Intact Financial Corporation

Samantha Cheung - VP, IR Charles Brindamour - CEO Louis Marcotte - SVP & CFO Darren Godfrey - SVP, Personal Lines Alain Lessard - SVP, Commercial Lines Patrick Barbeau - SVP, Claims

Geoff Kwan - RBC Capital Markets Kai Pan - Morgan Stanley Meny Grauman - Cormark Securities Tom MacKinnon - BMO Capital Mario Mendonca - TD Securities Paul Holden - CIBC Brian Meredith - UBS

Thank you, and good morning, everyone. Thank you for joining the call today.

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

Joining me 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'll begin with our prepared remarks, followed by Q&A.

With that, I would like to turn the call to Charles to begin his remarks.

Good morning, everyone, and thanks for joining us today. Earlier this morning we announced fourth quarter net operating income of the $1.58 per share with strong results in both property lines while personal auto saw weather and pool losses impact its performance.

Our financial position is very strong with $970 million of total excess capital, while our book value was up 7% to $42.72 over last year. Top line was up 3% in the fourth quarter despite us taking another early lead in pricing across all lines in provinces.

On an annual basis, premiums grew 5% on the back of growth initiatives including bolstering our brands, launching new product offerings and making leaps on the digital front. We see more of the same in 2017 from a growth point of view.

While commercial lines were impacted by continued difficult conditions in the west, we benefited from the introduction of new sharing economy products, the expansion of our specialty lines division and a favorable rate environment. We delivered a combined ratio of 92.5% in the quarter, thanks to very strong results in property.

Personal auto results were disappointing with a combiner issue just above 100%. We experienced some choppiness in this segment in part because of industry pool and early onset of winter.

Regardless of these factors we find this performance unacceptable and as we said last quarter, they do not yet fully reflect the impact of rate increases in the pipeline and the reforms implemented last year. Going forward, these benefits combined with our action plans in auto including more rates should bring significant improvements in 2017.

Our operating return on equity was 12% in 2016, despite significant catastrophe losses. When comparing ourselves to the industry as of the third quarter, we outperformed by a margin of 670 basis points on ROE, above our target of 500 basis points.

So let's now look at our fourth quarter results in a bit more detail. Personal auto grew 3% on a combination of customer experience improvements and recent rate actions.

The combined ratio deteriorated 4 points to 100.9% as we experienced higher frequency from early winter conditions, losses from industry pools and lower prior year development. We continue to address cost pressures in the segment with rate increases across the country.

In Ontario we raised rates another 4% effective this March on top of the 3% applied last September. This rate momentum combined with our claims action plans, tighter risk selection and continued benefits from reforms are expected to drive mid-single digit improvement as these actions are earned throughout the year.

When it comes to the industry outlook for personal auto, we continue to anticipate a rational competitive environment with low-to-mid single digit growth in the coming 12 months as rate increases are implemented to address cost inflation. In personal prop, premiums grew 7% as new products and continued rate increases for deployed and favorable market conditions.

Our profitability remains very strong with a combined ratio of 75.6% in Q4 and 91% for the full year after absorbing our country's costliest natural disaster on top of severe summer storms. With healthy top and bottom lines, this segment is very well-positioned for 2017.

In terms of industry outlook for personal property, we see no change there. We expect recent weather events will prolong defer market conditions with mid-to-upper single digit growth over the next 12 months.

In commercial P&C, difficult conditions in western Canada and robust rate actions taken in competitive markets led to a decline of 3% in premiums. That said, this business continues to deliver solid profitability with a combined ratio of 89.4% for the quarter, despite catastrophes and fire-related losses well above last year's.

On a full year basis, our combined ratio of 90.2% even with elevated catastrophes was in-line with our low-90s target. Commercial auto premiums grew 8% in the quarter mainly from our sharing economy products.

Although the combined ratio of 101.9% was driven by prior year large losses, I'm encouraged by the underlying performance improvement which improved by 5.2 points in the quarter as we continued to implement corrective rate actions. On a full year basis, our combined ratio was 94.6%, 4.4 points better than last year, another sign that we're on the right path to reach our low 90s target in the segment.

With respect to the outlook for commercial lines, markets remain competitive across Canada and particularly difficult in the west. Therefore we expect low-single digit growth in the coming year.

In summary overall, we delivered 92.5% combined ratio in the quarter, a decent result for fourth quarter on the back of a very strong result in our property lines. Personal auto was a drag on our performance in Q4 clearly, but I'm confident that the actions we're taking will have a positive impact over the next few quarters.

We're also making very good progress on several of our strategic initiatives. In distribution for instance we expanded our direct-to-consumer business with the acquisition of our part partnership with National Bank under the agreement belairdirect will underwrite all policies distributed under the National Bank's brand representing approximately 50 million in additional premiums or 5 points of growth.

