Intact Financial Corporation

Ken Anderson - VP, IR & Treasurer Alain Lessard - SVP Commercial Lines Charles Brindamour - CEO Darren Godfrey - SVP Personal Lines Don Fox - EVP Louis Marcotte - CFO & SVP of Finance Patrick Barbeau - SVP Claims

Kai Pan - Morgan Stanley Geoff Kwan - RBC Capital Markets John Aiken - Barclays Meny Grauman - Cormark Securities Tom MacKinnon - BMO Capital Doug Young - Desjardins Capital Markets Jaeme Gloyn - National Bank Financial Paul Holden - CIBC Meyer Shields - KBW Brian Meredith - UBS Mario Mendonca - TD Securities

Thank you Sheryl, good morning, everyone, and thank you for joining the call today. A link to our live webcast and published information for this call is posted on our website at intactfc.com under the Investors tab.

As a reminder, the slide presentation contains a disclaimer on forward-looking statements which also applies to our discussion on this conference call. Joining me here in Montreal today are Charles Brindamour, CEO; Louis Marcotte, CFO; Darren Godfrey, SVP of Personal Lines; Alain Lessard, SVP of Commercial Lines; and Patrick Barbeau, SVP of Claims.

We will begin with prepared remarks, followed by a Q&A. With that, I would like to turn the call over to our CEO, Charles Brindamour.

Thanks again. Good morning everyone and thank you for joining us this morning.

Yesterday evening we announced second quarter net operating income of $1.44 per share driven by healthy underlying underwriting results and continued growth in distribution income. Results were impacted by $0.58 per share from CAT losses which while lower than last year were higher than expected.

Many of our customers particularly in Québec and Ontario face the consequences of one of the heaviest spring rain falls on record but as usual our troops work hard to get our customers back on track. Our topline was up 2% led by continued momentum in personal property.

Growth in personal auto and commercial P&C was tempered as our disciplined profitability actions including rate increases flow through in a competitive marketplace. Our specialty lines business continue to contribute to grow this quarter again.

On the combined ratio, I'm not satisfied with 95% but when I look at our underlying results, I see strong performance in personal property and commercial lines and continued momentum in personal auto as our profitability actions in that line gain traction. Our operating ROE improved to 12.1% for the past 12 months despite some two points from excess CAT losses.

We ended the quarter in a very strong financial position with over $1 billion of total excess capital. When we compare ourselves to the industry at the end of the first quarter, we outperformed by 550 basis points in ROE above our target of 500 points.

But to be clear, while we exceed our ROE outperformance target, we don't view a 12% ROE as an acceptable performance level and we remain focused on expanding our advantage. So let's now look at our second quarter results by line of business.

Personal auto grew 1% in the quarter as our rate actions implemented earlier this year are resulting as anticipated in some near-term topline pressure. Our combined ratio rose slightly to 97.8% due to deterioration in prior year development but when I look at our underlying performance excluding pools, it improved close to two points year-over-year.

This is consistent with the actions we've taken today and as further supported by expense ratio improvements. We still expect rate increases together with continued benefits from reforms and our claims action plan to bring mid-single-digit combined ratio improvement in this segment in the latter part of this year.

When it comes to the industry outlook for auto, we continue to anticipate a competitive environment with low to mid-single-digit growth in the coming 12 months as rate increases are implemented to address claims cost inflation and personal property premiums grew a healthy 6% as recently introduced products and continued rate increases were deployed in favorable market conditions. The combined ratio of 99.5 included 16.9 points of catastrophes mainly heavy precipitation in Québec and Ontario.

That said, our underlying performance was very strong and positions this line very well going forward. In terms of the industry outlook for personal prop, we expect the elevated cap losses to support continued firm market conditions and mid-single-digit growth over the next 12 months as the industry continues to adjust to changing weather patterns.

Turning to commercial P&C, while continuing competitive market conditions challenge our growth this business is performing very well. Our pricing and segmentation actions are paying off and the combined ratio for this business line was excellent at 85.3% while underlying performance continued to improve by 1.8 points.

In commercial auto, premiums grew 7% on the back of multiple initiatives and specialty lines. The combined ratio for the quarter was strong at 89.9% as we continue to drive our profitability actions to deliver a sustainable low 90s combined ratio in this line.

We expect low single-digit growth in the coming year for commercial lines as markets remain very competitive across the country. Now turning to progress on our strategy, as you know we announced the acquisition of OneBeacon on May 2, the approval process is in progress and on July 18 shareholders of OneBeacon approved the transaction.

We received US antitrust approval and we're on track to close this fall. Transition planning with the folks at OneBeacon is well underway and we're looking forward to the prospects of joining forces and creating a leading North American specialty lines insurer.

There's increasing alignment and momentum on the areas that require strong profitability improvement. Two months into transition planning, we have greater confidence in our synergy estimates and our roadmap to a low 90s combined ratio is shared and clear.

We also see significant opportunity to leverage the OneBeacon products in Canada and open up cross-border capabilities, which will allow us to deliver broker and customer experiences, which are second to none. We'll also be much better positioned to compete with international insurers here in Canada.

