Definity Financial Corp

TSX:DFY

Earnings Call Analysis

Record Quarterly Performance Driven by Strong Underwriting and Investment Gains

Definity Financial Corporation reported record quarterly results with an operating net income of $109.1 million, driven by robust underwriting and investment income. The combined ratio stood at 90.1%, showing strong performance across all lines. Gross written premiums grew by 14.2%, bolstered by favorable market conditions and proactive rate actions. The company made a strategic exit from the Alberta auto market, anticipating improved profitability. Operating ROE reached 10.8%, with book value per share increasing by nearly 12% year-over-year. Looking forward, Definity expects sustained favorable market conditions and continued expansion through both organic growth and M&A activities.

Strong Financial Performance Boosts Confidence

In the second quarter of 2024, Definity Financial Corporation reported remarkable financial results. The company achieved record operating net income of $109.1 million, translating to $0.94 per share. This success was fueled by robust underwriting income, significant net investment income, and contributions from their insurance broker platform. The combined ratio stood strong at 90.1%, reflecting exceptional performance across all business lines. Notably, gross written premiums saw a substantial growth of 14.2%, buoyed by firm market conditions in personal auto and commercial insurance sectors .

Resilient Despite Catastrophe Losses

While the second quarter lacked the expected level of catastrophe losses, July brought significant events including flooding in Southern Ontario and wildfires in Western Canada. These incidents underscored the importance of the company's commitment to supporting affected clients and communities. Definity’s proactive rate actions and strong competitive position in 2023 facilitated the growth of its personal auto book within a firm market. The firm's performance amidst these challenges reinforces investor confidence in its underlying business fundamentals and operational resilience .

Strong Personal and Commercial Insurance Growth

In personal auto, gross written premiums surged by 19.5% in Q2 2024, driven by increased written rates, unit count growth, and portfolio transfer activities. The company aims to sustain this growth pace for the rest of 2024, focusing on maintaining target profitability through rate and segmentation actions. Despite exiting the auto business in Alberta due to non-viability, the personal auto combined ratio improved to 95.2%, 2.4 points better than the previous year, thanks to active expense management and a declining trend in theft .

Commercial Insurance's Impressive Performance

Definity’s commercial lines also showed strong momentum with gross written premiums up by 13.8% year-over-year. The firm targeted high-retention segments with rate achievement in a favorable market environment. The combined ratio in commercial insurance improved to 86.6%, driven by a 2.7-point improvement in core accident year claims. This growth trajectory is expected to persist, supported by the company’s underwriting execution and expanded capabilities in small business and specialty segments .

Focus on Sustainable Growth and Financial Health

The company is strategically focused on sustainable growth, with robust organic growth targets and continued M&A activities projected to secure $1.5 billion of managed premiums in the next 3 to 5 years. Definity’s financial position remains strong, with shareholder equity exceeding $3 billion for the first time. The company continues to prioritize capital deployment to support organic growth, maintain a disciplined approach to expense management, and explore further efficiencies and scalability .

Guidance and Outlook

For 2024, Definity expects the operating environment to generally support favorable market conditions, aiding in the achievement of their key financial targets. The firm has set a full-year target for distribution income to reach approximately $75 million. Additionally, net investment income is projected to exceed $190 million for the year, though growth rates may slow as book and market yields converge. The company's strategic capital management and strong profit margins in core segments further bolster the positive outlook .

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Definity Financial Corporation Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Friday, August 2, 2024.

I would now like to turn the conference over to Dennis Westfall, Head of Investor Relations. Please go ahead.

[Dennis Westfall, executive]

Thanks, Julie, 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 definity.com under the Investors tab.

As a reminder, the slide presentation contains a disclaimer on forward-looking statements, which also applies to our discussion on the conference call. Joining me on the call today are Rowan Saunders, President and CEO; Philip Mather, EVP and CFO; Paul MacDonald, EVP of Personal Insurance and Digital Channels; and Fabian Richenberger, EVP of Commercial Insurance and Insurance Operations.

We'll start with formal remarks from Rowan and Phil followed by a Q&A session, where Paul and Fabi will also be available to answer your questions.

