Annual Report 2022: CEO's Letter

Letter first published in Intact Financial Corporation's 2022 Annual Report.

In 2022 Intact delivered solid results. We executed our game plan against a backdrop of inflation, socio-economic and geopolitical challenges, and the increasing impacts of extreme weather.

More importantly, these factors have affected people, businesses and communities deeply over the last few years – including our own employees and customers. Our core purpose is to help and that’s what we’ve tried to do.

I was again reminded this year that our team really shines in times of adversity. This period has helped us redefine resilience – reinforcing our ability to withstand volatility, help our customers and grow the business. Our team of 29,000 people is guided by a common purpose and a set of core values that permeate every decision we make. We share a belief that we are here to help our customers in good times and bad.

Together, we’ve built an organization with incredible spirit, one that is transforming a strong Canadian champion into an international force. The Intact spirit is one that takes nothing for granted – we celebrate our achievements, but we are never satisfied. We benchmark against the best in the world and invest accordingly. We focus on what we are good at and try to get better.

It’s in that spirit that we’ve centred our game plan on helping society while finding ways to grow. We are at a pivotal time. We must take a whole-of-society approach to tackle issues such as climate change, poverty and inequality. To do so requires strong leadership in the business community. Solving these issues does not fall solely on the shoulders of government.

With that context in mind, I want to spend time in this year’s letter to explore deep trends and key socio-economic challenges and their impacts on our customers and communities. I will also share what resiliency means to us, why it is core to helping, and how we are uniquely positioned to lead.

Tackling these challenges from a business perspective requires strong financial performance. Despite the headwinds, we generated a 21% total return for our shareholders last year when the TSX 60 was down 6% on the same basis. More importantly, our long-term track record speaks for itself: we have generated 14% total shareholder return on average per year over the past decade, outperforming the TSX 60 by 600 basis points. I feel very strongly that we can help and win.

2022 Performance Highlights

Building on our track record as a resilient business, our solid results in 2022 enabled us to increase the common share dividend for the eighteenth consecutive year. 

We wrapped up the year with positive top line momentum. Premiums increased 23%, bolstered by the RSA acquisition. Excluding this and the impact of exited lines, premium growth was 5%, led mainly by our continued rate momentum.

The 2022 operating combined ratio of 91.6% reflected solid performance amidst elevated weather-related losses and inflationary pressures.

Operating net investment income increased by 31%. This was driven by the RSA acquisition and higher reinvestment yields, which we captured through increased turnover of our investment portfolio. With market yields remaining significantly higher than the book yield of our portfolio, investment income will provide a meaningful earnings tailwind for some time to come.

Distribution income grew by 21%, largely as a result of accretive acquisitions and continued growth in our On Side home restoration business. Over the last five years, annual growth has exceeded 10% and we expect this momentum to continue into 2023.

Net Operating Income Per Share (NOIPS) of $11.88 reflected robust underwriting performance and meaningful RSA accretion of 16%, coupled with strong investment and distribution results.

Earnings Per Share of $13.46 increased by 9%, as solid operating results were also bolstered by the gain on the sale of Codan Denmark. This translated into an Operating Return on Equity (OROE) of 14.3% and Return on Equity (ROE) of 16.5%. 

We ended the year in a strong financial position, with $2.4 billion of total capital margin and solid regulated capital ratios in all jurisdictions. We are well positioned to absorb volatility in the external environment and pursue future growth opportunities.

While the absolute performance matters, the relative performance compared to our competitors determines if we are winning. With an ROE of 10.3 points above the industry, it is fair to say that we’re at a healthy advantage. It’s this outperformance that drives our ability to invest, grow, face disruption in distribution and demonstrate tremendous resilience against adversity.

Our sights are set firmly on 2023 and beyond. The business overall is operating at a low 90s operating combined ratio. Top line momentum is positive and our balance sheet remains strong. We are on track to deliver on our financial objectives – to grow Net Operating Income Per Share by 10% annually over time and to outperform the industry ROE by at least 500 basis points each year. 