The financials of the acquisition in our view are also compelling and we expect to generate mid-single digit net operating income per share accretion within 24 months. We've already put in place a large portion of the financing, which Louis will review in a moment.

So while OneBeacon provides attractive diversification of our business and a significant new growth pipeline, we very much remain focused on our domestic business. On the customer experience front, we launched our new Montréal plane service center in April along with our centers in Calgary, Ottawa and Toronto we now have four locations across Canada, which have to date served over 9,000 customers.

In fact and better direct customers would choose to use the service centers, benefit from an easier experience, higher-quality repairs and on average, at 25% lower repair time. Satisfaction is up materially.

So in conclusion, I am pleased with our healthy underlying performance, which demonstrated yet again the resilience of our operations under challenged condition. Our commercial and personal property lines are performing well and our profitability initiatives and personal auto are gaining traction.

Our financial position is very strong. Momentum is good as we continue to execute on our strategic initiatives with a customer-focused mindset, while the OneBeacon acquisition will open up new growth pipeline for our business.

With an ROE about 12% after absorbing elevated cap losses and subpar personal auto performance, we had a strong base to improve from. I'm confident that the strategies we have in place position us well to deliver on our financial objectives, to outperform the industry ROE by at least 500 basis points and grow our operating income per share by 10% per year over time.

And with that, I'll turn the call over to our CFO, Louis Marcotte.

Thanks Charles, good morning everyone. For the second quarter net operating income of $193 million was $79 million better than last year which included Fort McMurray wildfires.

The improvement was driven by better underlying underwriting results, lower CAT losses and a higher in distribution earnings. Somewhat offsetting this is prior year development which declined year-over-year.

Overall our earnings per share grew 172% to a $1.82 driving the ROE to 12.3%. While Q2 CAT losses were lower than last year, they remain elevated.

However, we are maintaining our annual run rate guidance at $250 million as it is based on long-term trends. We still expect half of the CATs to occur in the third quarter.

On auto, prior year development is down 4.2 points in the second quarter. There are two main drivers for the change year-over-year.

First, a 1.6 point deterioration from pools which had high favorable development last year. The remainder relates to development on some large files which predate the June 2016 reforms.

Despite the lower prior year development, we see personal auto's underlying profitability gaining traction with further improvement is expected in the coming quarters. Our expense ratio improved 2.3 points to 29.4% driven by lower variable expenses and our cost saving initiatives.

Our distribution business added 50 million of operating earnings in the quarter, 16% higher than last year on growth and profitability improvements as we continue to invest in our broker network. We still expect distribution earnings to grow north of 15% in 2017.

Our Q2 non-operating results improved $83 million in a quarter reaching $57 million. Mark to market losses on our fixed-income portfolio due to rising interest rates were more than offset by realized gains from our equity portfolio.

Even though the OneBeacon acquisition is not closed yet, our hedging strategies had an impact in the quarter. Firstly the strengthening of the Canadian dollar in Q2 led to a net unrealized loss of $121 million on the purchase price hedge.

This hedge is mark to market through OCI until close at which point it will form part of the purchase price of OneBeacon and offset a lower Canadian dollar equivalent purchase price. Secondly, we recorded gains of $41 million on our book value hedges related to OneBeacon.

Movements in the value of these hedges flow-through non-operating results until close. After close, these hedges will stay in place and offset some of the currency exposure on the book value of OneBeacon.

The net impact of currency hedging transactions and acquisitions costs related to OneBeacon was approximately $0.71 on book value per share in the quarter. Based on the expense of transition work we've done so far with the OneBeacon team, we strengthen our belief in the economics of the deal.

The combined ratio improvements are clearly insight as we focus on three levers, managing the portfolio of businesses and the performance of each line of business, capitalizing on Intact's risk selection analytics and claims expertise across the OneBeacon platform, and capturing synergies across our businesses including reinsurance, shared services and supply chain. We continue to aim at a combined ratio in the low 90s within 2 to 3 years.

A few words on our financial position and the financing of OneBeacon. Our balance sheet remains very strong with MCT of 224% at quarter end and total excess capital over $1 billion.

This excludes any proceeds from the financing of OneBeacon. We expect our MCT to remain above 200% after closing of the transaction.

We have secured the majority of the financing for OneBeacon at favorable terms. We issued 425 million of tenure notes bearing interest at 2.85% and $150 million of perpetual preferred shares that yield 5.2%.

The proceeds from these issuances are reflected on our balance sheet. Our subscription receipt offering raise gross proceeds of $754 million.

This transaction is not yet reflected on our balance sheet at quarter end as the funds are held in escrow and the issuance is conditional upon close. At Lowe's, the subscription receipts will be converted into common shares and added to our book value.

The balance of the $2.4 billion purchase price including transaction costs is expected to be financed with a combination of excess capital, bank debt and preferred shares. Our debt-to-total capital ratio was 22.8% at quarter end, slightly above our target level of 20% due to funds raised and in relation to OneBeacon.

We expect to reach 25% at closing. Our ratings were affirmed by all agencies after the announcement.

