Definity Financial Corp

TSX:DFY

Earnings Call Analysis

Definity Financial's Q3 shows strong growth despite catastrophe challenges.

In Q3 2024, Definity Financial demonstrated resilience despite extreme catastrophe losses impacting their combined ratio by over 17%. Operating net income reached $14.6 million, or $0.13 per share, with gross written premiums climbing 12.2%. The firm anticipates continued solid conditions in commercial insurance and expects low double-digit growth through 2024. Their operating ROE improved to 10.7%, and they project achieving breakeven for the Sonnet portfolio in 2025. Their capital strategy remains focused on organic growth and selective acquisitions, with a target for annual combined ratios in the low 90s, while net investment income is expected to exceed $190 million for the year.

Resilient Performance Amidst Catastrophes

In the third quarter of 2024, Definity Financial Corporation demonstrated a strong financial performance despite facing significant challenges due to various natural disasters across Canada, including historic wildfires and floods. The company reported an operating net income of $14.6 million, translating to $0.13 per share. The active catastrophe period had a considerable impact on their underwriting performance, contributing more than 17 points to the combined ratio—a measure of profitability. However, the firm's solid underlying performance across all business lines remained robust, enhanced by increased gross written premiums which surged by 12.2%. The results highlighted the effectiveness of Definity's catastrophe response capabilities during these trying times.

Strong Growth and Improving Profitability

Definity achieved substantial growth in its premium collections, with reported gross written premiums showing an increase of 9.9%, influenced by the exit of the Sonnet Alberta personal auto division—which negatively impacted growth by approximately 5.5 points. Notably, the company succeeded in maintaining a healthy operating return on equity (ROE) of 10.7% over the past twelve months, alongside robust book value growth per share at 17.9% year-over-year. This growth trajectory signals a well-executed strategy within its premium lines, particularly with an underlying focus on expense management and investment income, driven by higher fixed income yields.

Industry Outlook and Market Conditions

Looking ahead, Definity's outlook remains optimistic, particularly in the auto and commercial insurance sectors. The company anticipates firm market conditions due to increasing theft and regulatory constraints in Alberta, with expectations for low to mid-single-digit growth rates in personal property. In contrast, the commercial insurance line is projected to grow at low double-digit rates for 2024. The firm believes that the persistent increase in severe weather events and elevated reinsurance costs will result in prolonged stable pricing conditions in the market, reinforcing Definity's competitive position.

Operational Efficiency and Expense Management

Our operational efficiency remains a significant focus for Definity. The company reported an expense ratio of 28.9%, which was an improvement of 0.7 points from the previous year's figures, aided by disciplined expense management initiatives. The company aims to further this trajectory towards achieving a sustainable operating expense ratio closer to 11% over the next couple of years. This focus on cost control, combined with a strategic shift towards leveraging its national broker platform, positions the firm favorably as it works to optimize both expense and profit margins.

Guidance and Financial Targets for 2024

Definity outlined several key financial targets for 2024, notably an operating ROE target trend towards mid-teens post-capital optimization. They expect full annual net investment income to exceed $190 million, reinforcing their position after a challenging quarter of catastrophe losses. The commercial lines business unit continues to emphasize efforts to achieve an annual combined ratio in the low 90s, reassuring investors of its commitment to maintaining profitable growth through careful underwriting and management.

Future Strategies and Growth Potential

In terms of growth strategy, Definity is actively pursuing both organic expansion and inorganic opportunities, including mergers and acquisitions. The company plans to deepen its broker distribution framework to achieve $1.5 billion in managed premiums in the coming years. Looking towards 2025, management is confident about returning Sonnet's personal auto business to breakeven, which can be pivotal for future profitability. As the company navigates through a complex environment of reinsurance renewals and fluctuating market conditions, its proactive handling of catastrophe management and ongoing operational enhancements are set to bolster its return potential.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen and welcome to Definity Financial Corporation Third Quarter 2024 Financial Results Conference Call. [Operator Instructions] Also note that the call is being recorded on Friday, November 8, 2024. I would now like to turn the call over to Mr. Dennis Westfall, Vice President, Investor Relations. Please go ahead, sir.

[Dennis Westfall, executive]

Thanks, Sylvie 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 today on the call 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 Fabian will also be available to answer your questions.