How We See the World

A key ingredient of our success over the last decade and confidence in our future performance comes from being focused on the deep trends shaping society. Having a good understanding of how they impact our customers, employees and our communities is fundamental to winning. And strategy is really about using our strengths and competitive advantages to turn these trends into growth opportunities.

Right now, we see high inflation and low growth at the top of the economic agenda. Inflation pressures and related uncertainty around short-term and long-term interest rates are driving current capital market volatility. While we see central banks acting with resolve to bring inflation back to target, we believe inflation will be stubborn. As a result, we intend to navigate the investment environment conservatively while seizing opportunities to improve income as they arise.

We are also seeing the effects of a strong labour market. While positive for real wage growth, it is also adding to the inflationary environment. With pressure on wages and supply chains, moving back to a 2% target rate of inflation could prove challenging. Monetary policy and related housing pressure coupled with capital market volatility will mean little or negative growth this year.

The cost-of-living crisis being felt by so many is feeding into the speed at which consumers’ expectations are changing. Customers want simplicity, transparency and – with purchasing power declining – they want value for money. Technology is also influencing customer expectations. It is changing how we consume and share information and influencing how we live. 

We’ve responded with an increasing range of digital options while continuing to focus on the importance of the human dimension. With a wider range of brands and products, we can offer a spectrum of services at different price points. We continue to look at additional ways to provide availability and affordability, including new low-cost options in the future.

We are seeing an explosion in the democratization of data. Over the next three years we expect the data sets that exist globally to increase by a factor of three. One-third of our competitive advantage is based on how we use data. Our focus on AI and machine learning over the last seven years has given us an edge. We need to build on it. Our enhancements to Usage Based Insurance – including our recently launched eco fuel component to help customers track their greenhouse gas emissions – is a good example of that work.

Cyber security is another by-product of data explosion. Cyber presents a massive threat and a big business opportunity. Ransomware attacks are up three-fold in the past two years and up 50% over the past year. In Canada alone, that represents $3 billion of losses, net of the investments on cyber defence, for customers and businesses. We are building defensive capabilities for Intact and our customers – we see Cyber as an emerging and important underwriting segment in our Global Specialty Lines operations.

While many of the trends we are planning for are more medium- to long-term, climate change is the defining trend of the next century. Weather patterns have changed dramatically in the past 30 years. Natural disasters are now four times more costly, frequent and intense. This is the case globally, but it’s even more true in Canada, where the temperature is rising twice as fast as the global average.

There is an urgency to the transition to net zero. To meet the commitments in the Paris Agreement, global emissions must be reduced by 45% from our current trajectory. This target has to be reached within eight years and emissions must continue to decline rapidly after that. For context, at the height of the pandemic, global emissions were only down by approximately 5%.

Much of the damage to our climate is irreversible and the positive impacts of emissions reduction will be slow at first. That means extreme weather is going to get worse over the next decade. Our societal response must be to double down on adapting to this changing environment and be better prepared for floods, wildfire and extreme heat.

We’ve been on the front lines of climate change with our customers for more than a decade – getting them back on track and helping them adapt. We have a plan – to help people build resilient communities – and win in the climate transition. I will talk about this in the last part of the letter.

What Intact is Aiming to Achieve and How We are Doing It

To build a sound strategy, you need to be clear about what you are trying to achieve. Success for us starts with customers. We aim to have three out of four customers as advocates – meaning they would feel comfortable recommending us to friends or family. Many of our customer relationships are via brokers and so we also aspire to have four out of five brokers value our specialized expertise.

Employee engagement is our second objective and a key factor for success. People are at the heart of our organization. We want employees to be representative of the communities we serve and to be proud of what they do and who they work with.

Our third objective is to ensure that we are one of the most respected companies. We measure this in three ways – by showing leadership in building resilient communities, by reducing our carbon emissions, and by outperforming our competitors financially.

To execute against these objectives, we have a bold strategic roadmap. Below, I’ve outlined our progress this year and how we are set up for success in 2023.