Concurrent with the OneBeacon announcement we suspended our NCIB in order to direct excess capital towards the transaction. Our priority post-closing will be to use excess capital to bring our leverage back below 20% within two years.

We structured the financing of the OneBeacon transaction conservatively to maintain our balance sheet strength post close. This is important as we believe there are consolidation opportunities in both manufacturing and distribution will continue in Canada and we want to be in a strong position to participate as these opportunities arise.

In conclusion, our personal auto profitability plan is gaining traction, commercial lines' performance remained strong and personal property remains resilient despite elevated catastrophes. Our operating earnings are supported by consistent investment income and bolstered by increasing distribution earnings.

We expect this will lead to higher ROEs. With the OneBeacon transaction, we are opening up a significant new growth and profitability pipeline while maintaining our financial flexibility to capture additional opportunities as they arise.

With that I'll return the call back to Ken Anderson.

Thank you, Louis. In order to give everyone a chance to participate in the Q&A, we would ask that you kindly limit yourself to two questions per person.

If there is time at the end, you can requeue for a follow-up. So Sheryl, we're now ready to take questions.

So first question is on the mid-single digit auto improvement in the second half of the year. Could you tell little bit more detail in terms of what the driver behind that mid-single-digit growth in term of both the core loss ratio as well as the expense ratio?

Yeah, we'll ask Darren to give you a perspective on what's in the pipeline from a loss ratio point of view and you can throw in your comments on the expense side of things, which by the way is not really part of the improvement plan, but we're certainly pressing on expenses as well in that sort of environment. So Darren.

In terms of the improvement plan in the second half of the year, we've talked in past quarters about the momentum we have from a rate increase standpoint. So if you think back to last quarter, we had earned rate increases of close to 2%, 1.8% in particular.

We saw earned rate increases in the second quarter of just over 3%, that will actually continue to grow into Q3 and Q4. The gap between written and earned was three points in Q2.

Our written increases will continue, but peak in Q3 and that gap will start the shrink as the earned premium gains momentum. So we have a lot further additional earned rate increases flowing into the second half of the year.

A lot of the actions we're taking from an underwriting standpoint from a risk selection standpoint, they will also continue to build as the year progresses and then obviously the action from past stemming claims as well will continue to gain momentum. So we're very encouraged in terms of what we see in the second quarter with two points of improvement for four pools, not satisfied obviously, but that momentum is building and our actions are gaining traction for the latter half of 2017.

And if I can add, I think one of the things that's interesting in the quarter as you see that the frequency and the severity in the markets where the action plans are bolder, had actually started to come down which is in my mind a reflection of the non-rate action and it has upset some of the bumps we've seen in other jurisdictions where there is no need really for action plans at this stage. So that's encouraging and I think the recent mix change to a certain extent, which will get earned in the remaining part of the year.

Hopefully we'll have a positive impact on frequency and severity. And we've done a lot of work on the expense front would be the region in the past about 10 years but in the past year in particular maybe you want to give a bit of color there.

Sure thanks Charles. So on the expense front, what we have done is shared some expenses from last year - at the end of last year and that are impacted this year’s expense ratio.

I would say that probably a bit less than half a point of the improvements and it flows through all lines of business. The other big chunk that's impacting this quarter in particular are the variable expenses those includes both the variable commissions, as well as variable compensation.

So those are linked to our current profitability and because it's been lower-than-expected those variable expenses are reduced. I'm hoping that as we increase the profitability some of that will go back through.

But the structural what I would call the structural which is really what we have saved in expenses is a nearly half a point of overall general expenses.

The other piece that is not to be neglected is the work that we're doing in claims to address inflation in automobile and maybe Patrick you want to take a minute or two to give a perspective of what's in the pipeline and things that should pay off over the next 12, 24 months.

Yes. So over the past six to nine months we've also implemented the list of actions trying to address the different source of customers we are seeing in this line of business.

If I grew some of those actions into white categories the first one is tighter and indemnity control leveraging our national IT platform that we deployed over the past two years. Those are controlled that are deployed in supporting the operations in identifying opportunities to reduce cycle times or reduce gut like rentals and also controlling better - the process of the repairs with the networks in terms of parts used and the like.

We also have accelerated our data analytics deployment in the fields of irrigation, flood detection, supply chain management which is starting to bring benefits. And lastly maybe we have mentioned to - we have also action plan specific to the longer tail lines like accident benefit in Ontario where we are focused on leveraging our health rely networks so those clinics have a better track record than average in bringing our clients back to work which also helps on our cost side.

And on the VI, we are very focused on maintaining settlements within minor injury regulation by increasing staff and trying to sell those things very early before. And that's without mentioning also as a reminder that the Ontario reforms launched last June have not fully been reflected yet in our result.

Some of it was applicable upon renewal. So we finished that cycle of renewal in June and as well be a new cap definition was implemented for all accidents after June 1 of last year and given the long-tail profile of those claims we haven't seen the full impact yet but this building up.

My follow-up question on the reserves side and personal auto in this quarter have adverse development which is probably the first one in quite a while. I just wonder you saw some number one effect of what this sort of underlying trend impact your current accident year loss pick.