With that, I will ask Rowan to please begin his remarks.

[Rowan Saunders, executive]

Thanks, Dennis, and good morning. We reported strong second quarter results last night that were well ahead of our key financial targets. In the quarter, robust underwriting income, healthy levels of net investment income and seasonally strong contributions from our insurance broker platform resulted in record operating net income of $109.1 million or $0.94 per share.

Our second quarter combined ratio of 90.1% reflected strong performance across all lines. The benefit of higher earned rates flowing through the business, low levels of catastrophe losses and ongoing operational expense efficiencies combined to generate a substantial increase in underwriting income.

Though we did not face the expected level of catastrophe losses in the second quarter, the events in July, from flooding in Southern Ontario to the wildfires in Western Canada, are reminders of the importance of delivering on our purpose to support our clients and communities. Our thoughts are with the families coping with the devastation from the Jasper wildfire and the realities of their path to recovery. I'm proud of the way our claims team are responding with on-the-ground support where that's possible to help our customers and broker partners rebuild and recover rapidly.

Our proactive rate actions in 2023 have put us in a strong competitive position to grow our personal auto book of business in what remains a firm market. The continued firming of conditions in auto, ongoing favorable conditions in commercial insurance and our strong broker proposition combined to generate significant growth momentum in the quarter as gross written premiums increased by 14.2%.

Operating results again benefited from growth in net investment income, driven primarily by higher interest income that was enhanced by our active management of the portfolio in recent quarters. Combined with ongoing contributions from our expanded broker distribution platform, our financial performance led to an operating ROE of 10.8% and strong book value per share growth of 11.7% from a year ago.

Turning to the industry outlook on Slide 6. We believe the operating environment is one that remains conducive to sustaining favorable market conditions overall. We expect conditions and order lines to remain firm as insurers aim to keep pace with the combined impact of elevated theft, ongoing cost pressures and regulatory uncertainty in Alberta.

We also expect firm market conditions in personal property will persist, particularly following 2 consecutive years of industry cat losses above $3 billion, the move to higher reinsurance attachment points and continuing elevated inflation.

In commercial insurance, we expect the market to remain firm overall as carriers focus on ensuring long-term profitability and sustainable availability of capacity, though some commercial niche segments started to see more competition in the second quarter.

Slide 7 shows our key financial targets for 2024. As you can see, both top line and underwriting profitability are better than target midway through the year, while the robust results from Q2 propelled our operating ROE into double digits, reaching 10.8% for the past 12 months. We are focused on continuing the progress made in the quarters ahead with the objective to move toward the higher end of our target range before capital optimization.

Slide 8 illustrates the composition of our national broker platform. We've made great progress in recent years to develop it into a vehicle to diversify and strengthen the earnings profile of the business with repeatable distribution income that complements our underwriting operations.

Looking ahead, we expect continued M&A activity and the organic growth potential of the business to result in $1.5 billion of managed premiums in the next 3 to 5 years. We continued our recent momentum with several additional deals in the first half of the year and maintain our expectation for 2024 operating income from this part of the business.

And with that, I'll turn the call over to our CFO, Phil Mather.

[Philip Mather, executive]

Thanks, Rowan. I'll begin on Slide 10 with personal auto. Gross written premiums were up 19.5% in the second quarter of 2024, driven by a double-digit increase in written rates, improving unit count growth and the benefit of portfolio transfer activity. We expect our broker business to benefit from strong retention, portfolio transfers and the inherent scalability of our Vyne platform, combined impact of which should support a mid-teen pace of growth for the remainder of 2024. We will continue pursuing additional rate and segmentation actions to maintain our target profitability.

Focusing on our direct business, Sonnet, we made the decision to exit the auto business in the province of Alberta. With no visibility to near-term profitability, it was a necessary decision. Given the loss-making nature of Sonnet's Alberta auto book, withdrawing from our business there reinforces our confidence for the remaining Sonnet portfolio to reach our run rate breakeven target by the end of the year.