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

[Rowan Saunders, executive]

Thanks, Dennis and good morning. Last night, we reported third quarter earnings that reflect a resilient performance in an active catastrophe period for the industry. Wildfires, flooding and storms across Canada reached historic levels this summer as impacted customers and communities work to rebuild and recover, our robust catastrophe response capabilities, again delivered outstanding support. From a financial perspective, these events had a significant effect on our underwriting performance. representing more than 17-point impact to our combined ratio, well above our expectations.

Despite this, we delivered a solid underlying performance across all lines of business, while benefiting from ongoing expense efficiencies, healthy levels of net investment income and strong contributions from our insurance broker platform, all of which resulted in operating net income of $14.6 million or $0.13 per share. The continued firming of conditions in auto, firm conditions in commercial insurance overall and our strong broker proposition combined to generate significant growth momentum in the quarter as underlying gross written premiums increased by 12.2%.

On a reported basis, growth of 9.9% reflected the impact of the exit of Sonnet Alberta personal auto business, which is now classified as an exited line. Operating results again benefited from growth in net investment income as interest income was driven by higher fixed income yields proactively captured within the portfolio. In line with ongoing contributions from our expanded broker distribution platform, our financial performance led to an operating ROE of 10.7% and robust book value growth per share of 17.9% from 1 year ago. Turning to the industry outlook on Slide 6. We believe the operating environment remains favorable overall. We expect conditions in auto lines to remain firm as insurers aim to keep pace with the combined impact of elevated theft, ongoing cost pressures and regulatory constraints within Alberta.

We expect market conditions in personal property to harden following the 2024 summer storm season that resulted in more than $7 billion of industry catastrophe losses, the expected move to higher reinsurance attachment points and industry participants adjusting their risk appetites. In Commercial Insurance, we expect the market to remain firm overall as carriers focus on ensuring long-term profitability. The increase in weather-related catastrophe events, elevated reinsurance costs and rising attachment points are expected to prolong firm commercial lines market conditions and pricing, with the exception of some large and specialty segments.

Slide 7 shows our key financial targets for 2024. Despite an unprecedented level of catastrophe losses for the industry so far this year, strong top line growth and resilient underwriting profitability, position us in line with our targets after 9 months. This has increased our operating ROE into the double digits, reaching 10.7% for the past 12 months. We are focused on continuing the progress made in the next couple of years with the objective to move towards the higher end of our range before capital optimization.

Slide 8 illustrates the composition of our national broker platform. We've made great progress in the past 2 years to develop it into a vehicle to diversify and strengthen the earnings profile of the business with repeatable distribution income that complements our underwing operations. We expect continued M&A activity and the organic growth momentum of the business to result in $1.5 billion of managed premiums in the next few years. We continued our growth traction with several additional deals this year and have great confidence that we'll achieve our objective for 2024 operating income from this part of the business.

And with that, I'll turn the call over to our CFO, Phil Mather, to go through our results in more detail.

[Philip Mather, executive]

Thanks, Rowan. I'll begin on Slide 10 with Personal Auto. Adjusted for the exits of Sonnet Alberta Auto gross written premium growth remained strong, up 15.8% in the third quarter of 2024. The strength was again driven by a double-digit increase in written rates, unit count increases and the benefits of portfolio transfer activity. We expect our broker business to benefit from strong retention, portfolio transfers and the inherent scalability of our buying platform, the combined impact of which should support a double-digit underlying pace of growth for the remainder of 2024. We will continue pursuing additional rate and segmentation actions to maintain our target profitability.

As previously announced, we have removed Sonnet's Personal Auto business in Alberta from our operating results. Classifying this book as an exited line impacted growth in auto by 5.5 points in the third quarter. Given the loss-making nature of Sonnet's Alberta Auto book, withdrawing 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 combined ratio of 98.3% in the quarter despite 4 points of cat losses and a more normalized level of favorable prior year claims development. The performance reflects an improvement in the core accident year claims ratio driven by higher earned rates, the benefits of our active expense management and heightened though declining levels of theft.

Turning to Personal Property on Slide 11. The story this quarter is clearly one of catastrophe losses, which accounted for more than 46 points of our reported combined ratio of 124.9%. That said, our cat response teams, product design and focus on accumulation management and risk selection enabled us to mitigate losses from the summer's events below what our market share would indicate. In addition, the full utilization of our catastrophe aggregate reinsurance cover provided some support for our combined ratio.

Beyond cats, ongoing actions to improve our underlying results are paying off as core accident year results improved 1.9 points from the third quarter of 2023. This quarter's combined ratio also benefited from expense management and higher favorable prior year developments, supported by 2023 cats developing favorably. These results give us the confidence to continue targeting a mid-90s combined ratio for the personal property line of business on an annual basis.

