Intact Financial Corporation

Dennis Westfall - Vice President, Investor Relations Charles Brindamour - Chief Executive Officer Louis Marcotte - Senior Vice President, Finance and Chief Financial Officer Patrick Barbeau - Senior Vice President, Personal Lines Alain Lessard - Senior Vice President, Commercial Lines Mathieu Lamy - Senior Vice President, Claims

John Aiken - Barclays Geoff Kwan - RBC Capital Markets Shubha Khan - National Bank Financial Tom MacKinnon - BMO Doug Young - Desjardins Capital Paul Holden - CIBC Mario Mendonca - TD Securities

Thanks, Lisa, and good morning, everyone. Thank you for joining us on the call today.

A link to our live webcast and background information for the call is posted on our website at www.intactfc.com, under the Investor Relations tab. As a reminder, the slide presentation contains a disclaimer on forward-looking statements, which also applies on our discussion on the conference call.

Here with me today are Charles Brindamour, CEO; Louis Marcotte, CFO; Patrick Barbeau, SVP of Personal Lines; Alain Lessard, SVP of Commercial Lines; and Mathieu Lamy, SVP of Claims. We will start with formal remarks from Charles and Louis, followed by a Q&A session.

The others will also be available to answer your questions during the Q&A. With that, I would like to ask Charles to begin his remarks.

Thanks, Dennis. Good morning, everyone, and thank you for taking the time to join us on the call.

Earlier today we announced strong results for the third quarter. For me, the results illustrate the underlying strength of our operations.

We've spoken before, probably more times than we would have liked about elevated cat losses impacting our earnings. This quarter was in some ways more of the same, but the net result was much improved as our actions are paying off.

We announced the $125 million impact from catastrophes, but still reported net operating earnings of $185 million or $1.37 per share, more than three times the level from a year ago. The Q3 earnings helped generate our 14.3% operating ROE and 10% growth in book value per share over the past 12 months.

So where does this put us in relation to our two primary financial objectives. On a year-to-date basis, our net operating income per share is up obviously significantly versus 2013, given the elevated level of cat losses last year.

So if we look back three years, our first nine months net operating income per share represents an average yearly growth of close to 12% compared to our target of 10%. From an ROE perspective, we target to outperform the industry by at least 500 basis points every year.

We've done so by 710 basis points on average in the past three years. Based on the most recent industry data at June, we outperformed by 850 basis points so far this year.

The earnings contribution in Q3 was broad-based in nature. Personal property is showing its resilience with a combined ratio of 97.7%, despite almost 17 points of cats.

Year-to-date this line generated a combined ratio of 94.4% better than our 95% target. Our underlying results have shown great progress in my view with only half of our 10-point improvement plan yet to be earned.

Similarly, while personal auto was heavily impacted by storms in Alberta, it's 95.8% combined ratio reflected an improvement in underlying results. Commercial P&C rebounded from a string of difficult quarters with one of its best ever performances, an 84.7% compared ratio.

Across all lines of business, our 93.2% combined ratio was close to 10 points better than a year ago. I think it's fair to say that the primary reason our results came in above expectations was due to the strong results in commercial P&C.

So the obvious question is how much of this improvement is actually sustainable. Clearly, we'll have quarters that are better than expected and others that worse than expected.

I'd say that several items lined up favorably in the quarter in this line of business. The year-to-date performance at 96.7% is how I think about this business, and this is just not good enough.

As such, our actions to improve the commercial lines portfolio will continue. In Ontario, the government's auto insurance cost and rate reduction strategy have so far led to a reduction in filed rates of 6% across the market as a whole.

Our process of reducing rates by 5.3% on average began in early April and has been focused on existing customers. We are encouraged that Ontario Bill 15 is progressing well through the legislative assembly.

This is consistent with our view that the government is very proactive on this file. That being said, additional meaningful cost reduction measures are necessary for the industry to achieve the government's 15% rate reduction target.

I think they get that. And in the current environment, due to the cost reduction measures already implemented and our own actions, we are comfortable with our margins in this market and we'll continue to pursue growth opportunities.

Turning to the topline, certain pressure points have dissipated in recent weeks. First, we've now completed our program to reduce the company's exposure to a large B.C.

earthquake. We have in the past 18 months effectively reduced our exposure by 25%.

This exercise obviously weighted on growth in past quarters. Secondly, we've talked about being an early mover with our 10-point improvement initiative in property.

The industry is clearly moving, as market conditions have continued to firm and our relative position has improved. Units were down about 1.5 in the quarter, despite now reflecting our full product changes and rate actions.

Looking ahead for IFC, we expect our underlying growth to start improving from the 1.3% pace of Q3. When it comes to our outlook for the industry, we foresee low single-digit growth in personal auto, while we expect upper single-digit in personal property from continued hard market conditions.