And the secondly - is an indication that the future reserve releases will be smaller than in the past that could impact your reporting combined ratio in personal auto?

So just a little to unpack the adverse prior development we saw in the quarter as we have mentioned in past quarters we tend to get a little bit of noise from quarter-to-quarter from pools Q2 of 2016 and 2017 we've two such quarters in particular with prior year developments. So as Loui mentioned, pools contributed 1.6 of the 4.2 points off deterioration in the PYD quarter-over-quarter.

So with respect to the quarter itself when you look at it before pools, we saw unfavorable PYD of just shy of 2 points, 1. 8 points in particular and this was largely driven through deterioration in Ontario accident benefit large losses.

These were mostly on older accident yields in particular 2013/2014 stemming from the combining of psychological increase on top of physical injuries. So this is what we call the stacking effect.

It was addressed as Patrick mentioned with the change in the definition in June of 2016 in those reforms, but only obviously for new claims beyond June 1, 2016. So definitely we saw some pressure there from the nature of those ID claims, which the reforms are now addressing.

In terms all the impact on our plan, on our plan is not dependent upon favorable PYD -- our action plan is not dependent upon favorable PYDs. So at this stage, we're comfortable in terms of what we have projected out into the latter half of this year.

With respect to guidance we don't try to give guidance by line of business, but when we look at of IFC we continue to expect PYD close to three to four points of opening reserves, but clearly with a little bit of noise from quarter-to-quarter.

And I think if you utilize the first six months of '17, we're at the bottom end of that range of three point something percent, 3.1%.

Just my first question is what we're seeing so far in Q3. Do you have any color cap if it's good or bad and I know here in BC there has been some wild cards, but I am guessing it's probably not a huge impact for you?

So exactly as Charles mentioned, if I go back to Q2 it was very wet in the east part of the country with a lot of rain that $105 million of cat during Q2 but in the West it was very different for the latter part of the spring and the early summer it was very hot and dry, which led to this situation at the beginning of July where lightning strikes have started a lot of forest fires in the province. So at the peak of the threat as by middle of the month, there was a more than 30,000 residents in BC where in fact what it is and we were monitoring more than 200 different forest fires in the trough.

But the situation has improved significantly over the past two weeks. Now most of the fires are under control and the majority of the evacuation orders have been lifted and people have been able to enter their premises and communities.

Our claims operation are deployed in all those locations. So we have good visibility on what we're facing and the outcome is much better than we could have anticipated based on what we saw in the media.

In fact, the property damage is very limited. Most of the claims we had in the area for additional living expense for the families that were evacuated, but at the same time we had a few hailstorms in Alberta during the month, but when we combine all those costs, it's very much aligned with what we expect for the month of July, no change in our forecast for Q3.

And just my other question is the ICBC there's been some talk, there was a report out suggesting that auto premiums out here for the basic economy need to go up 30% over the next two years and my question is more if there is any insight that you may have of when you have that type of potential shock in terms of increased rates for drivers, does that have an impact on the industry and in terms of demand, profitability, just recognizing also to your BCs a little bit different out here as to how we do the auto and obviously intact to exposure specifically as material as other provinces?

Yeah I think that the first observation I would make is that if you let the government run one what the private sector can do, you wind up with shots like all of a sudden there's a 30% gap in premiums and therefore I think the first message would be better to have a competitive marketplace that even when there's cost pressure going up, you have options to find ways to get a better deal, which in this case will be tough I think for drivers in British Columbia. I hope that NBC we’re starting to think about – introducing work competition in the marketplace as well as private operators that are in the business of trying to control costs ahead of bumps in costs like that.

So I think that's the main point I would make on that.

I was taking a look at the lines in the sub-pack about the direct-to-consumer sales is percentage of the total premiums and it's actually been quite stable over the last few years. I’m little bit surprised by I would have expected that to have a greater growth trajectory.

But is this is something that’s going on in the marketplace or is this actually a reflection of the consolidation that you’ve been doing through the distribution you actually are keeping pace with your broker sales?

I think that there has been a fair bit of growth in the direct-to-consumer business I mean if I look at the growth year-to-date in direct channel what we’re seeing in personal prop is a rate of growth that is almost twice that of the brokerage business and greater than that in automobile insurance. So I'll go back and look at the number that you're talking about, but there's actually been pretty steady growth in the direct channel in the past year.

I know probably caught you a little bit flat-footed. And then on the OneBeacon I mean you're progressing forward on the transaction you got the financing effectively in place you’ve been ordered to go through the operations I’m assuming a finer to the station the game one of the proposed areas that you’re looking at improving the combined ratio is actually looking at the lines that OneBeacon has provided.

Are you able to talk to us at this stage in the game as to which lines may or may not be continued on a go forward basis after the acquisitions completed.

The management of OneBeacon and my team are very much aligned on the work that needs to happen. The deal hasn’t closed yet and therefore I will not talk on their behalf at this stage, but there's very good alignment on some of the work that needs to be done.