On the digital front, we enhanced our telematics offering with the new mobile application that improves customer experience but also adds to our data collection capabilities. Speaking of data, we expanded our industry-leading data analytics capabilities with the launch of the data lab.

The mission of the lab is to expand our competitive advantage by doubling down on our focus on artificial intelligence and machine learning while expanding our massive property to read data sets with external data sources including those from telematics. Our claims team was busy as well with the launch of our Toronto service center in the fall.

We now have three locations across Canada with the fourth in Montreal scheduled to open in April. Results so far are positive with higher customer satisfaction level and an estimated 15% reduction in cycle times.

And finally we continue to do well in the people front. We were named the Platinum Level Best Employer by Aon for second year in a row and a Top Employer for Young People by Media Corp.

We believe that building engaged teams with a customer focused mindset is key to maintaining our competitive advantage. So in conclusion, while Q4 results were below expectation, our overall performance for 2016 was solid in light of the elevated catastrophe losses.

Our property lines performed well, our commercial auto is improving and we've already introduced significant profitability measures to address our personal automobile business in the near term. We expect growth momentum to continue in 2017 as we pursue our investments in customer experience and distribution.

And finally, our balance sheet is solid with 970 million of total excess capital. So with that in mind we increased our quarterly dividends by 10% percent to $0.64 per share, the twelfth annual increase, since our IPO.

I'm confident that our actions and discipline will continue to help us outperform the industry's ROE by 500 basis points and grow net operating income per share by 10% percent per year over time. On that, I'll turn the call over to our CFO, Louis Marcotte.

Thank you, Charles. Good morning, everyone.

For the fourth quarter, net operating income was 212 million, driven by the strength of our property lines, stable investment income and growing distribution activities. The auto lines were a source of pressure on our underwriting results, though actions are underway to deliver material improvements in 2017.

Our operating ROE was 12%, despite 2.5 points from cath losses above our expected run rates. We closed the year with 970 million of excess capital and our book value per share grew 7% from Q4 last year.

Our combined ratio for the quarter was 92.5%, a 4 point increase compared to last year's stellar results. We attribute the increase as follows: 3 points from weather driven frequency and caths; 1 point from industry pool losses; 1 point from large losses in commercial property – mostly fire-related; and 1.5 points of expense savings.

The remainder as prior year development which was a bit lower than last year but in line with historical levels. Our expense ratio improvement in the quarter was due to lower profit sharing commissions on the back of softer underwriting results and lower general expenses due to cost management.

Our distribution income grew 9% in the quarter to 24 million and reached 111 million for the year, in-line with our latest guidance. As we said on the last earnings call, we expect distribution income to grow north of 15% in 2017, with the usual seasonal variations.

Our investment portfolio continues to deliver consistent investment income – 104 million in the quarter, slightly below last year as expected. Although average net investments increased 6% to 14 billion from operating cash flows and mark-to-market gains, this was offset by a lower reinvestment yield.

We continue to expect investment income to decline marginally in dollar terms over the next 12 months. Our Q4 non-operating results improved $47 million, thanks to realized gains on our common share portfolio recycling the rebound in equity markets.

Rising interest rates led to unrealized losses on our fair value to P&L done portfolio which were largely offset by the favorable impact of a higher discount rates on our claims liabilities. Our effective tax rate was 23.7% in the quarter, 6 points higher than last year, due mainly to the reversal of a tax provision recorded in Q4 2015.

In summary, we reported quarterly earnings per share of a $1.27, 13% lower than last year as our operating results decline mostly on the back of weather and pools, while our non-operating results improve materially as equity markets rebounces. Finally a few comments on our financial position.

Our balance sheet remains very strong. Our MCT stands at 218%, 3 points higher than at the end of Q3 driven mainly by capital generated from operations and the phasing of new and MCT guidelines.

Our total excess capital amounted to 970 million at the end of the quarter and our debts total capital ratio was 19%. Our investment portfolio's unrealized gain position improved 11 million in the quarter to 269 million, driven by significant improvements in our common and preferred share positions, offset by unrealized losses on our AFS bond portfolio.

Our capital deployment strategy remains unchanged, prioritizing regular dividend increases investing in growth opportunities and using share buybacks as an additional capital management tool. This morning we announced a 10% percent dividend increase to $0.64 per share per quarter, our twelfth consecutive annual increase.

This represents a 12% annual growth rate since we IPO'ed in 2004. During the year, we deployed nearly 300 million of capital towards growth opportunities including broker acquisitions, investment in ventures and the acquisition of the partnership with National Bank.

With this latest acquisition combined with the integration the CDI acquired in 2015 belairdirect has materially grown its footprint and is capable of serving customers from coast to coast. We believe consolidation of the P&C industry will continue, both in manufacturing and distribution here and abroad.