Commercial P&C has firmed in the past year. The rate increases at renewals in this segment were up by close to 5% in the third quarter.

The low interest rate environment and elevated losses from catastrophes should support our growth outlook. So before turning the call over to Louis, let me close on where growth will come from in the coming 24 to 36 months.

In short, the message has not changed. At the end of September, our financial position was strong, with close to $0.5 billion of excess capital.

Our objective is to leverage our outperformance by reinvesting our capital to expand our leadership here in Canada. Organically, I expect growth to improve for two reasons.

One, the industry outlook is conducive to improvement, given our leadership in implementing corrective measures. And two, our multi-channel distribution strategy is gaining momentum.

When it comes to expanding our franchise, we continue to view meaningful acquisition opportunities here in Canada, in both manufacturing as well as in distribution. At the same time, we're continuing to pursue our strategy to expand beyond Canada in a prudent manner with the objective of building an organic pipeline with meaningful impact past 36 months.

So I am confident we have the right people and financial resources to make this plan a reality. And with that, I'll turn the call over to our CFO, Louis Marcotte.

Thanks, Charles. Good morning, everyone.

I will cover the three topics this morning. First, a brief discussion of the overall results, followed by more details on our lines of business, and finally I will comment on the strength of our balance sheet.

As Charles mentioned earlier, our third quarter results were driven by our strong underwriting performance, which generated a 93.2% combined ratio, including 7 points of catastrophe losses. The vast majority of these losses were incurred by the time our press release of August 27 was issued, and we were fortunate not to suffer any substantial weather events thereafter.

Our Q3 results also include improved underlying claims ratios as well as a healthy level of favorable prior-year development, albeit less than last year. Clearly, this quarter's results compare favorably to last year, when we were hit by the Toronto rainstorm, the Lac-Mégantic tragedy and multiple other cat losses.

Let me now take you through our results in detail, starting with our lines of business. Personnel property was hit especially hard by this quarter's cats, close to 17 combined ratio points in total, mostly from the hailstorm that hit the city of Airdrie, Alberta in August.

In terms of underlying results, excluding cats and prior-year developments, we saw a 5 point improvements year-over-year. Although we benefited from relatively good weather beyond the cats, the actions we've taken in this line of business over the past few quarters are clearly bearing fruit.

With a year-to-date combined ratio of 94.4%, including 11 points of cats. We remain committed to operating our property business at or below 95% combined ratio, cats included.

On the growth side, the continued severe weather has been supportive of hard market conditions. Despite our rate and product changes, retention to date was better than expected, helping drive Q3 underlying growth to 5% in this line of business.

The Alberta hailstorm also led to elevated cat losses in personal auto, resulting in a combined ratio of 95.8%, almost 3 points worse than a year ago. Favorable prior-year claims development was weaker than last year, but remains within our expectations.

Our underlying results were negatively impacted by the risk-sharing pools, whose results tend to fluctuate on a quarterly basis. Excluding this impact, underlying results in auto are about 1 point better than last year.

From a topline point of view, the personal auto business remains under pressure from government mandated rate reductions in Ontario. Moving to commercial lines, our P&C business generated strong results, as several drivers of the business impacted it positively this quarter.

The underlying current year loss ratio was low at 53.4%, a nice change from recent quarters. While we are pleased with the mid-80s combined ratio in Q3, we will continue our current plan to ensure a low-90s performance is achieved on a sustainable basis.

Premiums in commercial P&C grew 3% in the quarter, despite our actions to reduce earthquake exposure and to improve profitability in specific segments of our portfolio. The commercial auto line of business continues to deliver solid underwriting results, with a combined ratio of 89.4%.

A small amount of unfavorable prior-year development was recorded in the quarter, but this is not indicative of any underlying problems or new trends. Premiums were up 3 % from a year ago, despite competitive market conditions.

Before moving to our balance sheet, I'd like to comment on three other areas of our results. Our expense ratio of 29.6% was nearly 2 points better than Q3 2013, on lower commissions and lower general expenses.

The net investment income of $106 million in the third quarter of 2014 was up 2% from a year ago, as higher investments more than offset the decline in yields. Net investment income is not expected to grow from the current quarterly level in 2015, as the low yield environment should offset the growth in our investments.

Our distribution business continues to grow at a good pace. So far this year we recorded income from distribution of $61 million, up 9% from 2013.

Keep in mind, the distribution business tends to be seasonal. Finally, allow me to comment on our financial strength.

We maintained our strong financial position at quarter end, with an estimated MCT of 203%, $497 million in excess capital and debt to capital ratio of 17.8%. Three items explain most of the reduction in excess capital from Q2.