Personal auto generated a very solid combined ratio of 95.2% in the quarter, 2.4 points better than a year ago. The performance reflects the benefits of our active expense management and an improvement in the core accident year claims ratio, which continues to benefit from higher earned rates, but was again impacted by heightened, though diminishing levels of theft.

Favorable claims development amounted to 0.5 point of loss ratio, inclusive of adverse development of tools of about 1 point. We maintain our expectations for personal auto to generate a mid- to upper 90s combined ratio in 2024.

Turning to personal property on Slide 11. Growth momentum continued to build, reaching 7.1% in the quarter and benefited from continued firm market conditions, driving increases in average written premiums. This was partially offset by ongoing actions to address risk concentrations in geographies with a higher propensity to peril events. We expect this line to grow in a mid- to upper single-digit pace for the full year given the firm pricing conditions prevalent in the industry.

Focusing on the bottom line, we reported a combined ratio of 86% in Q2, significantly better than the 102.5% from a year ago. The unusually low level of catastrophe losses in the quarter was a key contributor to the strong underwriting performance. That said, July was an active month, flooding in Ontario and wildfire in Western Canada, though the inherent volatility of cat losses makes the timing of them difficult to predict. On a year-to-date basis to the end of July, we are in line with the expected level of losses company-wide from weather-related catastrophes. We continue to target a mid-90s combined ratio in personal property on an annual basis.

Slide 12 outlines the highlights in the quarter for our commercial business as double-digit growth in commercial lines continued with gross written premiums up 13.8% versus the prior year. Strong growth momentum was driven by targeted growth across strategic segments with strong retention and rate achievement in a firm market environment in our core segments and further expansion of our small business and specialty capabilities. We expect commercial insurance to maintain growth of double-digit to low-teen base in 2024.

Commercial lines benefited from a continued focus on underwriting execution with a strong combined ratio of 86.6% in Q2 of '24, driven by a 2.7 point improvement in the core accident year claims ratio. The reported increase from last year's 84.3% was a function of a COVID-19 release that benefited favorable development by 4.8 points in Q2 of '23.

Normalizing for this release, our commercial business reported a 2.5 point year-over-year combined ratio improvement. We continue to operate our commercial insurance business with the intent to sustainably deliver an annual combined ratio in the low 90s.

Turning to Slide 13. Consolidated premiums increased 14.2%. The purposeful nature of our growth through our underwriting expertise, pricing strategies and product expansion, along with the continued focus on expense management and the benefit of favorable weather conditions resulted in a second quarter combined ratio of 90.1%. This marked the strongest quarterly combined ratio we've reported since going public in late 2021.

Our expense ratio of 30.1% was 1.5 points better than the prior year, benefiting from the investments we've made to improve productivity, along with our disciplined expense management. As there were some benefits from timing, we view our year-to-date expense ratio as a better indication of our expectations for the full year.

Focusing on distribution income, seasonally strong second quarter contribution of $17.2 million reflects both the ongoing inorganic expansion of the platform, continued strong organic commission growth across the business. As we mentioned on past calls, the full impact from our national broker platform also includes a benefit to consolidated expenses in the form of the commission offset. In aggregate, we maintain our full year target of $75 million before finance costs, taxes and minority interests, and expected to have a roughly 70-30 split between distribution income and commission offset.

Slide 14 highlights the components of our investment portfolio. Our net investment income again increased meaningfully in the quarter, up more than $7 million from Q2 of '23 due to higher interest income from increased book yields captured through active management of fixed income portfolio. Growth is expected to slow from double digits to single digits for the full year 2024 as book yields and market yields have converged. We maintain our expectation for full year net investment income to exceed $190 million.

As you can see on Slide 15, our financial position remains robust, with shareholder equity surpassing $3 billion for the first time and nearly $1.4 billion in financial capacity. Strong operating income supported growth in our capital in the second quarter and generated year-over-year growth in book value per share of nearly 12%.