In certain lines and some of the work that needs to be done across all lines and there's details plans that have been developed at this stage and I feel pretty good about what we have in the pipeline. I was with Alan in the U.S.

last week to meet all the business leaders talk about talent, talk about the growth opportunities, talk about the pockets of improvement and was quite impressed with the 15 business unit leaders that I've met individually. So I think there's really good alignment, but I don't want to talk about specific segments at this stage before the deal closes.

Loui you reiterated your run rate call of guidance but more broader question is what gives you confidence that you’re not behind the curve on cat losses definitely quarter-after-quarter now we’re getting preannouncements. And so what’s the risk that history is not a good predictor for where cat losses are going and how do you think about that risk as you manage the business?

Yes, we’ll ask Patrick to give you a high-level overview of our thought process and that front yes.

No we tried to learn from all the new events and we find there is no new one we feed our models we update those on a regular basis and when we say that we look at there are a lots of trend we adjust for the most recent observations all the time. We have to also understand that in those models we factor in our own actions.

So whether some of them are on prevention to help our clients face changing weather patterns, but others are in our products. We implemented a few changes to our products in the past few years to contain some of those cost trends.

So when we factor all of this in and we project for growth and in the coming 12 months we still get the same ballpark figures of $250 million per year on three points of loss ratio despite the fact that in 2016 and so far in 2017 we've been higher than those expectations.

And then just as a follow-on question, it seems clear that you've learned the lessons from the previous severe rain events in Central Canada, but I'm wondering as you look at the experience from this most recent events, is it just a check mark that you're saying we did what -- we learned the lessons from the past and we implemented them. Are there other things that come out of this most recent experience in terms -- in terms of what you can do to improve the situation going forward?

Well, we have improved our technology in terms of as geo-mapping with the experience of 2013 but also with development of new products like water over the past couple years. So for sure we're implementing this into our operation.

I think we're more equipped to respond also with those geo-mapping technology to support the operations. In terms of can we implement more changes, for sure we learned from each other how we organize our own product with the government programs.

This is one learning we had with the Québec flood of the spring, but in terms of the cost of those items, I think it's very much aligned with what we're expecting from those changes in products.

Yes so I think when I look back a number of years you get roughly to a ballpark 3% loss ratio points of cash across all lines and that number includes FortMac and Calgary flood, which you could argue are one in 100 year type events. So the 3%ish includes a couple of one in 100 year event.

But if you look prospectively prevention product change claims action should help and if we realize that 250 is not high enough a guidance will be the first one -- the first ones to change it. We'll need to take into account the OneBeacon acquisition, which helps us diversify away from personalized personal property natural disaster to translate that into proper guidance.

It's too early to do that and we'll likely revisit in Q3 or Q4 with the guidance is, but at this stage there's not a view here that we need to increase the guidance all else being equal. We're certainly pricing and planning or pricing to make sure that we operate the business sub 95 in periods higher than the plan.

That's what we told you guys in the past few years. The point that I would have for you is that in 2016 with FortMac we closed the year slightly above 92% combined ratio all in for personal property which is the most impacted line of business.

So this is a data point that gives me some comfort that this is headed in the right direction. We're year-to-date in the 96% range in that line of business.

So therefore I think that we're headed in the right direction. If we view that number should go up, we'll do that in short order and we have this debate every quarter.

Are you more concerned about this issue now and then in the past or would you not…

No, I am less concerned with this issue now than in the past because of everything we've done. Look at personal prop, we've been changing the product, changing how we manage claims investing in prevention and then we've been increasing rates for four, five years in a row in the mid-single digit range.

You'll see that the quarters that are low cap in nature, that business runs in the 70s to 80. So I would say the risk roll risk of or let’s call it the mitigated risk of natural disaster is less today than it was 2 years ago.

And we are looking at this business quite frankly as a source of opportunity. I think Canadian realized the natural disasters are more important than in the past.

But I think oneself against natural disaster now is more tangible, for people and we view the pie as an increasing one in that segment that I think the moves we've made to immunize the product are giving us comfort that this is a good business going forward. You need to be able to stomach volatility, we’re quite capable on that and that's what were very transparent with you guys every three months in terms of what that means in practice I think you all look pass the quarter and 2016 for me is a good example of what personal prop in particular I can generate in a bad year.

A question on distribution income, up nicely, I think we’re up almost 30% year-over-year in year-to-date versus 17 versus year-to-date 16. So, what’s driving that – is there any seasonality in a number here.

I mean should we be thinking about that going forward. I think before you sort of talked about a 15% increase, but we seem to be running better than that?

Yes, but I will reiterate that for 2017 it’s still 15% up from last year's results.

Not year-to-date, 74 versus 57.

Not year-to-date from us. We had 1.11 last year and had about 15, bit north of 15 and that’s what we think we‘ll earning this year.

And it’s driven by our investments and don’t forget there is a bit of a lag, we acquire every year. But there is a lag affect and we have a big year last year.

The earning are starting to flow in. So, that's a positive momentum and we work on the profitability as well as individual brokers.

So, those two are the drivers of the improvements.

I think that new acquisitions on that front are sort of coming in the pipeline. Were not changing our guidance for 2017 as we integrate these businesses but obviously based on the first six months we’re very confident, that will hit the guidance on distribution income.