Firstly, a higher level of invested asset, assets led to a higher capital charge; the stock market drop in September reduced our unrealized gains; and lower discount rates negatively impacted our pension plans. Book value per share was 36.44% at the end of September, up only slightly versus Q2, as the unrealized gains in pension plans negatively impacted our book value.

On the investment side, our asset mix remains fairly stable. We now have 11% of our fixed income portfolio and 9% of our common share portfolio comprised of U.S.

securities both of which provide geographic and sector diversification. In closing, I believe our strong profitability, our financial strength and our people, enhance our ability to pursue growth prospects, whether in manufacturing, distribution in Canada or abroad.

With that, I'll turn the call back to Dennis.

Thanks, Louis. Lisa, we are now ready to take questions.

When we look at the property lines, both personal and commercial, you talk about all of the pricing impact and the claims mitigation strategies that you have in place. On personal property you're talking about half being baked in, so looking for another 5 points improvement.

But when do we expect this to get fully baked into the results, with obviously taking into consideration the ongoing volatility?

I'll let Patrick Barbeau take care of the impact of home insurance, which indeed has run its course to a greater extent than in commercial lines, where we've good actions in the past year, but there is still much in the pipeline, and Alain will comment on that. So why don't you start Patrick.

So maybe first to come back on a few reminder, the 10-point improvement that we implemented starting last November was about two-thirds coming from rates and one-third coming product and other actions in underwriting. Most of the rates have started to take in place on renewals last November.

So in fact, we're almost done. So starting in November of this year, the next coming months will fully reflect the rate increase.

But most of our underwriting actions were started in April and May of 2014, so it's only at that time in 2015 that our results will fully reflect it. However, there is inflation in the system, so there are further rate increases that are coming through at next cycle to cover that part.

But I would say that, starting at the end of Q1 next year, our results will pretty much fully reflect our 10-point improvement plan.

Thanks, Patrick. How about you Alain?

Well, I think at this point it's difficult to call as to when everything will be earned, because not all action are being taken place at the same time, and like you said Charles, some are still in the pipeline. But a good example of that is, let's say, on the rate increase side, we've always been pushing rate increase quarter-by-quarter to the tone of 1% or 2% in the past, but we've increased that gradually in 2013 to reach our rate increase close to 5% in 2014, so that's still going on.

We've also introduced minimum deductible on flood that hit most of our book starting in June this year. We've introduced in September a new rating algorithm for flood and sewer back up again, that will take another year to go through.

And we are tweaking continuously our segmentation on rate increase at renewal. And in fact, without changing our plan, we've always focused our rate increase on the worst 25%, but we are now introducing and even enhanced focus on the worst 3% to 5%, where we're going to see substantial rate increase, because this book is really completely under price.

We're talking a rate increase that could hit doubling the premium.

You're talking about the worst 3% to 5% [Multiple Speakers].

The worst 3% to 5%. Just to make sure, yes, the worst 3% to 5% will basically see substantial rate increase, considering the disruption that create with our broker, we've given them more lead time to deal with that situation and that will gradually hit our book starting January 2015.

So some of those actions are all piling up among all themselves, so it's difficult to see when we can say everything will be earned considering also, in fact that there is inflation towards in the system.

So I think maybe to sum up commercial lines, as far as I'm concerned we've been working on the worst 25% of the book for a full year and starting in '14 that started to generate close to 5%. So as far as I'm concerned, when you hit the first quarter of '15, you should have the full effect of that sort of 5% movement that we're seeing throughout the '14.

But I think that we are trying to find areas of under performance constantly in general, but in particular in our commercial lines portfolio at the moment and you can certainly see us continuing to work on that on an ongoing basis, and certainly for as long as the market will allow it. And I think the main point is that the market seems to offer up opportunities, because we're seeing capacity, shrinking in certain segment, we're starting rates from up in certain segments and we are going as far as we can in that context.

But my expectation, if you look at the first half of '15, I'm hoping to see the impact of what we've been doing in the past 18 months in commercial lines.

And then Charles, just as follow-on within the commercial lines, given the fact that renewals have been stronger than what you had originally anticipated. Should we expect that this pricing increase policy to carry on through 2015 and maybe even in the 2016?

Yes. I think that's the way to think about it, John.

First question I had was just looking at the expense ratio on your various business segments. I mean they had pretty good improvements quarter-over-quarter and year-over-year.

Just wondering if you can talk about the sustainability of it and maybe provide some additional color around some of the things that were driving the improvements?

Sure. So let me do it overall as, by lines of business the allocations are bit tricky, but on an overall basis, I would say, three drivers here.

First, on the commissions, a bit of an improvement there; part of it a catch up from prior years on the results of the first half. And the bit of structural impact as well that reduced the impact this quarter.

Secondly, on comp, on some composition, there were some adjustments to our bonuses. As compared to last year, we're accruing a bit less than last year and mostly due to growth in this year compared to last year.