Turning to the top line. Growth reached 6.9% in the quarter benefiting from ongoing firm market conditions, driving increases in average written premiums. This was partially offset by continued actions to address risk concentration in geographies with a higher propensity to peril events. We expect this line to grow at a mid- to upper single-digit pace for the full year given the firm pricing conditions prevalent in the industry.

Slide 12 outlines the highlights in the quarter for our commercial business. Our double-digit growth in commercial lines continued with gross written premiums up 12.6% versus the prior year. Strong growth momentum was driven by targeted growth across strategic segments with strong retention and rates achievement and a firm market environment in our core segments and further expansion of our small business and specialty capabilities. We expect Commercial Insurance to generate low double-digit growth for 2024 as we continue to strive to grow at twice the pace of the industry.

As you can see, commercial lines delivered another robust bottom line performance. Results in the quarter benefited from a continued focus on underwriting execution with a strong combined ratio of 89.9%, compared to 86.6% in Q3 of last year. The increase in the combined ratio was entirely driven by higher catastrophe losses, which amounted to 8.8 points this quarter versus 4.2 points in Q3 of '23. This was partially offset by higher favorable claims development and a decrease in the expense ratio. 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 12.2% adjusted for the exit of Sonnet Alberta Auto. The purposeful nature of our growth through our underwriting expertise, pricing strategies and product expansion, along with the continued focus on expense management, helped buffer underwriting results from 17.3 points of catastrophe losses. The resulting combined ratio was 103.4% up less than 1 point from 1 year ago despite nearly 4 points of additional cats. Our expense ratio of 28.9% was 0.7 points better than the prior year's very strong level as expenses once again benefited from a few items.

First, our continued expense management initiatives, combined with the benefits of increasing scale. We continue to benefit from the investments we've made to improve productivity, along with our disciplined expense management. Second, a structural reduction in commissions from the consolidation of our insurance broker platform benefited the expense ratio by about 0.5 point in both periods. And lastly, the negative impact of the outsized catastrophe losses on our claims ratio had a corresponding favorable impact on expenses in the form of lower quarterly accruals for both variable compensation and contingent profit commissions. Focusing on distribution income, the $15.8 million was in line with our expectations and reflects the contributions from acquisitions, combined with [Audio Gap] organic growth offset by a lower CPC income estimate.

As mentioned, the full impact from our national broker platform also includes a benefit to consolidated expenses in the form of a commission offset. In aggregate, we maintain our full year target of $75 million before finance costs, taxes and minority interests. Slide 14 highlights the components of our investment portfolio. Our net investment income, again increased in the quarter, up $2.7 million from Q3 of '23 due to higher interest income from increased fixed income yields proactively captured within the portfolio. Year-over-year growth continues as slow as market yields have now fallen below book yields. 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 and nearly $1.4 billion of financial capacity. Operating income, combined with recognized gains on bonds and common stocks drove growth in our capital in the third quarter and generated year-over-year growth in book value per share of nearly 18%. Slide 16 shows recent capital management actions and longer-term priorities. When it comes to deploying our capital, the 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. Following our initial build of the broker platform via our partnership with McDougall, recent acquisitions have been more programmatic in nature. We expect this to continue and have successfully deployed over $100 million year-to-date while maintaining a healthy pipeline.

Slide 17 illustrates the significant success we've had in our efforts to locate and distribute demutualization benefits to loss recipients. While we saw a steady decline in the restricted cash amounts throughout our asset unification program, we saw a large uptick in people coming forward to claim benefits as the lost recipient deadline approached. An administrative processing period is now underway to confirm the identity of and distribute benefits appropriate to those claimants who contacted us prior to the deadline. We estimate the ultimate [ uncashed ] amount will be at least $150 million. And as a result, we'll be recording the amount, together with any associated tax provision directly to retained earnings in the fourth quarter. After we have concluded our processing period, there may be some additional amounts unclaimed that will be recorded in 2025.

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

[Rowan Saunders, executive]

Thanks, Phil. This quarter again demonstrates that we have truly built a high-performing and capital-generative business with a winning culture. We're an underwriting first company at our core with deep expertise and relentless focus on assessing, pricing and managing risk. Our portfolio is constructed intentionally as we work across multiple dimensions to optimize returns while minimizing the overall volatility of our operating results. This is demonstrated by the fact that we're able to deliver a double-digit operating ROE despite historic levels of cat losses this quarter. As we've outlined before, we have 3 organic levers to improve our operating ROE towards the upper end of our target range.