I think we remain keenly interested in growing the business. It’s a great business.

So, you can expect some more in the coming quarters.

Okay. And as a follow-up on personal auto, I know that you talked about for 2017 you were to look to 4 to 6 point improvement in personal auto loss ratio.

I think you had talked in your earlier remarks that we’ve seen two point so far. Does that kind of mean that we would expect another 2 to 4 point improvement by the end of 2017.

In the personal auto line?

That’s sort of what we're shooting for and the underlying results, the sort of action plan we have in place should get us and that sort of zone and I think you've got expenses tailwind that will increase the likelihood of that happening too.

If I can squeeze one more in the operating tax rate, looks around 19%. I’m not sure where you kind of guide, but I think it was in the low 20s.

It is and again it's really the portion of underwriting income versus total income that guides this in a elevated cat quarter, you’d expect a bit of a lower tax rate because the nontaxable dividend become a bigger share of that. So, that's essentially the biggest driver of the lower tax rate.

But on a normal basis, I would expect something between 20 and 21.

Hi, Doug. You are probably in mute there.

Sorry. Good morning, it’s my issue.

I was about to answer question for you.

No. I was going to say I am not going to ask them because I am personal, but I may, but personal property, the guidance that you stated and you expect mid-single digit growth and I think last quarter, it was mid-to upper growth.

Just wondering what to think about, how we should read into this? Is it just that you pushed through so much in terms of price increases over the last few years that you're going to star to see a little bit about being in that.

And then along the same lines with personal property, we did see a deterioration in the current accident year loss ratio of just over two points I believe. Just wondering is that related to non-cat frequency, if any color you can provide on that and then I've got a follow-up, thanks.

Yes, so I think that the personal prop mid-single-digit growth guidance we're giving is that the actions we're taking in automobile are ahead of the market and we're I think comforted by some of the moves we're seeing in the marketplace in the past couple of months, but because personal automobiles growth has been under pressure because of the actions we've taken and a big portion of our portfolio combines home and auto, our view is that there could be unit pressure on home insurance for a short while and therefore we're saying along the lines of mid-single-digit here. But we're still acting on rates and I think it's more of a unit cautionary note but not raising big alarms here just saying auto is under pressure eventually home suffers a little bit from a growth point of view.

So I think that's the main, what was the other part of your question?

Just there was a deterioration in the current accident year loss ratio.

Yes, frequency jumped on the basis of non-weather in the quarter, 12% jump in frequency in personal prop, Darren, any color you want to give?

It was mostly driven from Ontario Québec with the heaviest rainfall that we're seeing in many years.

On the floods.

And just on the personal auto side and I know I harped on this in the past, but the pools I know the pools are a bit smaller than they were back in the day when they caused you a lot of problems, but we are starting to see negative experience I guess relative your view on negative experience out of the pools. Is this or why is this not a concern to you?

Darren?

Yes, I think when we look at the pools as we've talked in the last little bit, we obviously see a lot of noise from quarter to quarter. We look back Q2 was a very, very favorable quarter last year.

On the flipside though, we saw that Q4 was an unfavorable quarter. So when we year-to-date pool is still driving a favorable outcome to our claims ratio just slightly less than a point on a year-to-date basis.

We finished '16 with about half a point improvement in the claims ratio due to pools and we expect a similar sort of response in 2017 as well. So yes, we see a little bit noise from quarter-to-quarter, but generally it impacts us favorably when we look at the full 12 month period.

First question is related to going into personal auto. I just want to drive into the topline growth obviously a little bit softer than we would otherwise expect with the rate increases in the industry not following at the same pace.

What do you make of the industry's actions to be a little bit slower on this and do you have any color of more recent perhaps in the last month or two that gives you comfort that you'll be able to drive the four points of improvement just from rate increases?

Let me just say that there's nothing new with us being ahead of the curve on pricing movement. You've seen that in different lines of business over the past 10 years, 10 plus years and therefore, we cautioned the street that we were taking action in personal automobile insurance and would be comfortable with unit pressure before and nothing new in terms of the streets another street, but the industries slow reaction they're moving, but there has been in the past few months what I would call green shoots in terms of the great actions and maybe Darren you can give sort of high level perspective there.

Yes we are starting to see a little bit of movements in particular in Ontario and Alberta as Charles mentioned clearly we are still ahead of the pack and we expect to probably stay here as the packs were little bit, but we are starting to see as I say a little bit of movement from some companies which will help us a little bit as we move forward but we probably continue to see some top line pressure here in the short-term as we stay ahead of the pack.

Yes, and I think the phenomenon that is important to understand and that's one we like to avoid is that once you spot cost pressure in the system you ought to move fast in regulated provinces because when people wake up and everybody feels like they need to move their rates obviously regulators get nervous for $0.44. And therefore being ahead of the pack it gives you an overall profitability advantage, but you can do that in a much more constructive environment than an environment where everybody all of a sudden wants to increase their rates and it's been our strategy over the years and so we learnt from that experience and acted as such last year.

And second question related to commercial auto obviously top line growth been helped by specialty products including Uber so up 7% can you breakdown that growth between let’s call it organic or core products versus specialty and sharing economy products. And what you see for commercial auto topline growth going forward?