The third element is really savings initiatives we've taken on from the first half of the year to reduce cost. I think they've come together in this quarter and we expect that it will revert back to bit higher levels going forward.

So this is, I would say, a strong quarter from an expense point of view, but I would expect next quarters to go back to a bit more past levels basically.

And then the second question I had was, just looking at the personal property side of the business, you talk about a combined ratio of 95% or less. And if just for easy math, if you kind of say 95%, and let's just assume a 33% expense ratio, that would imply a 62% claims ratio.

Now, in terms of how you look at the underwriting to that 62% claims ratio, do you kind of model in how much of that might come from cat losses, and if so, like how much might that be?

You want to take it Patrick.

Yes. Overall, if we take a long-term average, we've talked about in the past I think the $50 million per quarter that we're expecting in cat losses that was all lines combined.

When we factor in the property, it's around close to 15 points now of premium, so 15 points of loss ratio that could come from cats in coming years.

Geoff, just so we're clear, we say that we want to operate that business sub-95% in good times and in bad times, maybe not in extreme times, but in certainly in bad times. We're pricing the business to do better than 95%, just so we're clear.

Sure. Absolutely.

I was just trying to use round numbers.

Just a one question with respect to Ontario auto. So again, I guess, you reiterated the view that you can protect the combined ratio there.

And just so I'm clear about how you're thinking about this, would it be appropriate to assume that the 6% in average rate reductions announced by the industry so far can be offset by cost reduction measures already announced, and so further government action is required for the remaining 8% or 9% in rate reductions?

So I think there are different views about what's been announced already and how much that's worth, because depending on how you run your business, these measures will have an impact that will differ from one company to the other. In aggregate, we're not that far from the measures that have been already announced, is what I will think.

If you look ahead the government still has in mind to reduce rates by 15%, so there is 8 to 9 points missing. There is still 15% on the table at the moment that is moving nicely through the legislative assembly.

That will be worth a few points. And the government is considering a range of additional measures to get closer to 15%.

And therefore our expectation is that we will see momentum on the cost reduction front going forward. If you look at where we are today, there have been a number of measures that have been implemented either through the budget in August last year, earlier in February this year.

There has been an election in June as you know. And yet despite all of that, now there is a bill on the table that is Bill 15 progressing well.

So there is a fair bit of momentum, especially when you take into account the fact that there has been an election halfway this year. And I mean these guys get it, they're smart, they're focused on Ontario drivers, and so far we're comfortable that we're very much in line with what we see as the base scenario, which is symmetry between cost and premiums.

But clearly more is required at least by the industry in order to make up the remaining 8% or 9% in rate reductions. And so I'm curious as to whether you have a sense on the timing of further sort of cost reduction measures and what in particular you might be looking forward to?

Why don't I ask Mathieu, our SVP, Claims, to talk about some of the elements in Bill 15 and them some of the areas where you expect or would like to see more cost reduction measures to get closer 15 in the near-term?

Sure. So in Bill 15 there is three elements on the claims side that we expect is going to help us.

First big thing, the dispute resolution system as recommended by the Justice Cunningham report in last February; lowering the pre-judgment interest rate on non-economic damage, that's going to help us; and the measures on the towing and storage costs, that's going to help us control the worst operator in the business. So those are three important elements of Bill 15 that should help us control costs.

In our discussion with governments, in terms of further measure to help us control costs, we're discussing a new cat definition, shortening the med rehab benefit period from 10 years to four years; discussing the disappearing deductible on the tort side and the eliminating sum on the fees on the tort side, so those are discussion. Hopefully, we're successful influencing the directions there.

I think it's fair to say, indeed that Bill 15 will certainly move the needle, but then if you want to really closer to 15, you have to focus on catastrophic injuries on AB and on the tort-related side of things. And I think the government has a number of good ideas on that front.

It might be worthwhile to spend just a few seconds on clinic regulations and what's happened on that front in the past six months.

Yes. The intent of Bill 65 was to regulate clinic and mainly to license them and restrict payment from insures to only licensed clinic in the industry.

This is taking place this year. Clinics are getting licensed right now.

It is to be effective December 1 this year. It's positive.

The jury is still out though, how effective it will be.

My understanding is that 82% of clinics have been registered so far, which is quite good. I think the question for us as a firm here in terms of how much that's worth is that you'll recall that in 2010, we basically revamped our claims operation to tackle fraudsters.

And that really moved the needle for us. And for those who followed our story back then, we said the reforms will be worth 6, our own actions will be worth 6.

A bit chunk of that 6 was actually around fraud monitoring and mitigating frauds. So we'll see how much that's worth to us.

But I think if we take a broad perspective at the industry level, clinic regulation is actually a very good move and they're making really good progress.