Expanding our leadership position in Canada

Our strategy in Canada is clear. It starts with leading in customer experience and ensuring that three out of four customers are digitally engaged. Scale in distribution and further consolidation in the market round out the game plan. 

With one in two customers willing to recommend us to friends and family – and that number rising to 70% when customers have a transaction with us – we are confident that we will achieve our customer advocacy objective.

On digital engagement, we have hit a major milestone of two million Client Centre accounts, up 14% from 2021. Over half of our customers in Canada can now access insurance services online. And more than half of online transactions are now completed via our apps.

We are on track to achieve our targets in distribution. BrokerLink further bolstered its footprint this year with 24 acquisitions representing $374 million in Direct Premium Written (DPW). In 2022, BrokerLink surpassed $3 billion in DPW, putting us on track to hit our distribution goal of $5 billion DPW by 2025.

The RSA acquisition and integration has been a game changer for our Canadian operations, leading to 20% market share in Canada and adding 30% more volume to the business. Customer retention has been in the range of 90%. We see further consolidation opportunities over the next five to 10 years and our goal is to insure one in three Canadians.

In 2023, we will strive to deepen our relationships with customers by doubling down on the customer experience both digitally and in-person. We’ve set bold ambitions to outperform the industry operating combined ratio by five points and to hit $20 billion in annual premium by 2027.

Strengthening our leading position in the U.K. and Ireland

We’ve laid out a game plan focused on building a strong, sustainable and profitable business in the region. It begins with leading in customer experience and digital engagement. Optimizing underwriting and focusing the footprint for outperformance are also key elements of the plan.

We are investing in technology platforms to drive a better digital experience for customers and brokers as well as for the employees who are serving them. And we have started to deploy IFC’s competitive advantages – improving pricing and risk selection with the help of our Data Lab.

We continue to evaluate our value propositions across our personal lines portfolio in the U.K. in an effort to drive sustainable outperformance. And we see big opportunities in mid-market commercial lines where we have strength and scale.

We are aiming for a sustainable low 90s operating combined ratio across the U.K. and Ireland by the end of 2024. 

Building a Specialty Solutions leader

With the strength of the RSA network and access to 70% of the global market, we have built a truly global specialty solutions platform. We can now service customers around the globe, offering policies and handling claims locally in more than 150 countries and territories. Marine has been established as our first Global Franchise.

Our core platform is built on three pillars: talent and expertise, deep distribution relationships and diverse product offerings. With a sharper focus on execution, we are in a solid position to outperform.

In 2023, we will bring our global capabilities together in a cohesive fashion across the platform. And we will continue to improve our risk selection tools and strategies.

As referenced earlier, with deep trends in the explosion of data and climate change, we are focused on cyber and renewable energy as two emerging and important specialty underwriting segments.

With a solid growth plan in place, we have raised our ambitions to reach $10 billion in annual premium by the end of the decade while further deepening our outperformance in this sector to operate at a sustainable sub-90s operating combined ratio.

Transforming our competitive advantages

Our use of data and AI for pricing and risk selection, our deep claims expertise and strong supply chain, and our strong capital and investment management expertise set us apart from the competition.

Data and AI

The Data Lab has grown to more than 500 data specialists. This team is focused on improving risk selection and making our operations as efficient as possible while creating outstanding interactions with customers.

We have delivered nearly 300 AI models that have in aggregate yielded almost $100 million of run-rate underwriting benefits.

Advanced machine learning techniques have helped us test more than 100 new proprietary weather variables and deploy more than 10 specific spatial and geographic models – all created by our own meteorologists. The Lab is also working with our social impact team to better identify the most climate vulnerable communities in Canada.

We can now better predict losses and customer behaviour, and we will be leveraging this expertise to a greater extent in our Commercial and Specialty Lines operations over the next three years.

Claims and supply chain

We handled over one million claims globally in 2022 – paying out $11 billion and getting our customers back on track.

We’ve continued to internalize our claims process over the last year, driving synergies and better customer service.