I think that overall when I look at the growth I would say majority of our growth is coming from the sharing economy products okay. We’re still seeing a competitive market with places like trucking that are firmer and we’re taking some action there that is putting a bit of a pressure on the topline because we think that's – natural and necessary action that we need to take to improve the portfolio there.

An overall we think that this will still continue to grow at low single-digit on an organic basis at the industry level.

And just in terms of just following up on the specialty lines of sharing economy – so we expect any sort of base effect as we grow into 2018 where this high single-digit growth rate from specialty lines subsides or is there still a lot of a lot of traction in the Uber I know in the past quarter it’s been over too early to tell based on miles driven and things of that nature. But can you provide any color looking into 2018?

I think the - indeed we started this program in July last year and therefore you will have base effect coming in the second part of this year upsetting that is the fact that we've been taking a real harsh action on a portion of the commercial lines auto portfolio trucking an example which has been a meaningful drag on the topline which should subside in the coming period as well. Alain I don’t know if you want to give some more color.

Well I was just going to add on the Uber side like we’ve mentioned in the past this is a usage base program so the more usage there is the more premium there is. That was like an annualized impact for the first two quarter this year that will subsidize after that, but as the popularity and the usage of Uber continue to grow we will see other growth on this side.

On the trucking side, we've been taking a very solid action on the rate side okay and that will continue at least till the end of the year and we’ll probably subsidize a bit in 2018 okay. But we’re seeing some pressure on the unit side because of the action we’re taking on the rate side on the trucking this year.

And if I can sneak one more in then just quickly on some of the more recent innovative or technology investments. Can you write any color on progress with Metromile or 2 row and the impact they're having in the commercial auto sector?

Well I think that with regards to Metromile I think making good progress on this front but I mean these guys are day in, day out, rolling out their new offer, are starting to manufacture product for say that we’re more of a distribution starts with moving now, into a manufacturing we are giving them a bit of help on that front given it is our trade, but satisfied with the progress we’re seeing on that front. I think Chevro is a separate business model which is in the car sharing as oppose to right sharing space.

And I think good traction on that front as well. This is a smaller impact for us in terms of the insurance element of that, but this is another model and our view is that the sharing economy is probably the most important trends that will influence the industry in the coming 3 to 5 years and we want to be over that trends and therefore our involvement with a number of these business.

Question for you related to the commercial P&C segment. You talk about competitive forces there impacting the premiums written.

Is it possible the competitive forces will also impact the loss ratio and if not, why not?

Alain, why don’t you give us your perspective on this.

I think you know, competitive of the situation in the commercial P&C market is, we’re in a much softer markets than we were a year ago and going into that is very important to us to protect and maintain on our underwriting margin. And in fact, in Q2 despite a competitive market we've passed on rate increased to the tone of about 3%, and that has really had an impact on the overall growth.

And although, we’re not happy with the overall growth when we split our portfolio let's say into two parts of parts where we are quite happy with the profitability level and everything that part has been growing to for the tone of about 4%. The part where we see action still needed, classes were you neither rate action or account that have been unprofitable and we have taken nonrenewed or things like that.

This part as strong by 20%. So, overall when we look at that the quality of the portfolio in our minds as improve a lot and as more than offset the impact of the negative growth in the quarter.

And I think that's we’re seeing very strong performance, our pockets of the market that are indeed quite competitive and where we are taking action, we’re improving the quality of the portfolio. So I am certainly not concerned about the margin in that environment.

And keep in mind that we are seeing 3% rate increase for the fifth year straight in that segment. So, it is competitive, but we’re going where we want to grow and therefore that's good for the margins.

And then second question would be related to OneBeacon and I know there is probably a number of things you can do ahead of the transaction closing to help set yourself up for quick execution post closing. So, maybe if you can quickly give us some color on some of the things you are able to do over the next few months?

You mean what to expect upon closing, Paul?

I mean, if you - you mentioned you're down there for a week recently like, what kind of things are you working on with the one Beacon team today so that you can execute quickly post closing. Or the things that you will execute even on today before closing?

I think we led them run their business until closing and then will work with Mike Miller. He was a great leader and his team post closing.

But there's a lot of work in cooperation going on at the moment. We have 10 different transition team that I've been working since May to prepare the transition they'll start upon closing.

We have an operational group, an IT group, a claims group, a finance group, an HR et cetera, that are making sure that we hit the ground running upon closing. We’ll announce a new structure that will sort of reflect the addition of OneBeacon to the entire family in the coming weeks.

We expect to have profitability improvement action plan that will take place if they're not already in the pipeline upon closing. We expect to have new products by the end of the year here in Canada we expect to have a cross-border capability or service that we offer to brokers in 2017.

So while we haven't closed, there is a ton of work that's gone into preparing us welcoming the OneBeacon team in the coming weeks when we close. And so on all fronts I think we’re not waiting upon closing to establish the base to build a leading North American specialty lines and sure we're sort of all hands on deck working with these guys now.