Charles, if you could maybe update your thoughts with respect to the M&A environment in terms of how much in terms of market share points you see moving, when you see it moving, and how Intact is positioned in this?

Yes. I think from our perspective, if you take a 36 to 60 month perspective, starting now, we think there will be 15 to 20 points of market share that will change hands.

We used to say 25-ish points and there has been more than 10 points in the past three years actually that have change hands. Half of that we've done through AXA and JEVCO.

So I think we've demonstrated then that when market share change hands, we have an ability to act on that. That hasn't changed.

And in fact, the fact that our integrations are finished at this stage means, that operationally speaking, we're ready to grow inorganically, so to speak. When we look at the environment today, there is nothing that points to any reason to change our view that there will be 15 to 20 points of market share that will change hands over the coming say, five years.

But as I've mentioned before, we don't think it will be back-ended into necessarily. We think it will happen throughout just as we've seen in the past three years.

And maybe just as a follow-up, I think you used to give total guidance with respect to cat losses of $200 million a year and it looks to be around 2.5 to 3 points on the combined. Look, it was a great call in 2008 through maybe 2010 or maybe part of 2011, but of late it hasn't been.

I know you're not in the business of predicting weather, but how should we be looking at that going forward? Obviously, '13 was a tough year and so far in '14, it's probably running higher than that.

So how should we be thinking about a cat load?

Yes. I think your observation is correct, Tom.

I think you're right on. I mean, if you look at in the past three years, certainly it's been above the sort of average cat that one should expect.

I would say that sitting here today, our perspective is pretty much still around that level, because we've introduced a bunch of measures aimed at curbing the cost of these catastrophes. I think the impact in 2013 was 7.7 points related to cat.

For us, that was one outside the curve and so I think if you look at the average excluding that you're not too far from 3%, and then we've put a bunch of cost reduction measures in place, and that's the number we're still keeping in mind. In other words, run rate of about 50, knowing there seasonality obviously for quarter-to-quarter, but that's still the number we have in mind.

And I think when we change our perspective on that, we'll make sure that it's made very clear to your guys.

So just wanted, Charles, to go back to the commercial P&C business, because in your prepared remarks, you talked a bit about sustainability and you said there were several positives that came through. I'm just wondering can you go through what those positives were, what the unusual items are?

Because I mean, an 84.7% combined ratio on the quarter, I would imagine you would guide me not to punch that into my model. And I know you're targeting around 90% over the year or bringing for the year down towards 90%.

So I'm just trying to get a sense of what the outsized return was this quarter and what we should be expecting in that business

So I think that's my comments, Doug, were basically that I look at this business after nine months, and I am assuming that's about the run rate in that business, and that's about 97% combined ratio. We are working hard at corrective measures that I've described earlier and I touched on that, and we're pricing that business to be in the low-90s.

I don't think we said 90%, but certainly low-90s. So 97% just doesn't cut it.

It's not good enough. So that's the first sort of point in terms of direction that we expect.

If you look at what happened in the quarter, prior-year development was slightly better than before, large losses were slightly lower than what we've experienced historically and cat losses were also slightly lower than what we've experienced historically. And it's on the basis of those three elements that we're seeing that many elements were slightly better than what they've been historically.

I guess where I'm confused is, I mean the underwriting results in the quarter were $62 million. If I look at the last 10 quarters, I mean on average it's been $4 million, so the delta is huge.

And I know there has been some big losses in those past quarters and some big gains. And I'm trying to get a sense as the right number kind of in between those, because I know the last 10 quarters have been obviously some difficult times too.

So that's where I'm trying to go with it.

Doug, I think if you look at the slides that we've produced for the call, I think there is a slide that talks about the commercial P&C action plan, and what we do in there is we actually break the performance by components. You'll see clearly the cats, you'll clearly see the favorable development and the underlying performance.

The only thing you don't see in there is the large loss. Maybe, Alain, can you comment on large losses for the quarter.

In general, you don't see that, but our historical level of large losses is in around about 16 point, but it has varied from quarter-to-quarter anywhere between, let's say, 9.5 points to about 22 points. So there is inherent volatility, and the result there that are affected.

In this quarter, our large losses came in at about 12 point that is about 4 points below historical average, which has affected; influence, I would say, favorably our result in the quarter.

And then, just wanted to go back thinking about Ontario auto. It's a market I have struggled with trying to kind of figure out, and I understand everything that you're saying I guess.

One of the kind of things I wanted to probably get a sense of was, well, there is two items. We've had some rulings, I would imagine, coming through an arbitration.

I'm interested if there has been any rulings in the arbitration that have come through that are concerning to you? And then the auto pool or the risk-sharing pools, I know, you show the delta in the auto pools.

