What may happen when Intact’s ROE reaches the mid-teens

Don’t expect in 2020 to see the Canadian P&C industry’s return on equity (ROE) rise to the level of the 10%, which is one possible indicator that the hard market may be ending, according to Intact president and CEO Charles Brindamour.

“We don’t think the industry is going back to 10% in 2020,” Brindamour said in answer to a question from an investor during a 2020 Q4 earnings call Wednesday. “We think the industry should be somewhere in between 4% and 10%.

“If you look where we are in the cycle, growing at, say about 10%, and we are talking about [Intact in] Canada, quite frankly our objective is to get back to mid-teens ROE. Once we feel we are there, this is where you capture growth and try to maximize margins where you can, depending on the market.”

Intact reported Wednesday an operating ROE of 12.5% over the past 12 months. “It’s got to be at least 500 basis points [above industry average] every year, given the nature of the business,” said Brindamour. “We have built our strategy to do that. If you look at the last 10 years, we have run it at 700 basis points [higher]. Ultimately, the company’s strategy is to return to an ROE number in the mid-teens.”

One investor asked during the conference call why Intact felt the need to compare its performance against the base industry ROE. “Why, as an Intact analyst or investor, should I care about the [P&C] industry ROE?” he asked. “Is there some kind of interconnection between your capacity to generate an ROE and where the industry sits?”

“The best way to create value in our space is to maximize ROE when the industry’s performance is weak, and then make sure we are comfortably above our cost of capital when the industry is stronger to grab as much growth as possible,” Brindamour replied.

Given the cyclical nature of the property and casualty insurance business, he added, it’s important that the company be able to “take advantage of the market at different points of the cycle.”

“If you go back 20 years, and you look at the patterns of the industry’s performance, it’s ranged between 2 and 17%,” said Brindamour. “I would say, if the industry hits the top of the bracket, you want to make sure that you outperform and grow in that environment. It’s not clear to me that running a business flat [e.g. with a flat ROE] in a cyclical industry is the best way to create value [for shareholders].”