We doubled down on the Intact Service Centre model in Canada in 2022, opening 11 partner-operated locations. These new centres exclusively service Intact customers with an enhanced experience that is faster and more convenient while strengthening controls on indemnity.

Our strong supply chain networks helped us better manage supply chain dislocation and inflation and minimize disruption for our customers during a very challenging period.

Our investment in On Side, our property restoration company, continues to pay dividends. It’s been a game changer from a customer experience perspective. We will aim to double the size of On Side over the next few years. With extreme weather on the rise, demand will only continue to increase.

Capital and investment management 

Our capital and investment management scope has grown significantly over the last 18 months. We added global expertise to our internal investment management team – an already best-in-class and award-winning team. Our diverse geography, strong balance sheet and capital position underpin our ability to optimize asset allocation decisions, capture opportunities and manage headwinds. 

With the experts on our team in Canada and the U.K. leading the way, we recently strengthened Intact’s balance sheet further by completing a £6.5 billion U.K. pension buy-in agreement with Pension Insurance Corporation (PIC). This transaction removes U.K. pension exposure on our balance sheet by fully insuring U.K. defined benefit pension liabilities with PIC. The transaction supports our ROE outperformance objectives by improving capital efficiency and enhances our ability to pursue future growth opportunities.

Investing in our people

Our people are at the heart of our ability to deliver on our purpose. That is why one of our objectives is to ensure that our people are engaged. It’s why investing in our people is an important aspect of our strategic roadmap.

Being a best employer, a destination for top talent and experts, and enabling our people to thrive are the key areas of focus.

Being a best employer means ensuring our employees are engaged as measured through Kincentric Best Employer surveys. In Canada we’ve achieved Best Employer status for the seventh consecutive year and for the fourth consecutive year in the U.S. We also launched the Kincentric survey in the U.K. and International region this year. 

Being a best employer goes beyond survey results. It’s about delivering on our Employee Promise to provide people with the opportunity to shape the future, win as a team and grow with us.

We believe our team is stronger than it’s ever been. At the same time, the world is changing. The demographic challenges of an aging workforce are impacting an already tight labour market and the ability to attract and retain talent. Continued outperformance means we need to keep growing our skills and leadership capabilities, and be proactive in identifying talent so that we can maintain our edge for decades to come.

Finally, we know that thriving employees will enable sustained outperformance and growth. That is why it’s important to invest not only in our employees’ growth and development but also in the tools that our people use to perform each day, as well as in their resilience and wellness.

Building Resilience and Transitioning to a Low Carbon Economy

Society is at a pivotal time. There are increasing expectations for businesses to step up – three out of four people want us to do more. Governments and businesses must work together to address key societal challenges, seize momentum and capitalize on the big trends. 

To me it starts with leadership. True leadership requires genuine care for people and a desire to relentlessly challenge the status quo. Leadership is about the cause. It’s about inspiring people to be better.

At Intact we’ve always believed that we could help society and win in the marketplace at the same time. It speaks to why we exist. It goes to the core of our role as risk managers – and the part insurance plays in protecting society.

As leaders in getting people back on track, we believe we are uniquely positioned to help build resilient communities. At Intact we define resilient communities as being climate proof and economically thriving.

In that context, let’s tackle climate first. It is one of the biggest challenges we collectively face over the next 50 to 100 years. As mentioned earlier, we’ve been on the front lines of climate change with our customers for over a decade. For us it’s about learning from our experience and leading with our strengths.

With that in mind, we’ve established a shared mandate of helping people adapt to climate change, encompassing our approach to building resilient communities and our broader climate strategy.

Our thesis is that the most economically vulnerable communities are also the most climate vulnerable. Our focus on climate adaptation is guided by an ambition to make these communities more climate resilient.

We’ve invested $25 million into 100 climate adaptation projects over a 13-year period. This includes partnerships with several leading organizations.