Our troops are experienced and ready to tackle opportunities as they arise, so is our balance sheet. On buybacks, we launched our program one year ago and repurchased nearly .5 million shares for approximately $44 million at an average price of $88.54.

While our priority is to invest in growth opportunities, we feel that buying back shares at times when the market price may not fully reflect intrinsic value is a responsible use of our capital. Therefore, we plan to renew the Normal-Course Issuer Bid upon our expiry later this week.

This renewal does not signal any change in our perception of the opportunities for market consolidation. In conclusion, with strong underlying results in property lines, we continue to focus our efforts on improving results in personal auto with our usual discipline and energy.

We believe the actions we are taking in our auto lines combined with the strength of our property lines will drive improved results over the next 12 months. Our earnings have proven the resilience to adversity during the year, thanks to the strength of our insurance operations across the country, the contribution of our distribution and investment activities and our investments in growth, innovation and technology.

With these advantages in mind, we are looking forward to 2017. With that, I'll return the call back to Samantha.

Thank you, Louis. Jody, please open the line questions.

In order to give everyone a chance to participate, kindly limit your questions to two per person and time-permitting you may log in a follow-up. Thank you.

Hi there. I know this is more of a short-term type question, but just thinking about Q1 results.

Can you kind of talk about what you're seeing across kind of maybe even just kind of general comment because I think from a weather perspective – at least I'll share in Vancouver, the weather has been pretty brutal unless you like to speed skate on the side street. In Toronto though, I think it has been relatively mild.

Calgary, I think it's been a little bit mixed, but just wanted to get any comments you have on what you've seen so far this quarter.

In fact, being the lead sponsor of the national speed skating team, we do like to speed skate on Side Street, but prudently, Patrick, he's overseeing or claims operation can give you maybe a perspective on the level of activity we've seen so far in the quarter.

Yes. So in January, we've seen as any January some variations in the weather, but no big event so far.

We've had a few ice storms, we're seeing some in Atlantic a good example, yesterday here in Toronto, but none of those single events have reached what we consider a cath. But it has had some impact on general frequency, but nothing unusual for January.

No? Nothing of concern there and I think service is pretty good as well.

No important concerns on our part there.

Okay. And just my other question was you had I think was about 90 million in restructuring-ish related costs.

Can you just maybe provide a little bit color because you also mentioned some expense management initiatives. Maybe some color as to what you're doing on that front and kind of some color around the size of the booking in Q4?

Yes. Geoff, we're really focused in terms of building an advantage when it comes to segmentation and claims management.

It's been our big focus. We don't talk about the expense as much but there's a fair bit of focus inside to run the operation as lean as we can and constantly sort of challenge ourselves on the status quo and I think there has been a fair bit of that in the past few months.

I'll ask Louis to give you a perspective. So we do outperform meaningfully from a combiner issue and from an ROE point of view and if you think of the numbers in particularly by channel for the broker distributed business, as well as the direct business, the thing you'll notice is we also outperform on expenses meaningfully in each of the channel and I think that's the way to look at this because of mix-related issues.

Louis, why don't you give us some color on some of the moves we've made to remain agile and effective as a shop?

Sure. Thanks for the introduction, Charles on this topic.

So we are continuously managing expenses course and as part of our usual process, we do take a few actions back in the fall and essentially driven that streamlining some of the management structures in house. So we did take some action that led to a bit of restructuring costs.

It's in the $10-$13 million range and that's what's you see in the non-operating results, Geoffrey. That was booked in Q4, executed in Q4 and will have a slight positive impact in 2017.

Okay, great. Thank you very much.

Thank you, and good morning. So first question on personal auto.

In recent year, you've seen some of U.S. player's basically recording higher frequency and some higher severity.

I just wonder from your perspective, do you see any underlying trends. What's your assumption on the last cost trend going forward and what pricing have you taken or planning to taking and when do you expect the margin we'll see meaningful improvement?

How soon will we see that?

Yes. If you take a full-year perspective guide, the frequency in personal automobile is down 0.4%.

So there's not meaningful pressure on that front. If you look at the severity for the full year, it's up close to 2% and we've been talking about general inflation starting in '15 across the land which has led to us firming up our view on the past as well as taking rate actions.

I'll let Darren to give a bit of flavor on the full year perspective in automobile insurance, then I'll ask him to give you a sense of what's in the pipeline in terms of improving what we think is not a good performance in that line and sort of timeline of improvements and probably worthwhile hearing Patrick as well on some of the things we're doing in claims because when we look at performance, pricing, rates level is one thing; segmentation is something else; risk selection is another part of it; claims prevention and so on. So Darren why don't you give us a sort of 2016 perspective?

Sure. Thanks, Charles.

As a Charles mentioned from a frequency standpoint, down slightly in the year versus the prior year. Obviously as we saw in Q4, we get a bit of noise from quarter-to-quarter.