These include Sonnet achieving breakeven, expense optimization and the transformation of our claims operations. Beyond this, we require inorganic growth, which would allow us to deploy our excess capital and introduce leverage into the balance sheet, thereby enabling us to target a mid-teen level of returns. As we approach the end of 2024, we continue to make progress on all of these organic levers and see an operating environment that is favorable to executing our ambitions and strategies.

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

[Dennis Westfall, executive]

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

[Operator]

[Operator Instructions] And your first question will be from John Aiken at Jefferies.

[John Aiken, analyst]

Phil, in your prepared commentary around the expense ratio, you talked about the 3 buckets. A lot of it coming from the efficiency gains that you've been talking about. But there were still some usual items that benefited what I believe is probably the lowest number that we've seen. Can you try to quantify what the impact in the quarter was from some of the items that were not sustainable just in terms of a range or just where we can go from because I do expect to see a little bit of inflation or sorry, return at this stage in the year. But I'm a little bit unsure how much we should be factoring in?

[Philip Mather, executive]

Yes. Thanks, John. So the only item that we'd say is not sustainable for a good reason, is the depression of the contingent profit commission costs and the incentive accruals because of the cat losses. So the underlying impact from the expense efficiencies that we've been making and the structural reduction coming from the acquisition of the broker platform, those would be sustainable. I think the way to look at it is, if you look at the full year view, you'll see the operating expense ratio is just around 12%. And we think that is a good view for the kind of underlying level at which we're operating right now. In the quarter alone, you saw that was more like 11%. So I would say the underlying kind of position we're at now is around 12%. If you look at the commission ratio, that's just above 14%. That's probably more like 15% on a run rate basis because of the impact of the contingent profit commissions.

So now going forward, our objective on the operating expense ratio is to try to drive that down 1 point on a sustainable basis over the next couple of years. So we want to triangulate that down towards around the 11% level. And on the commission ratio overall, we'd actually like that to tick up a little bit because obviously, we don't want to see sustained cat losses as the mechanism to the reduced operating expense ratio. So the other comment I'd make is, if you look at the year-on-year improvement, you'll see that we're about 1 point better than this time last year. That, in our view, is fully supported by the sustainable actions that we've been taking to reduce the operating expense ratio. Q3 of last year also had big cat losses. So that had the same kind of relative impact on CPCs and incentives.

So a good proxy for how much progress we've made is that underlying more than 1 point improvement compared to this time last year.

[Operator]

Next question will be from Jaeme Gloyn at National Bank Financial.

[Jaeme Gloyn, analyst]

I did want to just key in on the commercial insurance profile and growth in commercial insurance continuing to look pretty solid here. Can you talk to what you're seeing in that market specifically? And as we hear other peers talk of slowdown in certain lines, it seems you guys are growing in that space and maybe improving your competitive position. So a little more on that, please.

[Fabian Richenberger, executive]

Thank you, Jaeme. This is Fabian Richenberger, answering your question. I think the big picture is that we're always pushing for more growth in a firm market environment and for more moderate growth when more conditions are less firm. Having said that, kind of very much in line with your comments. We still view commercial insurance lines as a very attractive segment and we are happy to drive growth in that segment. To give you a little more color on your comment about the marketplace having become more competitive, Indeed, we've seen a couple of segments, especially in the large account segments in the specialty segment that have become more competitive. But our frontline teams have just done an incredible job mitigating that increased competition.

And overall, we are really pleased with how we are executing our commercial business plans overall. I think what I want to point out to you is the growth rate that we have achieved in Q3. As you've seen from our disclosures, the growth rate that we achieved in Q3 was 12.6%. And I think what is important to recognize is that about half of that growth rate is due to rate and inflation adjustments and that gives also a great deal of confidence that we're covering the loss trend that we have in our portfolio. And with that kind of we believe that our guidance of low 90s combined ratio is still very sound as well.

I think the other area that gives us a lot of confidence in is that the recognition that our commercial portfolio is skewed to the lower end of the commercial account size. So over 80% of our portfolios are in that premium band of below [ 100,000 ]. And given the fact that we have a very strong digital capabilities in the space, given the fact that we have very strong service proposition in the space. that really mitigates the impact of price quite effectively. And again, that gives us additional confidence that we can continue to operate the commercial portfolio in that low 90s combined ratio range. And then maybe the last point I want to add from my side, we have built a very strong value proposition in our core strategic segments in small business, in middle market and in specialties that is well supported by our brokers, by our customers. And we continue to gain market share quite proactively.