Slide 16 shows recent capital management actions from longer-term priorities. When it comes to deploying our capital, primary focus remains in support of our robust organic growth strategy. We also intend to continue growing our dividend over time. With an objective to build the company into a top 5 player in the industry, we are actively pursuing inorganic growth, including both insurance carriers and distributors. Flexibility to leverage short-term debt in support of organic growth increased in the quarter as we upsized our credit facility by $100 million to $800 million.

Following our initial build of the platform via our partnership with McDougall, recent broker acquisitions have been more programmatic in nature. We expect this to continue and have successfully deployed almost $100 million year-to-date.

With that, I will turn the call back over to Rowan for some final remarks.

[Rowan Saunders, executive]

Thanks, Phil. While favorable weather bolstered the performance in the second quarter, on a trailing 12-month basis, we've experienced cat losses somewhat above expectations and still delivered a 10.8% operating ROE. This gives me confidence in the strong underlying fundamentals of the business. We've taken the actions we believe are required to ensure our success is sustainable from last year's focus on order rate adequacy to the management of our property portfolio to address potential cat exposure, to our work with the Alberta government and eventual withdrawal of Sonnet from the auto market in the province.

At the midpoint of this year, we are in an excellent position to continue building on our profitable growth momentum. We are realizing the benefits of the operational leverage of our digital platforms and remain active in our efforts to further our track record of success.

And we have the right team in place to deliver on ambitious plans. In fact, one of our key strategic pillars is being an innovative, high-performing and inclusive culture. Great Places to Work Institute has recognized our efforts on this front and has recently named Definity as one of the best workplaces in financial services and insurance in Canada for 2024.

And finally, I'd like to welcome the latest addition to our Board of Directors, Sonia Baxendale. Sonia brings over 3 decades of experience as an executive and Board member in the financial services industry. Her appointment will further strengthen Definity's ability to navigate the opportunities ahead in a dynamic industry and market environment.

And with that, I'll turn the call back to Dennis to begin the Q&A session.

[Dennis Westfall, executive]

Thanks, Rowan. Julie, we are now ready to take questions.

[Operator]

[Operator Instructions] Your first question comes from Geoff Kwan from RBC Capital Markets.

[Geoffrey Kwan, analyst]

My first question was on personal auto. Just the comments around kind of mid-single-digit physical damage inflation. Just wondering, do you see it stay at this level for a while? Do you see it eventually coming down into the low-single digit? And really, if it does get to that level, what would be the key drivers that would get you there?

[Rowan Saunders, executive]

Thanks for the question, Geoff. And just maybe a quick comment before I ask Paul to give you some details on that. I think that we are watching the trends very carefully and are generally pretty -- seeing some favorable momentum. I think that when we look at our overall auto portfolio, we're pleased with our positioning that we're outperforming the industry. We're pleased with the trending.

As we've told you in the past, we're very focused on cycle management, and the last couple of years was not the type to grow without focusing on quality and rates. We've moved past that trough and are now quite comfortable with the environment. And you've seen very strong kind of growth with the personal auto portfolio. A lot of that is still rates in the portfolio. But the reality is we are comfortable and seeing some stability in the loss cost trends. And that's why we're kind of leaning into the growth. But Paul, do you want to add a bit more color to that?

[Paul MacDonald, executive]

Yes. Thank you, Rowan. So Geoff, you asked specifically about APD, and what we've noticed is that it seems to be stabilizing at about that mid-single-digit range. Of course, the theft component still remains a little elevated. We mentioned previously, frequency is down, and we're seeing a further reduction in frequency, but the actual cost of the vehicles being stolen is still quite elevated.

So although it's stabilizing, just as a reference point, pre-pandemic, it was about 2% of loss costs. Now it's still almost 5%. So more work to be done on that component. But APD as a category, it does seem to be stabilizing around that mid-single-digit level.

You asked do we think it's going to get much lower than that. And I think the answer is likely not too much lower. If you think even pre-pandemic, the cost of vehicles, the content in the vehicles, cameras, technology, the increasing percentage of EV vehicles in the fleet, all contributed to a mid-single-digit trend, and we expect that to continue on in the near future.