So literally the increase we saw in frequency in Q4 was totally weather-driven. So other quarters, obviously we're seeing a favorable impact from a weather standpoint relative to the year-on-year quarter.

Frequency, relatively flat. We still see, as Charles mentioned, the 2 points in severity.

Just at least a little bit of inflation within the system. That varies very much from coast to coast.

We've taken and we mentioned obviously on the Q3 call in terms of some of the actions we're taking from a rate standpoint. We are continuing to push out further on that on that front.

We received approval as Charles mentioned in his opening remarks for further increases – Ontario. To give you a sense of the rate momentum that we have currently within the portfolio and I'll quote some January 2017 numbers here.

We had a 3.9% rate increase in the month of January just going and this compares to a written – and I should say that's the written rate increase. This compares to a written rate increase in Q4, impacting our results of 2.2 and an earned rate increase of just 1% in Q4.

So this illustrates the current rate momentum that is building within the portfolio in 2017. Now in addition to that, as I mentioned, we have rates coming, rate increases coming in Ontario and we also have a number of other rate increases that have been currently filed with the many right to approve authorities across the country.

So when we look at the right momentum that's building, obviously, there is a little bit of a lag between the written and the earned and that will narrow through 2017. So in combined with the rate increases, the segmentation, our advancements in UBI, et cetera, together with the claims action plan, obviously we'll continue to see impact and benefit from the Ontario reform also in the 2017.

We're confident that even though we may see a little bit of choppiness early in the year, but we're confident that we'll see improvement in our results in the mid-single digit range in 2017. We'll see a little bit of choppiness as our action plans are solely bagged in towards the second half of the year.

And just in rates, we expect to earn a good 4 point. Just in rates.

There's more action taking place. Maybe a good opportunity to ask Patrick to give us a very brief window into what's in the pipeline in claims.

Sure. The claims action plan that we've started to build over I would say the past six months with some actions already in place and March 2017, is expected to produce also another 2 points roughly of improvements on the bottom line for personal auto specifically.

It involves four main themes: the first one is tighter indemnity control. This is enabled by our new national IP platform, so better controls within the system on a national basis to reduce indemnity.

The second one is accelerated leverage of our data analytics in the field of [indiscernible], fraud detections and supply chain management. There's quite a few initiatives there that will also help us reduce our cost.

And then we have specific action plan for buy coverage for longer tail lines. So on body injury, we are increasing staffing to address some of the trends we're seeing specifically in Alberta that involves higher, more surveillance and more proactive settlements of claims early on in the process.

And finally an accident benefit. It involves a lot around the management of our reline network.

We see benefits from a cost perspective when our clients elect to go to our [indiscernible] and we have additional initiatives to try to help on that front as well for big areas.

That's great, very comprehensive. Then my follow-up question is on the industry pool because this piece is probably less of your control.

I just wonder, will that get any worse before you can -- there continue to be a point to track on your combined ratio in 2017.

From a from a pool standpoint, maybe a little background. There's two elements of the pool.

There's one element which is the Facility Association. Now as we as we like to refer to it is the market of last choices for the industry.

We assume back from the Facility Association our market share proportion of their under-earning performance. The other element of pools is what we call the resharing pools.

This is where the industry and individual companies, it's a mechanism whereby we have the ability to seed underpriced risks what we deem to be underpriced risks to this industry pool and then we issue them back a proportion of the whole pool. Now, those two pools do represent a very small portion of the total industry, so not too sure we could sort of say that they are reflective of overall performance.

Now, we definitely do see noise in the pools from quarter to quarter as you've seen in our over the last few years. We will have some quarters like this year.

Sorry, this quarter in Q4 where we've had some unfavorable development, we've seen other quarters where we're seeing significant favorable development. The pools themselves operate and we get quarterly updates from their actuary with updated reserve valuations.

So that obviously can generate some of the noise. Sometimes there's a timing mismatch between maybe where we may recognize something from a PYD or a development standpoint.

There may be a timing mismatch for the pool as well. So we don't see that the pool is of a longer term drag, but definitely from quarter to quarter we will see definitely noise in '17 just like we saw in '16 and prior years as well.

Yes, I think in the fourth quarter, the drag was 3 points roughly when you put through an excellent year prior year from pools; only year-to-dates in personal auto, it's 0.7% and I think Q4 was probably a function of a good pool performance in Q4 of last year versus a not-so-good pool performance this year. Not overly-worried about the pools being a meaningful drag like we experienced in the quarter for the full year next year but there might be some choppiness there.

It's great. But thank you so much for all the answers.

Thank you.

Hi, good morning. Just going back to personal auto.

Just a broader question in terms of when you see a quarter like we saw in Q4, what gives you confidence that you are taking the right steps to address those problems? I guess another way to ask it is could you say that maybe the measures are not strong enough?