• A $10 million commitment over 10 years to the Intact Centre on Climate Adaptation at the University of Waterloo – helping homeowners, communities, governments and businesses reduce the impacts of climate change and extreme weather risk.
• A new $8 million, five-year partnership with the Nature Conservancy of Canada to help accelerate nature-based solutions for climate resilience.
• A U.K.-based partnership with The Wildlife Trusts on natural flood management techniques that will enhance biodiversity, test sustainable urban drainage systems and help protect communities downstream.
• A new partnership with Landscape Enterprise Networks in the U.K. focusing on organizing the buying and selling of nature-based solutions to improve water quality, sequester carbon, enhance biodiversity and promote more resilient land management.
• While helping communities adapt to climate change is where we want to lead, seizing the opportunity to help and win in the climate transition is an important part of our strategic roadmap.

Building on our leadership in climate adaptation, we launched a comprehensive Climate Strategy earlier last year. It includes five big intentions – commit, adapt, shape, enable, collaborate:

• We commit to achieving net zero emissions by 2050 and halving emissions from our corporate operations by 2030.
• We will double down on our shared mandate on climate adaptation – with a focus on investing in natural infrastructure and scaling up restoration services to address the growing impact of severe weather.
• We want to shape customer behaviour – leverage our platform to help them adopt climate friendly behaviours in their own transition to net zero.
• In our role as risk managers, we can do our part to enable the transformation of industries that are key to the transition.
• Collaborate with governments and industry to accelerate climate action. We’ve had very positive interactions with governments on climate.

We’ve been active participants on the Sustainable Finance Action Council and in the development of the National Adaptation Strategy (NAS) in Canada. Through RSA we committed to Build Back Better, a joint initiative between the U.K. insurance industry and the government that promotes affordability and availability of flood insurance.

Climate change isn’t the only challenge that communities face and building resiliency also includes economic resilience.

Over the last few years, we have focused our efforts on economic resilience by creating opportunity for families living in poverty. We have existing partnerships with the United Way and Breakfast Club of Canada. In 2023, we are taking a fresh look at how to best use our strengths in this area. We will aim to identify new partnerships to help communities both navigate a challenging economy and access opportunities for development and growth.

I think there is room to work with government to better address economic opportunity and a challenging labour market as we shift to an increasingly automated and low carbon economy. We need to better identify and seek out under-represented groups in the labour force – including Indigenous Peoples, Black and Persons of Colour and people living in poverty. Many of these individuals do not have access to equitable skills training and other community support to help them thrive. This requires both business and government investment.

One of our values is generosity, and I have been impressed by how our people have stepped up. Last year, our employees donated more than $3 million and volunteered more than 14,000 hours of their time to over 400 organizations. It is important for us to support them in helping their communities, so in 2022, Intact donated $12.5 million to more than 2,000 organizations across all regions where we operate.

We want to make a difference and we hold ourselves accountable to that. We’ve set an ambition to have three out of four stakeholders see us as leaders in building resilient communities. And we’ve developed a Resilience Barometer to measure our progress. In 2022, we asked six stakeholder groups – customers, employees, brokers, investors, governments, NGOs and industry associations – for feedback on our performance.

Our inaugural results in Canada indicate we’re on the right track – 54% of stakeholders recognize us as leaders in building resilient communities. And 90% of stakeholders believe Intact has a responsibility to help communities become more resilient. We are expanding the Barometer’s geographic reach in 2023 to include U.S., U.K. and E.U. stakeholders.

Conclusion

While communities continue to face challenges around the world, I am optimistic that we can make important progress with the right leadership and an all-of-society approach.

Our purpose grounds us – to help people, businesses and society prosper in good times and be resilient in bad times. Our Values guide every decision we make.

Intact’s track record demonstrates our ability to manage in difficult times and our competitive advantage is stronger today than a decade ago. This strength fuels our ability to take a help-and-win approach in everything we do.

I want to thank our shareholders who have been backing our growth over the past decade. Rest assured – we do not take your support for granted.

Thank you also to our employees for their commitment to living our values, delivering second-to-none service to our customers and brokers, and demonstrating their generosity in the communities where they live and work, day in and day out.

Charles Brindamour

Chief Executive Officer