[Geoffrey Kwan, analyst]

Got it. And just my second question, just any updates in terms of the [ cat A ] cover policy you have, kind of what's the, I guess, usage or how to think about it on a year-to-date basis? And then also, two, is it still fair to say that it may not necessarily be cost effective to get a new [ cat A ] cover policy when the current policy expires later this year?

[Paul MacDonald, executive]

Geoff, thanks for that question. Yes. So in terms of where we are on a year-to-date basis, I mentioned that July has obviously been an active month. And we saw pretty large events for us in the GTA area. But overall, the year-to-date at the end of July is very much in line with our overall expectations. And the ag-only, really, you want to use it in outsized years like Q3 of last year as an example. So right now, the way the ag works, each event above $3 million will contribute a certain proportion into the accumulation because we've had a reasonably in line year-to-date.

We're not at a point yet at which the aggregates is switched on is the way I kind of describe it. So there would still need to be some additional loss activity to get that to a point where it's going to respond. But like I said, that's really reflective of overall to the end of July, pretty much in line cat experience.

In terms of the renewal cycle, we certainly think volatility protection, there's a role for reinsurance to play in there. The aggregates is the best example of that. But since we put the original 3-year contracts in place, the reinsurance market hardened significantly. You've seen it move up in attachment points around that. We would definitely have an appetite for a renewal of an aggregate style structure as part of our reinsurance strategy, but it has to be on terms that are effective for both counterparties.

So it's something for sure we'll explore. And if the opportunity is there on an appropriate basis, we'd certainly have an appetite, but we have to be kind of cognizant of the market conditions that have changed somewhat since we put it in place for the first time.

[Operator]

Your next question comes from Doug Young from Desjardins Capital Markets.

[Doug Young, analyst]

So the announcement that you're taking the Alberta Sonnet business out of operating and putting it in accident lines. I'm hoping you can just give us some color in terms of what the impact that will have on underwriting profit, on operating earnings? Any metric you can, just to give some context of how to think about that?

[Rowan Saunders, executive]

Doug, thanks for the question. And maybe before Phil gives you a little bit more insight, I think it's kind of worth pausing on for a moment because I think that we step back to the context. There, I think we've signaled this for some time that unfortunately in the Alberta environment, the regulatory changes, they have made it difficult for a startup company like Sonnet.

And as you recall, I mean, the government had an auto freeze when moved to a cap at inflation, which just isn't enough for somebody like -- a business like Sonnet, there was rate inadequate, but even considering the trends that are currently happening in Alberta. So there is certainly some concern we have with that marketplace where the cap of rates is just not going to keep up with the loss cost trends.

We've worked closely with the government over the past year. We were looking for an exception for the Sonnet brand. Unfortunately, that did not happen. We, therefore, could not see a path to breakeven or profit in the foreseeable future. And I think as we've shared before, this is a material portfolio for Sonnet. It's 25% of Sonnet's auto portfolio and 19% of the total Sonnet. But it's really not that material to the group with less than 1.5% to Definity.

And I think the way we look at it is that this portfolio would have continued to deteriorate. And as you know, we're focused on getting Sonnet to breakeven by the end of the year. And that portfolio continued to build up losses that would have been very difficult to do. So that was the kind of rationale. We filed our exit. We will still be issued policies until the end of the year, and then there'll be that $65 million decision. So I think that's the main message of kind of what we've done and how we've done it. And perhaps, Phil, you can add some detail to the rest of Doug's question.

[Philip Mather, executive]

Yes, absolutely. So as Rowan has said, in the context of the business overall, it's a relatively small portfolio. And in the context of Sonnet, it's much more so. So the actions that we've taken are really about preserving our confidence in our ability to achieve those go-forward financial targets. And the impact on this historically has been relatively modest overall given the size of that portfolio.

So if I look forward to the kind of expectations for auto as a whole and for Sonnet in terms of kind of breakeven run rate kind of you achieving that by the end of this year, we aren't changing our views on that. So the announcement to exit Sonnet Alberta auto was more about preserving those views, and we reiterate kind of our guidance on that point.