And so, how do you gauge that? I know it's probably an art and a science together but I'm just wondering what your perspective is on that.

I'll take this one, Darren – at a high level how do I comfort myself that we're being proactive and I would say that I look at what's in the pipeline in three different buckets at the high level. The first bucket is what we're doing in terms of pricing, reselection, claims, improvements and so on.

I think that's what Darren and Patrick have talked about. These are things that are baked in the system.

I think the fact that there's 4 points of earned great, that's easy to execute upon. You put it in the machine, it goes out and then you manage your retention basically.

The claims piece is not as easy to execute upon, but there's a fair bit of things in the pipeline and the claims guys are really good at executing. On that first angle which is what we do, there's more than mid-single digit worth of meat in the system.

That's point number one. The second lever is reforms.

So part of the issue now is there have been reforms in the past few years, meaningful reforms in the spring in Ontario, further reforms in June and we have yet to see the full benefits of those though we're very confident about the quality and the nature of these reforms and there might be more this year. How much is that actually worth?

I'm not sure, but I know it's worth something and part of it, we've reflected in pricing earlier in June to work with the government to reflect the impact of what we think is pretty good work on their part. So that's the second bucket that gives me confidence that inflation will be in check in part in Ontario for sure.

And I think the third bucket and this is a much tougher one to assess, is the fact that our teams in the field are dealing with many changes at the same time are becoming more efficient, are processing claims faster and that is also to a certain extent reflected in the numbers, which gives me a fair bit of confidence that between the actions we're taking ,the impact of the reforms and the fact that our folks in the field are probably processing claims faster and that might point to some deterioration, which is in fact process-driven as opposed to ultimate cost-driven, I think it gives me a reasonable degree of confidence that we will see mid-single digit improvement in in 2017. It's important to keep in mind in all of this that personal automobile is a long duration product and that it is a regulated environment and that there's a lag between the data set you can use to price the product and the moment at which the product is actually consumed, that is when the claims is paid.

That in itself in personal automobile is a source of uncertainty and certainly from quarter to quarter, it's not surprising to see some noise. Now, the better you are at [indiscernible] trends segmenting the business, the more aggressive you are at taking action and being ahead of the market, the more you outperform.

That's what we've done in the past 20 years here at Intact and I think these past few months and the coming year will be very much about that. We try to over-execute on what we control and beat our competitors in the exercise.

Just to clarify. You talked about timing in a previous question but sort of an important time mark for you would be sort of the middle of the year.

If you were to see if you just see a lack of progress in the middle of the year, would that be a time where you would reappraise the situation and not earlier? Is that a fair assessment?

How would you look at the timing?

We do that every week to be honest with you. We monitor the progress in the field, we monitor the progress in claims and we reassess weekly at the latest on a monthly basis.

This is how we run the business. I think there might be some choppiness in Q1.

There might be some choppiness in Q2, but the execution will be monitored very closely on a weekly basis and there are a number of things that are a given like rates for instance. It's just running in the system and I think Darren's point which is when you compare the earned of Q1 and Q4, the written of a little more than two in Q4 and when you look in January with the series of the rate increases, the written is close to four, this is just happening.

So we reassess frequently. I think for sure when we hit June, I'm hoping that those things are well ingrained and have created momentum.

Thank you.

Yes, thanks very much. Two questions – one, I think you talked about a reversal of a tax accrual in the quarter?

I wonder if you can quantify what that was and if we should see the tax rate which I think the operating tax rate, which I think was 23% in the quarter. What we should see that going forward?

Because it's a little bit higher than what we've trended at, and then I have a follow up.

Sure. In fact the reversal of cured in 2015.

Oh, sorry

Comparative. So we have a big jump from '15 to '16 and that's because we have reversed a provision in 2015.

Oh, okay. I misunderstood.

So do you think the 23% tax rate we're seeing on operating basis right now seems to be...

No. That's a bit high.

I would say there's probably a point in the half year that is quarterly fluctuations. So I would not expect that to trend going forward.

I'd be much more in the 21.5%, 22% range on an ongoing basis.

Okay. And then I really think this pool stuff was causing a lot of noise in the quarter here.

Just looking at it. What it was in the fourth quarter was a 15.

It was only 6 million and all over 2015, there was 6 million lost in pools and then the fourth quarter of 2016, we had a 24 million loss from pools and that was half of the entire 2016 loss. I think it really does noise from the tax and the pools has really caused a lot of maybe some of the confusion in the quarter.

I'm wondering if you can help us model what pools should be going out? You got 6 million for 2015 – 48 million for 2016 and as I said, 6 million for 2015.

As I said, how should we think about that going forward? Because obviously, this is causing some volatility and it's not really necessarily attributable, Charles, to your business.

Yes. Fair enough and I think the pool would look at their provisions and their financials maybe in a different frequency than we run our own business.