Are the auto pools generating a loss or the allocation, is that a loss for you? Can you quantify how much that is?

And are you starting to see, because of some of the changes happening, the auto pool starting to grow here again?

Doug, I think the best way to tackle this is, I'll ask Mathieu to talk about mediation and arbitration decision, and how that shapes our view of the world. And then I'll ask Patrick to talk about pools and we'll see if we can echo your question this way.

Why don't you go Mathieu?

In terms of arbitration, the outcome of those decisions are, there is no really adverse decision in the last quarter and even though in the last few years actually. The decision that I have been rendered are maintaining the sprit or the intention of the reform.

So I'd say there, it's positive. And when there was a bit of doubt, the government has reacted swiftly.

So that leads us to believe that the intent of the reforms are going to be maintained.

Mediation same sort of story, I think.

Yes. Mediation are not binding by nature.

So the only downside there, there is a huge backlog and there is very few decision rendered on post-reform cases at this point. I'd say that's why there is still uncertainty in the system.

But those that have been rendered are maintaining the spirit of the reform.

I think Mathieu, for Doug's benefit, if you go back to 2012, there have been a few meaningful decision, which we actually talked about on the call, such as [indiscernible] and all of that having an impact on cats.

Yes, case law, not mediation and arbitration.

Well, that's right, it's case law.

And that's why we are recommending reform of the cat side. So those decisions are still standing, but hopefully in future after build '15 that's why we are discussing with government to get a new cat definition to enable that, have more certainty on the cat.

And I think when these decisions came out in '12, we have made a number of reserving adjustments as a result, talked about that with the Street and integrated that in our pricing model. But if you go back one year, there's nothing that we see that is concerning.

One decision, I think it was in '13, weakened the minor injury definition and very soon thereafter through the budget and the February regulation, it actually tightened the interpretation of the minor injury definition. Is that correct?

It's correct. And since then there is another arbitration decision that reinforce that the minor injury guideline are in fact binding, that it was quite big actually.

All right, let's move on to pools.

The pool results are made up of two main things, so its premiums and losses that we cede to the pools, and those premiums and losses that we assume, because of our market share and usage of the pool. So when we look at the quarter, Q3 of 2014, if we look at it from a year-on-year perspective, it increases a bit of the gap, because 2013 was actually a very good -- Q3 2013 was a very good quarter.

But when we look at specifically the Q3 of this year, it is a loss of close to 1 point, caused by both side. So we assume that has been worst than the average quarter, and also the profit we get from the session that has been slightly worse.

Overall, over the years, quarter-to-quarter it fluctuates a lot, but it generates in general a slight profit, because we are performing slightly better than the average of the pool and the risk we select to see, which in this quarter it's a small loss of close to 1 point.

To Doug's question I think the more interesting thing to look at, to understand the state of the market, is the size and the growth in the facility association, which is a direct reflection of how much capacity is available in the market. So you can comment on that.

That's right. From that perspective both the facility association and the risk-sharing pools of the industry, the volumes has been stable over the past many years.

I would say four or five years. In fact, we've seen it slight decrease in the facility association, which is really the final stage.

After the pools, there is the facility association in the regulated markets and the volumes there have slightly decreased in 2014 compared to prior year.

Just so we're clear, the facility association for those who wouldn't be familiar with that is, essentially, if you cannot find an offer from a private carrier, there is an industry mechanism called, facility, where you can get insured. And we haven't seen much movement there for the past few years.

We manage one of the big facility carriers on behalf of the industry. So we have good sense of what's going on there, and there is no sign of capacity shortages based on what we see in the FA.

Just one quick one hopefully. I know the biggest item here to get the full 15% cost benefit or to offset the rate reductions in Ontario auto is going to be the new cat definition.

We've had a new cat definition out there that has been proposed, but never kind of adopted. What probability would you put on it, Charles, that you actually get a new cat definition here?

I would say that there is a lot of efforts right now invested in looking at ways to tighten, and make the definition of what is a catastrophically injured driver, to make that definition as tight as possible. In other words, to reduce the likelihood of leakage over time.

It's not many cases, but it represents a meaningful portion of the incurred losses. Our goal so far, is to say, close to one-third of incurred losses are cat related.

So there is work being done at the government level considering various options at this stage. And I do think that the make up of the government will be conducive to see a change on the definition of excellent benefit catastrophes.

So to your question, I would say, north of 50%, which in this world is pretty good.

First question I wanted to ask you is on Alberta auto. We've talked about some potential cost pressure coming through on the BI side.

When I look at the overall personal auto results this quarter, it doesn't seem to have had any impact. But wondering if you could provide us with an update there?

I think I'll ask Mathieu to comment on some of the things that we have in the pipeline to curtail inflation and bodily injury in Alberta, which I am very pleased with where we are now. I think what happened in the quarter is that the catastrophe in Alberta, the hailstorm in Alberta was 60% automobile driven, and that's certainly an area of focus for us.