In terms of how exited lines will shape out, under the terms of the withdrawal, we'll still be required to underwrite business for the next 6 months through to the midpoint of December. So you'll still see written premiums will show up as part of the exited lines presentation. We'd estimate there's about $50 million worth of earned premiums to come through over the next 6 quarters. That will take us through to the end of 2025. Maybe half of that comes in the next couple of quarters and half in the year 2025.

And this is a loss-making portfolio. So we have taken that decision to exit. So you will see underwriting losses come through on a go-forward basis. Certainly, with the new accounting standards, as you write business, you have to put losses up against that. So it will be more front-loaded. And so what we probably expect to see is we still expect to see some millions of dollars of losses come through on this portfolio overall, not tens of millions. And for the next few quarters, we should expect to see a few billion dollars a quarter come through in exited lines associated with that continued requirement to underwrite the business and earn it out over the next 6 quarters or so.

[Doug Young, analyst]

I appreciate the color. And then second, just on the commercial market, I mean, we're hearing from a number of players about increased competition, and you're talking more in the niche markets. Hoping you can dig a little into that in terms of what you're seeing. And what do those niche markets -- I assume in those niche markets, you're seeing prices drop. And what do those niche markets represent in terms of your total commercial portfolio where you're seeing increased competition?

[Fabian Richenberger, executive]

Yes. Thank you, Doug. This is Fabian Richenberger answering your question. So you're right that we've seen increased competition coming to the marketplace this year in those new segments. I would say that large property schedules and large lead businesses would be a good example of that. But what would I say is that we are very proud of our [ frontline ] team as we've been executing our business plans that allows us to sustain our strong margin position that we have across commercial insurance.

I think one data point that is important for you to consider is to look at our overall growth rate that we achieved in Q2. Our growth rate came in at 13.8%. And what is important to note is that over 40% of that growth rate is being generated through rate and inflation adjustment actions, and that gives us a great deal of confidence that we continue to cover the loss trend that we have in our commercial portfolio. And with that, we will be able to sustain our guidance of low-90s combined ratio going forward.

To answer your question more specifically, kind of what helps us as well is that large account segment in our portfolio is the smallest segment. So we are, as you would expect, making appropriate decisions between sustaining our growth and protecting our profitability. And if a large account proposition doesn't make sense to us from a margin perspective, we are quite happy to let go.

And given the fact that those segments are small, less than 15% of our portfolio overall, you don't really see the impact of those decisions on our portfolio overall. So, big picture is that we like the business, we like run rate profitability and we are comfortable to sustain our guidance of low-double-digit growth and low-90s combined ratios in the commercial space.

Maybe the other point to add as well, as we mentioned in prior calls, we built out this strong value position in our core strategic segments. We are focusing on small business and specialty business, and we are very comfortable with our new business rate retention growth that we have in those segments and more importantly, very comfortable with the margin position in those segments as well, and our underwriting capabilities.

In small business, we are benefiting from a market-leading digital capability that allows our broker partners oftentimes build business in an automated fashion and that gives us good profitable growth opportunities. And then in specialties that we are very comfortable with our margin position as well, we have very strong underwriting capabilities and something that we're not talking about all that often for 5 years now, we've been the leader in the share in economy in Canada. We've had those partnerships in place for 5 years as I mentioned, very comfortable with the market position, very comfortable with the partnership.

And what we would have noticed over the last few years is that those segments generate above-average growth as compared to the general economy. So what I would say is that, this gives us a great deal of confidence that our growth guidance in that low-double-digit range is sustainable and is not hurting our profitability going forward.

[Operator]

[Operator Instructions] Your next question comes from Paul Holden from CIBC.

[Paul Holden, analyst]

So, from some of the U.S. insurers, we're seeing increased negative PYD related to liability, the so-called social inflation. I know your PYD remains favorable. But just wondering if you're seeing in any lines of business sort of any indication that liability trends are becoming more challenging? Are there any kind of early warning signs that's something to keep a closer eye on, whether that's in personal lines or commercial?

[Rowan Saunders, executive]

Why don't you just go through this, Paul?