I think next week is the investor's day and you know what? I will commit to sort of provide better guidance at the investor's day.

We'll devote these specific question on it and give us a week to sort of think about '17 in that regard, which is not something we spend a lot of time on. I think we totally understand '16.

I think we're comfortable with the overall provisioning of the pool at the end of '16, but will spend a bit of time and take a perspective view of the pool and put that on the table at the investor's day. Does that work for you?

Yes, that's a good. Thanks.

Good morning. Charles, could you just put a fine point on this guidance you're offering on personal auto?

You're saying that the improvement could be mid-single digits in 2017, relative to 2016? I think that's the way I've interpreted it.

If I were to use the current year claims ratio in 2016, about 76.6. I think I'm close to what the actual number is.

Are you suggesting that could be 500 basis points lower in 2017 full year?

Pretty much, yes.

That's significant because that would take us back to the levels that we saw, say in 2012 and 2013 which are pretty good years. So you're saying you can reverse pretty much everything?

The deterioration we've seen throughout 2015-2016 in one year?

I think we're certainly – I have lots in the pipeline [indiscernible] that I feel will create some momentum throughout '17.

That's helpful. The reason I want to clarify, just it seemed like a big commitment to take it down back to what we saw in '12 and '13 and I appreciate that a lot of that could be pool-related.

It just seem like a big [indiscernible] and I wanted to clarify. Thank you.

Yes. I think there are caths and things of that nature that took place, but I think we're closing the year with 100% combined ratio.

This is far from the level at which we operate the business and we think there's mid-single digit improvement, all else being equal.

I think given your track record, it's important take these things very seriously. That's why I'm clarifying it.

Thank you.

Yes, good morning. First question is related to the uptake in bond yields that we've seen over the past couple of months here.

I'm just wondering given your forecast that investment income is going to continue to decline into 2017 honestly. If you were to stay flat, where would the inflection point be for investment income to start taking up, given the maturing bonds reinvested at a higher yield?

So at this point we see it as I said, moderately decreasing. What we've estimated it would take, probably 35-30 beeps increase for us to have that investment income stable.

So we need that level of points to bring it to stability. In terms of inflection point, I assume you're talking about the time?

Yes.

And given the turnover of the portfolio, we're probably in the north of more than 12 months. Probably at least, I would say 9 to 12 months out.

Okay. So just to confirm then, it would be 35 basis points from where we are today or from the I guess the average yield of 2016, or what would be the base for that?

End of '16 where we close '16.

Where we close '16. Okay.

Just a quick question on the National Bank and Sun Life relationship. How will that be broken down by line?

I guess could you give a little bit more color around what that relationship is going to bring in terms of the 50 million in premiums written.

So this one is a 50-50 partnership and so the 50 is the incremental premium. We're picking up by thinking over that partnership.

It's a white label agreement that our direct is running the business, it's through the National Bank, it's through Sun Life. I think the Sun Life is a much smaller impact than this acquisition.

It is of course personal lines deal and waited towards personal automobile, 60% to 70% personal auto. The rest, personal property and it's Quebec only in the case of National Bank.

We love the business in Quebec and for us to strengthen, better-position in Quebec strategically really good and would like to work with National Bank. They're good people.

Okay, and this commenced I guess in 2017, or is it due to commence soon?

December is the closing.

Okay, great. Thank you.

Thank you. First question is related to commercial P&C.

So it's a bit of a down take and premiums written year-over-year as you highlighted that related to western Canada. Wondering how we should be thinking about that business in terms of premiums written for 2017, given some of those macro factors versus some of the initiatives you're doing and especially lines.

Go ahead, Alain.

Okay. Well, when we look at the growth or the minus-2.9% in the quarter, like we said, some of that is driven.

There's a bit of a timing issue but very small, 0.3%. We've got some action coming up from profitability action where segmentation and risk selection has lead to about 25% of the explanation for the reduction there, which is about 0.7 point and the economy drag – and I think that's the part that's probably the most difficult to predict or see where it's going – the economy drag in the quarter is probably in the 40% to 50% explaining that reduction in growth.

And we see the same thing at the industry level. When we compare like the industry or our performance compared to the industry, we don't have the Q4 result, but we have our experience at the end of Q3.

At the end of Q3, we were reducing by 1%, but the industry at the same period of it was reducing by 2.3% and in both cases, the biggest drag was really coming from economy condition in western Canada. Our view when we look at it and we look at it combining commercial auto and commercial P&C together, is really to see that going forward, this will operate as a very low-single digit growth in 2017.

Okay, and then my second question would be related to belair. You've invested a lot in new technology, invested a lot in advertising over the last couple of years, particularly targeted at the Ontario market.

Just looking for an update on realized growth and then also growth appetite for the year ahead.

Yes. I think the last two years in the direct channel with a number of acquisitions, the branding deployed from coast to coast.

