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Below is an overview of our expectations for the P&C industry over the next 12 months, together with our current strategies intended to further improve our industry standing. These expectations are subject to risks and uncertainties, and our actual results could differ materially as a result of various factors, including those discussed earlier in the document. Please read the “Cautionary note regarding forward-looking statements” included in this MD&A.

2016 Overview of Expectations
  Canadian P&C insurance industry Our response
Pricing and underwriting profitability
  • We expect overall industry gross written premiums to show low to mid single-digit pace of growth in both personal and commercial lines.
  • During 2016, the industry was impacted by deterioration in personal auto performance across a number of provinces, which we expect will continue to pressurize performance in the near term.
  • As part of the continued actions by the provincial government to reduce insurance premiums in Ontario personal auto, further changes were introduced in June 2016 which address the definition of catastrophic injury and also medical, rehabilitation and attendant care benefits, and other minor items. We continue to closely monitor the impact of Ontario reform changes.
  • We believe that severe weather caused by climate change will continue to affect the industry and result in higher and more volatile claim costs in both personal and commercial property lines.
  • We expect climate change and the shift in consumer behaviours to result in the continued need for enhanced changes to product coverages.
  • We continue to improve our predictive analytics, pricing sophistication, and processes. We expect that these investments will drive profitable growth through appropriate risk selection and pricing. In particular, in 2017 we will focus on profitability improvements in certain auto lines.
  • We continue to focus on improving profitability in our commercial property and liability business through a range of measures including underwriting discipline, product enhancements, and targeted rate increases based on risk-based pricing.
  • We are implementing product changes and continue to employ geographic segmentation to manage our overall exposure to weather-related events. Product changes in 2016 included the launch of an overland flood personal property product. We continue to proactively monitor product developments and our suite of products to respond to the changing market.
  • We continue to review the adequacy of our reinsurance programs to ensure sufficient reinsurance protection is in place at an appropriate cost.
  • We continue to improve operational efficiency, while enhancing risk management and underwriting capabilities.
  • We are investing in a new personal lines policy administration system to improve productivity, and our ability to deliver products and services to the market in a timely, competitive, and efficient manner.
Multi-channel distribution
  • Consumer demographics are shifting and their behaviours continue to evolve with the rise of the always connected consumer. Consumer connectivity is creating increased demand for digital and direct offerings of insurance products. We expect growth in this part of the market to continue to increase.
  • We have expanded our distribution strategy with the recent launch of Sonnet. Our broker business will continue to be a core part of our business model, and is expected to benefit from our broker investment strategy and the investments we are making in a new personal lines policy administration system. Our multi-channel distribution strategy is expected to drive profitable future growth by optimizing our competitive position to address changing customer and market dynamics.
Economic conditions
  • The improved global economic outlook is situated against a backdrop of heightened political and policy risks, which we expect will result in continued volatility in global bond and equity markets.
  • We anticipate interest income will ultimately be supported by the rise in bond yields, although a near-term positive impact is not anticipated.
  • We expect that the Canadian economy will experience relatively benign growth in 2017.
  • We plan to maintain an investment strategy that focuses on long-term value creation while effectively managing our financial risks. Our target asset class allocations are aimed at maximizing returns within acceptable risk parameters.
  • Our cash and investment portfolio continues to be largely composed of high quality, actively traded securities including Canadian fixed income investments issued or guaranteed by domestic governments, investment-grade bonds, and Canadian and foreign equities.
  • Our financial position remains strong as demonstrated by our MCT ratio of 276.1% as at December 31, 2016.
Industry consolidation
  • Premium levels are becoming increasingly concentrated within the industry’s largest companies with the top five P&C insurers in Canada representing almost half of the market in 2016.
  • The importance of scale is expected to become increasingly important for P&C insurers in order to achieve sustainable profitability through enhanced price segmentation and operational efficiencies.
  • Our broker partner network, a key distribution channel for Canadian P&C insurance, is also undergoing significant consolidation as brokers seek to enhance profitability, retain key talent and invest in their operations. Consolidation of the broker network is expected to continue as brokers execute succession plans but also expand access to capital and formalize partnerships that improve future acquisition capacity.
  • We continue to invest in our corporate development capabilities to execute and integrate smaller and mid-sized acquisitions.
  • Our strategic focus on consolidation was demonstrated by our recent acquisition of Canada’s largest pet insurance company, Western Financial Insurance Company, and its flagship brand Petsecure, further diversifying our product portfolio.
  • We expect ongoing investments in our business to improve the efficiency and scalability of our operations and better position us for future large scale acquisitions.
  • Our broker investment strategy has expanded to better support the growth objectives of our broker partners and continue to participate in the consolidation of this important distribution channel.
  • Preparation for a potential demutualization and IPO continues, which is intended to provide access to the necessary capital to support our strategic initiatives, including allowing us to make larger scale acquisitions.
Overall
  • We expect overall results to continue to be impacted by the scale and frequency of weather-related events, as well as the deterioration in personal auto results. In a period of continued low investment returns, we expect that the industry will continue to focus on greater underwriting profitability and active consolidation.
  • We continue to focus on our investments in our leading analytics capabilities and our operating platform in order to advance our competitive position. We are also focused on expanding our distribution strategy, with the recent launch of Sonnet, and continue to invest in corporate development capabilities to effectively position us for meaningful participation in industry consolidation. These strategic investments will continue to elevate our expense ratio in the near term.