Intact Financial Corp Earnings Call Nuggets: Auto Biz, Expense Ratio

On Wednesday, Intact Financial Corp (TO:IFC.TO) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Auto Biz

Andre-Philippe Hardy – RBC Capital Markets: I have two questions and they both relate to the auto business. The first is, in your MD&A you talk about results improving by 5.5 points on year-over-year basis on a current year accident-year basis. That seemed largely driven by the positive impact of weather on frequency. Is that right? If it is right, why did you not benefit more from Ontario reform and Company actions? I didn’t get the sense that you had seen the full benefits of those actions last year.

Charles Brindamour – CEO: Martin will take that question.

Martin Beaulieu – SVP, Personal Lines: In fact, we have, we are estimating that the improvement that is coming from weather is about 3 points in our auto portfolio. So, when you say that there should have been more as well coming from the reforms, we’re still seeing some progress there.

Andre-Philippe Hardy – RBC Capital Markets: Can you help us understand – I mean, a while back you’d said that, relative to 2010, you expected reform to help by 6 points and Company actions to help by a similar amount. How much of that you saw last year and how we should expect this year?

Martin Beaulieu – SVP, Personal Lines: The 12 points we have in our books at the end of 2011, what we are looking at now is that we would have maybe a few more points that we are starting to see in 2012.

Andre-Philippe Hardy – RBC Capital Markets: My other question is also on Ontario auto. You had a pretty big drop in the number of cases in mediation, yet I think we can infer from your disclosures that you did not release more reserves than usual. Again, is that an accurate statement and if so, why would you not release some reserves if you’re seeing less uncertainty in your open cases?

Charles Brindamour – CEO: It’s an accurate statement and I think it goes back to the fact that the improvement in the case incurred at the file level is very strong. In our view there is still uncertainty even though the backlog has dropped by 25%, and therefore we remain cautious in that market. At this stage, we’re working hard at closing those mediation files, but don’t forget that there is the impact on the files that you close, but the uncertainty associated with the mediation per se, can have an impact on many of the open files. So, even if you close a quarter of the files, there is still a fair bit of open files that are being mediated and therefore the uncertainty is still there. I think we’re going as fast as we can to reduce our backlog, but the industry that exists or the uncertainty that exists in Ontario auto is not only related to our backlog, it’s related to the backlog of the industry in general, which has not dropped has actually increased.

Mark A. Tullis – SVP and CFO: What I could add there is that what has been the reduction in the mediation pending files in our portfolio has been result outside of the mediation process. So, what is being mediated is still out there.

Expense Ratio

Tom MacKinnon – BMO Capital: I have noticed the expense ratio kind of ticked up nearly 2 points quarter-over-quarter and just kind of wondering what’s been driving that and then I go a follow-up?

Mark A. Tullis – SVP and CFO: I think, it’s two things Tom. I’ll say a bit half, a little more than half of it is due to increase in contingent profit commissions’ year-over-year because of the good results. The rest is because of the mix of business, primarily the commercial business, but little bit the Quebec business as well, AXA versus Intact. So let me give you a few numbers to sort of put that in perspective. If you look at Intact’s 2011 expense ratio for 2011, for commercial lines it was a little over 36%, for personal lines it was little over 28%, so you can see the difference in the expenses between commercial and personal. Of course in combined ratio it works out, because the loss ratios are different, but as we pick up relatively more of the commercial business from AXA, it’s going to shift the expense ratio.

Tom MacKinnon – BMO Capital: So we should probably see somewhere around this level continuing? It’s strictly due to mix and as the mix changes…

Mark A. Tullis – SVP and CFO: That’s due to commissions and the offset time is, the pricing works out so you’ll see the offset on the loss ratio side a bit, but what you’ll see is a shift with the change in mix toward a bit heavier on a commissions.

Charles Brindamour – CEO: I think what bakes in prospectively is – are the synergies obviously.

Mark A. Tullis – SVP and CFO: Correct. On the general expense side you see a drop, but you see that increased on the commission side.

Charles Brindamour – CEO: Exactly.

Tom MacKinnon – BMO Capital: So a little bit of the synergies will come down and knock this down, but as I understand it, as the business mix moves more toward commercial then that might be – it works the other way to some extent –

Mark A. Tullis – SVP and CFO: Expense ratio will go up, but you should see an offset on the loss ratio side.

Tom MacKinnon – BMO Capital: In the supplementary on page – on table four, there is an item called distribution income and that’s running at a rate around 3 times higher than we have normally seen it. So, what’s up there?

Mark A. Tullis – SVP and CFO: I think there is two things going on there Tom. So, what that represents is – the increase represents two things, one is the inclusion of the AXA brokers. As you will remember, when we purchased AXA they included some brokerages similar to some of the brokerages we owned. If you look at the increase in the quarter, approximately half of that increase is due to the inclusion of the AXA brokers within the – so, you can figure, half of that is permanent, half of it’s timing because it was a particularly good quarter for the brokerages. So, I think you could see half of that increase over a year ago run rate stuff, half of it was because those outlets enjoyed a particularly good quarter from a timing point of view.

Charles Brindamour – CEO: Your two questions are linked because the fact that our commissions went up and profit sharing went up because of good results, means that our distribution unit such as broker-linked received better commission income as a result of good result…

Mark A. Tullis – SVP and CFO: Hence the timing. Half of it’s just the base inclusion of the additional business from AXA.

Tom MacKinnon – BMO Capital: If I could just squeeze one more. In the 595 and excess is that – just remind me what MCT that’s supposed to be over?

Charles Brindamour – CEO: It’s 170.

Tom MacKinnon – BMO Capital: What is it that’s over 200?

Charles Brindamour – CEO: Since it’s your third question…

Charles Brindamour – CEO: We will come back after the call.