We just finished the integration of CDI, Canadian Direct Insurance, which improved our position in Alberta. We feel pretty good about the level of that, that four minutes performance like it's doing really well.

The growth in '16 in the direct channel was 11% and 7% if you were to exclude the impact of CDI. So, for me, a business that's doing well from a combined ratio point of view with that growth profile, I think that's pretty good and quite frankly.

I've been happily surprised by how well these guys have established a brand in the new markets they're in and I've been happily surprised by how much response we've had from customers to the new digital innovation we've launched, new quick quotes and various service platforms where the response has been stronger than what I anticipated. So I think that this is a business unit that is growing north of mid-single digit.

I think that the CDI. In fact certainly won't be there in 2017, but this is an upper single digit growing business.

That being said, we're thrilled by the progress we're making in Intact Insurance and the progress we're making in broker link like BrokerLink. BrokerLink now is approaching.

A billion to the margins are very strong, you're seeing the distribution, profits of 114 million pretax at the end of 2016. Keep in mind, this is a new business generation machine that feeds Intact Insurance and the growth in our broker distribution business Intact Insurance is also quite good and we're prepared to support that growth for as much growth as we can, and in fact insurance because these guys are doing well.

Intact Insurance has grown close to 4% in in 2016, which is faster than the industry and when I look back at the year, certainly would have loved to have bigger acquisition, but from an organic growth point of view, we've grown close at twice the speed of the industry. So when you have close to 20% of the market and you outperform from an ROE point of view by 670 basis point, if you can grow organically almost twice as fast as the industry, it's good place to be, regardless of the distribution channel you're in.

That's sort of how we look at the world.

Okay, thanks for that and hopefully at the end of 2017, the message will be a little bit different on the big acquisition – we're glad we did the big acquisition 2017. Thank you.

Yes. I think that the message we want to have at the end of '17 is about personal automobile performance.

Yes, thank you. Charles, first question here.

I noticed that your language with respect to your outlook on commercial price environment is 'change.' You took out the commentary about firming market from market.

If you can give us a little color behind why you believed that you're no longer to see a firm market?

Yes. I think as I mentioned earlier, we've been four years' worth of rate increases generated, 13% rate increases in what was the firming market to a firm market, to a market that has been still competitive throughout with pockets where we could take – or meaningful pockets where we could take action.

I'll let Alain give you a bit of color on that market and Brian, I think it's important to understand that we're in the small-to mid-space and meaningful presence and specialty lines that is doing quite well. Why don't you, Alain?

If I look at where we see what we see in the market a little bit like Charles explained, the market was competitive but we saw throughout the year lots of pockets on places where type of risk where we saw you know rate increase more underwriting action, selection from our competitors – this is still continuing, but at the same time I would say that by the end of the year. This was happening to probably a lower extent than the beginning of the year.

Throughout the year we've continued to basically increase rate and in fact when I looked at the rate increase in the fourth quarter. It's about 3% that we've passed through on the renewals.

And yet at the same time our retention has almost not dip. We saw a small dip in the last quarter of less than half a point and that's part of what we're doing on both the segmentation and the selection and some corrective measure ourselves on pockets of the risks.

We think the market remains competitive. It's still open to some rate increase but maybe a little bit less.

On our case, we're continuing to pass the 3% rate increase. Our aim is to continue to protect our margin and improve our portfolio and basically if I look at what's happening right now, we're going to be earning the rate level of what we'll be earning in the next 18 months, will continue to rise.

I think, Brian, just to put things in perspective, when I look at our retention and December, it's 89.3%. It is a little bit lower than what it was a year before.

The industry is still in a rate increase environment. I think there are industries that point to that, but I think we're just being cautious with the words.

We like what we see in the market. There's always people who do crazy things and that's fine, that's part of how one out performs, but at the end of the day we're focused on growing earnings and we will see rate increases go through the system even though the performance is getting pretty good.

I think the industry's performance in commercial lines is it's not great.

No.

And I think that's important to keep that in mind, Brian. Do you want to comment, maybe, Alain, on the industry?

Well, the industry in 2016 was really affected.

Yes, just nine months.

Yes, we are just nine months, but we outperform in fact the industry on a loss ratio basis by 15 points. So that would put basically the industry results north of 105% to 106%.

That's fairly affected by Fort McMurray, but this will continue as the pressure point on the industry to continue to add some rate increase.

Yes. I guess, Brian, I sort of used that as a key data point to say this is not a soft environment by any means.

If anything, if people look at their performance closely, you could expect the industry to take a firmer view, but because we've seen the retention dip a little bit. We're sort of cautious with our language.

In the meantime, you'll see rate increases go through the system.

Great. Thanks.

