), operational risks and others. Our philosophy is to avoid risks that could materially impair our financial position, to accept risks that contribute to sustainable earnings and growth and to disclose these risks in a full and complete manner. Q: During the financial crisis that began in 2007, Intact did not realise any decline in earnings and did not face the negative impacts of the financial crisis. What are the main reasons for such stability and strength? Like all financial institutions, we were not shielded from the financial crisis of 2008 and 2009 as we incurred investments losses of approximately C$450 million during that period. However, the impact on our bottom line was not as severe as it might have been for other companies. And there are a number of reasons for this. The first one is the conservative approach we have historically taken in ensuring that we always maintain a strong financial position. This approach has always been reflected in the way we manage our investment portfolio. It ensures that the risk profile of our portfolio balances the investment return required to satisfy our liabilities, while optimising the investment opportunities available in the market place. As a result, our portfolio includes mainly high-quality bonds as well as equity securities of large, publicly-traded and dividend-paying Canadian companies. We do not invest in leveraged securities, and our exposure to the American or European markets has always been minimal. The second reason is that during the financial crisis we implemented a periodic review process to adapt our investment strategy to the high volatility of the investment environment at that time. Our main objective was to protect the strength of our financial position. For example, we employed several risk mitigation factors, implemented changes to our strategic asset mix, implemented a financial hedging programme and increased our holdings in cash. These actions reduced our exposure to the equity 4
markets and decreased the sensitivity of the Minimum Capital Test (MCT) ratio to fluctuations in the equity markets. In fact, throughout 2008 and 2009, our MCT was over 200 per cent. The third reason is that throughout the crisis we continued to generate significant operating income. Our core competencies are in underwriting, pricing and claims management. We have always held the belief that our insurance operations should be profitable on their own and we manage them with discipline to ensure our products are priced according to the risks that we assume. Q. Now that you have been the P&C leader in Canada for a number of years, what is your strategy moving forward? The fact that we consolidated our leadership position in the Canadian market has not altered our strategy as we intend to pursue further growth. In the short term, we will benefit from the firming of local market conditions in both personal and commercial lines. In the mid term, we ll continue to develop our distribution platforms. Intact Insurance, our affiliate that distributes the products through brokers, will continue expanding its support to our existing distribution partners, while our direct-to-consumers affiliates will also continue their expansion. BrokerLink, our own brokerage, will complete the transformation of its business model to better compete with direct writers. We also believe that current conditions are more conducive to further consolidation in the Canadian market and we intend to continue to be an active consolidator. Q: Any thoughts about expanding your activities outside Canada? While we intend to continue our growth in the Canadian market by further developing our operational platforms and participating in the consolidation of the industry, we intend to expand beyond the Canadian market. We see a number of potential opportunities in auto insurance, either in emerging markets or in unsophisticated targets in mature markets. Our intention is to target markets where we can bring value by leveraging our strengths in pricing and claims management as well as our online expertise. Our current platforms are easily scalable and could be extended to new markets. Q: In conclusion, which special accolades would you like to share with the readers about Intact? Our disciplined approach to pricing, underwriting, investment and capital management has positioned us well for the future. We are currently and by far the largest P&C insurance company in Canada with a consistent track record of industry outperformance, and the recent acquisition of AXA Canada will further improve our performance. Our financial position is strong with excellent long-term earnings potential as our current organic growth platforms are easily expandable both in Canada and abroad. Author: Etti Bararnoff is Research Director, Insurance and Finance, The Geneva Association. Financial Stability in Insurance Visit The Geneva Association website on www.genevaassociation.org/home/financial_stability.aspx to access complimentary publications on systemic risk and financial stability. This article was published by The Geneva Association (The International Association for the Study of Insurance Economics). Articles, documents and recent publications of the Association can be found on its website, at www.genevaassociation.org 5