[Paul MacDonald, executive]

Thank you. So Paul, social inflation is really a feature of the awards given to the plaintiff being inflated on by jury awards. We don't really see that pressure in Canada. And so on the casualty lines, we still have seen a fairly persistent mid-single-digit trend, which is in line with what it was pre-pandemic.

That being said, we are starting to see a little bit of an increase on BI trending, specifically in Alberta. A couple of points higher than that mid-single-digit trend we're seeing elsewhere. But this seems to be specific to that territory and really focused on litigation costs. And by that, I don't mean the awards going to the plaintiffs or the injured party. We mean legal costs associated with carrying those pieces through the court system. So we're watching that carefully, but we're not seeing that in other parts of Canada.

[Fabian Richenberger, executive]

And maybe just adding some color from the commercial perspective. So I think very much in line with what I just mentioned is that our portfolio is a portfolio of low-end exposures in the small, low end and middle market space. So we don't really have those global or scary liability exposures. And with that in mind, we are very comfortable with the liability trends that we're seeing in our commercial portfolio as well. And as I mentioned, we do expect that we will be able to cover those loss trends with adequate rate and inflation actions.

[Rowan Saunders, executive]

So Paul, I think we feel pretty good about that, not too concerned. And just a little bit of context to what Paul shared is when we think about where there is a little bit of a slight elevation in Alberta, Sonnet's exiting, and that was 4% of our auto portfolio. And the only other part of the business there is the broker segment, which is just about 8% of the auto portfolio. So really kind of a small portfolio at the grand scheme of things.

[Paul Holden, analyst]

Okay. Okay. That's all helpful. And my second question is related to personal auto specifically. And I'm just wondering, given the expense improvements you've seen, I know look at more year-to-date versus Q2, but the expense improvements, the claims, the better claims management tools you're going to put in place and then sort of the rates you've gotten. Does that give you more confidence that the combined ratio should be more in the low end of your 95 -- mid-95 to upper-90s guidance range?

And I guess, most importantly, to me, given those initiatives, is that kind of a sustainable guidance range going into next year?

[Rowan Saunders, executive]

I mean I think I'd just start that question by an answer by saying, look, I mean, I think, number one, when we think about ourselves compared to the industry, we're outperforming. And so I think we're in a pretty good position there. And as we -- what we are seeing is year-on-year improvement, and we pay a lot of attention to that accident year, the attritional loss ratio.

There, however, are still a couple of trends that we're dealing with. Paul talked about theft, that's still elevated. We think that will settle. Alberta, we just talked about and whilst it's not a big portfolio for us, it's going in the wrong direction. And then there is some offset from the industry pools that have kind of adapted to our profitability. So I think we've got to figure -- keep all those things in mind.

But this is a regulated line of business. Our kind of, let's call it, run rate target is more in the 95 kind of range. And as Sonnet continues its pleasing progress, we'll get there. So I think it's more about timing, Paul, for us. And so we're not changing guidance at this stage. But ultimately, we've got a good level of confidence that we will be able to run the total auto portfolio in that the mid-95s area.

[Operator]

Your next question comes from Jaeme Gloyn from National Bank Financial.

[Jaeme Gloyn, analyst]

Just wanted to get a little more color on the expense ratio improvement. Your guidance would suggest 50 basis points coming from distribution income. I'm just wondering, does that apply to this quarter on the year-over-year improvement? And how much would the expense savings initiatives around the real estate footprint and then scalability, like if you could break down the contribution of those 3 drivers to the year-over-year improvement?

[Philip Mather, executive]

Yes. Thanks, Jaeme. So in terms of the national broker platform, you're right, it's about a 0.5% or 50 basis point structural benefit to the commission ratio at this point in time. Obviously, that broker platform expands and as we continue to focus on winning business through that platform, that could increase. And certainly, we have a goal and an objective to do so. But that kind of about a 0.5 point benefit is structural to this quarter. It's up a little bit from last year, and we'd hope to grow it over time, but about 0.5 point basis point improvement is valuable.