But I'll let Mathieu comment on the work we're doing in bodily injury to a little bit like we did in Ontario five years back, really create outperformance as a result of claims management.

So this increased activity in the bodily injury files in Alberta is stemming from a decision that happened early 2012, the Sparrowhawks decision that kind of excluded the TMJ out of the minor injury cap and opened the door for chronic thing to be outside of the cat. Since then, we have I think vigorous action plan to make sure that the intent of the minor injury cap is maintained in Alberta.

So we've increased staff. We have created a special handling unit handling those cases, where with certain plaintiff lawyers and when TMJ and chronic pain is alleged, and then we have the special protocol to handle those cases and make sure that the intent of the reform is maintained.

And the claims organization has been essentially broken into teams to work on different degrees of pressure, so to speak, coming from the trial lawyers.

Yes. Triaging the more difficult file and a special unit to handle that.

Exactly. And changing protocols as a result of this common law decision, and I think so far so good, like making a really good progress on that point.

So I understand the answer correctly then. The measures you're taking are effectively offsetting cost pressures that others in the industry might be feeling.

Yes, exactly. And when we talk about underlying performance in automobile insurance in the quarter, if you put cats aside, you see that the severity is well within check and the frequency is actually down a bit.

And that's an observation that holds pretty much across the land.

Next question, when I look at your direct premiums written that are done through the direct channel, it's up 12% year-over-year, so obviously, quite healthy growth there. Can you give us a sense of where that's coming from?

Is it primarily Ontario auto?

There are two areas. The area where our direct operations are growing the fastest is in home insurance.

And we've run our combined ratio in home insurance and the direct channel is actually a bit in the 80s for a long period of time. So that's the place that's working well for us, because it is a hard market, people are shopping and our direct operations have benefited from that.

The second area of good growth as far as I'm concerned in the direct channel is in the automobile Ontario. I would say that we're very comfortable with our pricing position there.

We're very comfortable with our selection mechanism as well as how we manage claims. So I would say, home insurance, one; and then Ontario auto, two.

And then, Charles, earlier you mentioned that there continues to be cost inflation in personal property, no surprise there. But wondering if you can give us a sense of what kind of cost inflation you're seeing outside of cats?

And therefore, what kind of rate increases we might see in 2015?

I am not sure I talked about cost inflation much in personal property outside of cat at this stage. But I'll let Patrick comment on your question.

I think beside cats, I would say just a normal inflation in the material and labor, but not inflation in frequency, for example, outside of cats, more than normal.

You're exactly right. I would say Paul, if I look at how personal prop, let's take nine months, for instance, is shaping up on a current accident year basis, frequency is down 1 point, severity is up 2 points, but then as you know our sum insured is up 3 points.

So net-net the cost equation is actually improving, so to speak. And then on top of that you add the rates, and that's why we feel pretty confident that our results in personal property are headed in the right direction.

Because as Patrick has mentioned, two-thirds of our action plan was rates, the rest was basically either product changes or cost reduction measures. And Mathieu in claims is working really hard at reducing the cost equation, and we think that's working.

So maybe, Mathieu, you want to give a few examples of what you're doing on the property side of things to keep the cost equation in check.

Well, first, we're working hard to internalize most of our adjusting, so we have reduced our alliance on external adjustor. And we think given process and technology, we do a better job on scope and controlling costs, when we do those losses internally.

We have worked hard also on securing capacity ahead of event to respond to big events or cat losses. And we are working ahead of events on protocol, on how we're going to handle water losses and restoration with different vendors to enable us again to contain the scope of the work we have to do and ultimately the indemnity overall.

Yes. And that's, Paul, is not just in the case of cats, it's in all cases.

So we're really cranked up control around appraisal, on-site reviews and things of that nature.

So water losses were a pressure in the past on the cost side, but given the actions you're taking, that's no longer the case?

Well, no, I wouldn't put it like that. I think that we're certainly correcting the pressure there, but we're not done.

And we're seeing momentum in the right direction, but I wouldn't want anyone to feel comfortable about us having tamed water damage at this stage.

Next question. On the commercial P&C side, you said the average rate increase year-to-date 5%.

I think the average last quarter was 5%. So I'll take away that the average this quarter was also 5%?

Yes. Just short of being 5% rate increase and renewal on the quarter, so roughly 5%.

I think Paul, what I like about the quarter in commercial lines, of course, other than 85% combined ratio is the fact that our ability to sell has improved despite what we've done. And I think our retention has been fairly strong.

So it's one thing to get rate increases. It's something else to grow in the market.

And I feel we're in a better spot in Q3, than we were in the first part of the year. And I think it's the combination of both that's we're positive about.