And then my next question, Charles just curious, in the past you've kind of mentioned that a possible area of acquisition would be a small commercial in the U.S. Given the changes we've seen you know in the administration and kind of the political climate here in the U.S.

and some of the things that the administration has talked about doing pre-economic growth etcetera, has that changed at all in your views with respect to that type of an acquisition?

No. I think that we're in this for the long run and we feel that this is an environment where we can bring something to the table, given we have close to a 25% market share in that space in Canada and outperform a [indiscernible] our Canadian competitors.

We are not well-positioned to help Canadian businesses who do business in the U.S. for sure but I think the portion that he said in the U.S.

is significant. We've studied it for a long time and what's happening in the near term in the U.S.

is not changing our view fortunately there.

Got you. Could it make it actually even a better opportunity from your perspective?

It could indeed, yes.

Got you. Thank you.

Great. Thanks.

Good morning. One quick question I don't know if we want to address this next week, but what's the pricing flexibility on the industry pools?

There is two different set up – one is what we call the restoring pool which is companies seeding some of their own risks in the pool. That's all done at the company's filed rates.

Okay? So your question really applies to what we call the Facility Association, which is a separate insurance company.

We actually manage half of it roughly on behalf of the industry and we receive a fee to manage that unit. And there the facility in most jurisdictions would have to file rates the same way an insurance company would.

But regulators understand that the facility has to have the highest rate in the market because it's the market of last resort. If the facility didn't have the highest rate in the market, you'd end up with lots of rate risks in the facility and that would be that market dynamic.

So I would say in general, there is reasonable flexibility. Patrick who's running claims, you're involved on the board of the Facility Association.

Maybe you want to get a perspective?

Well, you're absolutely right, Charles on the DSE which is what we call the last resort. It's to ensure availability of auto insurance for everyone.

The idea is not for it to compete with private insurers, so it's always the highest rate in the market and it's based on filing. There's not in dollars jurisdiction that we can fully reflect maybe what would be normal cost of capital in the rates, but besides that small margin globally, we filed DSA five full indications and that's not the source longer term, I would say of last because we [indiscernible] more.

The pools though is each insurer seeding the risk that they believe they were not able to have enough rates. So the portion of their book and on that overall, it is deficient.

But on the other end when we count pools, we also have our seeding ourselves at worse risk and there's benefit from that. Overall, we'll come back, as you see, Charles, next week with probably more details but I don't expect long-term the total of those two things to be significant difficult.

Exactly. Thank you.

That's very helpful. The second question, I guess if you look at the full year personal property results, from the perspective of I guess underlying attritional non-cash few other losses in major catastrophes; can you talk about how those compared to expectations probably?

Yes. So first of all, prop -- closing the year at 91 with FortMac in there, I would say is probably slightly better than what we would have expected.

And we would not have expected FortMac. I think we've talked about the fact that we want to position ourselves to do well in good and bad times; and I told investors you know for us that sub 95 in bad times.

So you know when you look at 91 and FortMac and their plus a decent loan of cath, you know what I think that this is better than what we had anticipated. Maybe you want to give some more color Darren because while I say that, we're still moving the needle from a rape and recession point of view in that line of business.

No, absolutely Charles. So when we look at Q4 four.

I mean top line was up 7.5% in the quarter. And there is some writing there about three points of right but we also are still growing units as well close to five points of unit growth.

So that's a line of business that -- yes, we've taken some strong action in the past both in terms of rate but also in terms of product but we're continuing to grow and really outgrow the industry within that line of business as well. We have taken further action in particular targeted segments, we have taken a little bit of further action in Alberta with respect to hail and our coverage around again hail, again following another tough summer from a hailstorm standpoint.

So we're continuing to grow our margins in targeted segments where we feel that we need to create maybe further sustainability in terms of the product.

Yes, exactly. And I think -- look, I mean the reality is what personal automobile performance being subpar as far as we're concerned.

We're not in the mindset of letting margins go to grow in other lines of business even though those other lines of business are good. I mean this is the practical reality of running an insurance company, at least like ours.

I completely understand. Thank you very much.

Thank you for fitting me in. Just a quick follow-up on the PYD commentary.

In your management discussion analysis, you said fourth quarter PYD up three points as in line with your our long-term extension. For the full year it was about five points and that's remained consistent with long-term these sort of levels.

So are you expecting three points or five points going forward?

We've talked about three to four points. Every time this question has been asked in the past few years, I said this is how you want to look at the future even though it's been five, six, seven points in the past few years.

I think three to four points is the right way to think about that.

Great. Thank you for the clarification.

Thank you all for your participation today. Following this call the telephone replay will be available for one week while the webcast will be archived on our website for one year.

A transcript will also be available on our website in the quarterly financial archive. I should also note that we will host an Investor Day one week from today in Toronto on February 15.

Please let me know if you would like to attend. As well we will host our Q1 2017 earnings call and AGM on May 3.

Thanks again, and this conclude our call for today.