In terms of the kind of expense initiatives going forward, what you're really seeing from us is a focus on discipline. So what we're trying to do now is grow the operating expense base at a much lower rate than the earned premium pattern coming through. And I think you'll see that our operating expense ratio within the expense ratio overall is around 12%. That was over 13% not too long ago, and we still think there's a good opportunity to drive that down maybe to 11% or below over time.

Now the real estate component itself, as an example, isn't a huge cost saving. But really what we're doing here now is we're able to grow the organization without adding additional costs to the base. So it's a really good example now of leveraging the scalability of the organization. We do not need to grow the FTE at the same pace, and therefore, we don't need to grow the footprint occupancy costs of that either.

So I'd say that's a good example, not so much of a dollar out kind of perspective, but our ability to kind of grow the scale of the organization going forward. So if I step back, the year-to-date view of just under 31%, we're really pleased with that. We're really pleased with the progress that we're making in terms of leveraging the scale efficiencies of the organization. We think that's a pretty good pick for the second half of the year. That's what we're focused on achieving. But we still think there's a point or so of additional opportunity to get out of the operating expense ratio over the next period of time.

[Jaeme Gloyn, analyst]

Okay. Great. And then second, just on the distribution income, there's been a handful of smaller, I guess, tuck-in broker acquisitions so far this year that you're dedicating some capital towards. Is that the view going forward? Or do you still have -- I believe in previous calls you kind of talked about maybe doing another larger-scale broker acquisition. Like where would you say you are on that side of the M&A story?

[Rowan Saunders, executive]

I think that we're definitely very pleased with what we've built. And part of this is the opportunity. And so over the last 18 months, we had the opportunity of adding 3 scale, high-quality brokers, which really traded the bulk of the platform. If we could find or when we find something similar, we're absolutely happy to and lean into that and add it on. But I think what we're finding in the meantime are generally smaller, we call them, more programmatic bolt-on acquisitions.

The pipeline is pretty good. The McDougall's team has been active. We completed 5 transactions so far this year. So as they come on board, that's obviously going to help with what it's going forward and the organic growth is still pretty good.

I think the main message here is that nothing too much is different. The market is consolidating, but we do believe there's going to be a healthy pipeline for really quite some time. But there really are not a huge amount of large, high-quality assets available. So those are much more kind of rare to get and we were just very fortunate and pleased that we've got off to such a good start. So I think what we can count on is a healthy pipeline of smaller transactions as opposed to larger ones. But we wouldn't rule that out if we could find the opportunity.

[Jaeme Gloyn, analyst]

Right. And just following on that, just given the transactions in place so far and the growth in premiums, as we think about future years for distribution, and I don't think you've provided guidance, but thinking through that, I mean, at a minimum, like double-digit growth in future years would be kind of the expectations or something maybe more elevated?

[Philip Mather, executive]

Yes. I think we'll refresh the guidance as we obviously get through closer towards the end of the year. But certainly, you've seen continued activity. And I think we've certainly got an objective to grow that over time. You've seen that we're hoping to get to $1.5 billion of kind of premium scale over the next 3 to 5 years. That will be a good proxy from kind of where we are today to where we think we could go.

Timing of that is obviously dependent on the transactional activity. But we'd also say beyond that, the underlying business is in really good shape. They've got very good strong organic growth capabilities outside of transactional M&A. And we're very fortunate there to have a strong leadership team in place.

So there's good opportunity outside of M&A to drive that forward as well. But we would refresh our kind of 2025 views later on in the year. But certainly, direction on traffic as we continue to scale the size of that organization, it should flow through beneficially into that distribution income [ clip ].

[Operator]

[Operator Instructions] And there are no further questions at this time. I will turn the call back over to Dennis for closing remarks.

[Dennis Westfall, executive]

Thank you, everyone, for participating today. The webcast will be archived on our website for 1 year. Telephone replay will be available at 2:00 today till August 9, and a transcript will be made available on our website. Please note that our third quarter results for 2024 will be released on November 7. Please also note that we'll be hosting our inaugural Investor Day in Toronto on Thursday, September 19. Additional details will be posted on our website a bit closer to the event. That concludes our conference call for today. Thank you, and have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.