Final question, there were some mark-to-market losses on the common equity portfolio in Q3. Looking at what the market did in October and some of your exposure to the energy sector, wondering if you're taking any response or change in security allocation post quarter-end?

Nothing specific Paul the mix has being fairly stable. We're monitoring it, obviously.

But there is no change in direction specifically on the allocations here. We are monitoring obviously the energy sector carefully.

Absolutely. At the same time, I mean if you look across all securities, our unrealized gain is pretty solid across the board but obviously we're looking at the market as most of you are with intensity, but it's really not something that's keeping us up at night at this stage.

Perhaps an all-encompassing question that would capture a lot of the things you've discussed on the call so far. In your opening remarks, you referred to the company's ability to outpace the market or the industry in terms of ROE.

But I didn't get a good sense of what you think on an absolute basis your company's ROE capacity is? And if you could talk about that sort of in the context of what we've seen so far, like over the last 12 months, about a 15% GAAP ROE, but there were some elevated cats in there.

So could you help us think through, on an absolute basis, what do you think this company's ROE capacity is?

The industry has generated 10 over time and if you look at 30 years or within cycles of seven years, you always tend to revert back to about 10. We've said as a firm that we want to beat the industry by 500 basis points every year, which we have a pretty good track record of doing.

We also said that we're actually gearing the machine to generate more than 500 basis points, because there are moments in time, when the industries performance is just not acceptable to only beat it by 500 basis points. And if you look at the industry performance in the past five, six years, it hasn't been really good quite frankly, and that's why we've outperformed by 700 basis points, as I've mentioned in my remarks, which is not too far from how we're planning our actions.

We're asking Mathieu in claims to generate 300 basis point of ROE outperformance. We're asking the folks on pricing and risk segmentation to generate 200 basis points of ROE outperformance.

And then from investment management and capital management, we're hoping to generate another 200 basis points ROE outperformance. Now, I'm not saying that you should expect the machine to generate 700 basis points of ROE outperformance, because we think that there are points in the cycle where you ought to reinvest to grow faster at high ROE, we think that's the best way to calibrate the economic levers in the business.

We're planning for more. We're saying the objective is 500 basis points.

The ROE of the industry is about 10. So in theory, you should expect north of 15, performance in the long run, and we're planning for a little more than that.

However, we keep room to reinvest. That's how I think about this.

And so when you said there are times when it's appropriate to reinvest in the business for better topline growth, you said when the ROE is high. So what is a high ROE that would encourage you to reinvest for growth?

When you get in the upper teens, Mario, when you get close to 18%, 19% 20% type ROE, you really ought to ask yourself what additional point of growth is worth. And whether there is any kind of an economic logic to reinvest.

And that's in that context that I talk about that.

And then finally, excluding anything to do with cats, like if you just consider the previous 12 months have been a normal cat period, do you think there's momentum in ROE at this point on an absolute basis for your company, not in relation to the industry? Would you expect ROEs to be improving, because of all the actions you're taking?

So let me first say, Mario, that 2013 was a real bad year. I mean, we got hit on all fronts.

And that's certainly reflected in the industries ROE and our own operating ROE was about 11 in what was a real bad year. And I think that's a point that's important to understand.

Now, to get back to your question, is there momentum in the ROE? Well, first point that I will make is that if you look at the underwriting performance, automobile insurance we think, if you leave cats aside, we think we're in a margin neutral territory there.

I'd say that not just because of Ontario, but I see pluses and minuses from coast-to-coast. We see rates up in Alberta.

We see rates fairly flat across the land. And we see a decent stability in cost in automobile insurance.

And I would say that this is an area where we don't necessarily see or expect much margin expansion. I think though, if you look at home insurance, there is clearly momentum on that front and the actions that we're taking are bound to have an impact, and they have so far this year.

And I would say same thing in commercial lines. If you look 12 months, the performance in commercial lines is completely unacceptable.

And I think everybody feels that here. And that's why we've been taking action for a year or over a year.

And to me, that should bring an improvement to the performance in that line of business, because what we've done in the past year is just not good. I'll let you judge on the interest and capital investment income and capital markets side of things.

You're probably better equipped than I am on that front. And then it's a question of using our capital effectively, and that's clearly an area where there's a lot of focus for my team in terms of expanding the business in economically very attractive ways.

That's another lever in my mind.

Thank you everyone for participating today. The webcast will be archived on our website for one year.

The telephone replay will be available at 2:00 PM today until Wednesday, November 12. The transcript will be made available on our website.

Please note, we'll be hosting our Annual Investor Day in Toronto on the afternoon of Wednesday, December 3, and our fourth quarter and yearend results for 2014 will be released on February 4, 2015. That concludes our conference call for today.

Thank you and have a great day.