Just one quick question if I can, when you look at the various sharing economy products that you’re writing at your - planning growth within, do they have a different lost ratio, expense ratio, or mixed than the legacy business?

There is an important difference in the loss ratio, expense ratio mix than the traditional business absolutely first point. Second point, it is a business that is performing well and that is consistent or better than the overall results you're seeing in commercial lines.

And so when one looks at the underlying loss ratio of commercial auto for instance, one has to realize that the loss ratio, expense ratio mix is quite different from the rest of the book. And therefore I encourage people to look at the underlying combined ratio in commercial auto to better understand the trajectory of the margins there.

Is that helpful?

Yes, I mean my assumption and please correct me if you assumption is wrong is that the expense ratio was lower and loss ratio was higher but the possibility part has been bottom line is still better my assumption is correct?

I think you’re in the ballpark yes.

Got my first question right there, but second one could you talk a little bit about what’s going on with the distribution income, I noticed that the acquisition theirs have slowed pretty dramatically in the first half. Is that just function of the pipeline or is that purposeful given the OneBeacon transaction which we expect to going forward?

So you’re right in Q2 it was $42 million about half of what we had last year at the same time. It is not related to the OneBeacon transaction, it's more the environments, the pipeline we’re still very active there and it can be choppy quarter-to-quarter.

But we still have expectations to be able to make deals over time.

The guys who make the deals happen don't have a deal objective number. We have hundreds of relationships from coast-to-coast and the same way we think about.

And then they broadly we go with the flow, we go with the relationship and that's the best way to transact. And I think from quarter-to-quarter you'll see fluctuation.

Our view is that there is a lot of consultation and distribution still to take place for the coming midterm for sure. And we’re very keen, there's not been constraints imposed on the distribution constellation activities or in us financing entrepreneurs who want to get bigger in distribution whatsoever because of the OneBeacon transaction.

We like the margins we’re seeing there so long as the margins and the returns are in line or above what we're looking for, we’ll find a way to deploy capital in that space.

And lastly so I am just curious, does the OneBeacon transaction constraint you guys off financially from potentially doing a transaction up in Canada if something becomes available.

No, that's why we structured our financing conservatively, and we feel comfortable with something comes up in Canada to be able to participate in the opportunity, no doubt.

The way we think about that Brian right now in terms of capital deployment is part on non-Canadian staff focus on improving the - or working with Mike Miller to make sure that our specialty lines operations top quartile in terms of the combined ratio performance that's outside the priority but here we’re very keen to expand our position in Canada, both in manufacturing and distribution, and we have some resources we can leverage, and if not will convince investors that that putting Some more capital in Canada is a good idea, when we’re convinced that is.

Charles, just want to clear. I want to go back to personal auto, the adverse development.

What gave rise, was it individual claims actual claims that were resolved in a way that was higher than expected, or was it an event that played out in the quarter that cause you review the assumptions on those older policies in 13 and 14?

So beyond the pool there is largely a flow of large losses.

So no specific event like litigation that would've caused you to review assumptions?

No.

And going to then Q2 - sorry, Q4 2012 and I know that’s back, But I think it is not institutional memory in this call. That was the last time, there was adverse development in personal auto and it sort of - it disappeared by the very next quarter, by the very next third quarter, we’re off to positive development.

Do you recall, what it was that caused the adverse development. Why we cover so quickly?

I think that, this was and Darren is there, who used to run first lines in Alberta or claims at that time in Alberta. So you are right about institutional memory.

I think what the sparrow hawk decision in Alberta related to a decision related to - if you are -- you would be deemed non-minor injury claims -- that's what change in assumption in reserving claims on that front. Maybe I want to give some more color.

This is a long time ago, but I think that’s….

That’s exactly it. I mean we had that one decision, sort of reposition the minor injury cap in the definition given that judicial decision and at that point in time, we did exactly as you said Charles looked on it, the reserving level and may move increases because of that adverse situation.

So, I would be right in saying that this time around the causes are very different. It has something to deal with decisions or anything by nature?

I think that’s right that this time around, the decisions or anything that I think that's right that this time around the decision is for the court's decision is not something that happened. There has been a weakening through common law over the last 3, 4 years.

In Ontario and a number of the large losses we've seen are a result of some of these past decisions, but it’s not something that's happened in the quarter that needs us to reassess, our outstanding reserves in its entirety . Some of these decisions that were 13, 14 in nature, I forget the exact dates, has been tackled by June 2016 reports.

So, you don’t feel any big need to go back and review files throughout 13, and 14 and reassess assumptions as a result?

I don’t think so, I think we’re assessing every quarter, the flow of claims that we’re getting. IF it changes our ultimate views of those accidents years.

We have been sort of increasing reserves for those accidents years through the past year, which has put a bit of pressure on our PYD. But it's not a common-law decision that has taken place in the quarter per se, that is leading to a fundamental lead different view on the ultimate.

Thank you all for joining us today. Following this call, the telephone replay will be available for one week, and the webcast will be archived on our website for one year.

Transcript will also be available on our website in the financial reports and filings archive. Our third quarter 2017 results are scheduled to be released after market close on Tuesday, November 7.

Thank you again and this concludes our call for today.