In terms of a quick comment to close out my update in terms of the market growth outlook with the rate and inflation and loss trends normalizing, we do expect that the commercial marketplace will generate the growth rate in that mid-single-digit range going forward, that is down from 9% or 10% that we've seen over the last couple of years and that pretty much brings us to our guidance. And we are confident that we can continue to grow the commercial portfolio at twice the industry growth rate without compromising on our profitability thresholds and that's very much a function of the strong team that we have in place and the strong underwriting capabilities that we've built across the commercial portfolio.

[Jaeme Gloyn, analyst]

Okay. Very good. And one more on distribution income. The guidance is still the same but it looks like unless Q4 is maybe seasonally weak, is what I should take away from this, it looks like you'd be perhaps above where that guidance is at this point. Maybe a little bit more color as to why that guidance didn't maybe tick higher?

[Philip Mather, executive]

Yes. Thanks, Jaeme. Q4 is usually a little bit less than the middle couple of quarters because the level of premium activity is more subdued Q1 and Q4. Q1 is normally the lowest of the year and is a little higher in Q2 and Q3. So that's an accurate statement. I think the difference for this year is, we're very pleased with the acquisition activity that we've seen. And we're very pleased with the underlying organic growth level of the business. It continues to perform very well in that regard. But in just the same way as we've seen our contingent profit commission expense get a little bit more subdued because of the catastrophe losses, we've reflected also a bit more of a pessimistic estimate on the CPC income that the broker platform will receive.

And you'll be aware that McDougall has got a great presence in Ontario and has got great presence in Alberta, both of which experienced pretty widespread catastrophe losses in the quarter. So if I look at the overall mix of the $75 million, I'd say we're really pleased with the level of acquisition traction. We're really pleased with the underlying organic growth in the business. And then we've got a little bit of a headwind coming on the contingent profit commission income expectations. That's why overall, we get to the same kind of answer but with different moving parts within that.

[Operator]

Next question will be from Mario Mendonca at TD Securities.

[Mario Mendonca, analyst]

This might be best for Rowan or Phil. The market -- we can all sort of make our minds up on this but it does appear that the market is on board with your strategy and your outlook for a meaningful improvement in the ROE over time. What would be helpful for me, at least would be, if you could be more precise on the timing?. Like when do you expect that sort of 12%, 13%, perhaps 14% ROE? Is it something we could see in the next 2 years? Or is that a longer-term goal?

[Philip Mather, executive]

Yes. Thanks, Mario. I think in terms of the organic levers, what's important to comment on is that good progress is being made across all 3 levers. So you're already seeing about a 1 point underlying improvement on the expense ratio this year compared to last year. And as I say, we reckon there's about another 1 point to come in terms of those operational improvements and we're looking to glide to those over the next 2-year period. In terms of Sonnet, we're holding firm with our views that we'll get to breakeven on a run rate basis for next year.

So that is our target. And there has been an improving but still a drag on historic results. So we should get ourselves to that breakeven point for next year. After that, we'll start to look to see -- do we continue to grow at a pace at a breakeven level? Or would we grow at a slower level and generate some additional margin? And I think on the claims ratio, the claims transformation activity, good progress there too, in that the implementation of the technology stack for auto was successfully done in Q2 but we're only at the infancy really of seeing some of those benefits. We have the property stack to come.

And by that regard, we're hoping to have that implemented by the end of next year. But then you'll see another 12 to 18 months of time before you'll start to harness the full efficiencies. So the way I'd put it is, on the operating expense ratio, we're already kind of halfway there. We should glide down over the next couple of years. Sonnet, we look good in terms of getting to that breakeven level for next year and then we'll see where that goes thereafter. And claims ratio, I think, on the claims transformation activity [Audio Gap] the longest pathway to run and we should see kind of more full run rate benefits in more than 2- to 3-year time horizon.

So that should give you a perspective. We do expect to see continued progress in the operating ROEs when we look out next year. You'll see it a little subdued over the next couple of quarters because we're going to have to carry the tough cat quarter that we've just experienced forward in the trailing 12 months for the next couple of years -- sorry, sorry, in the next couple of quarters. And we've also got the big equity run-up. But when you look out a year from now, the second half of next year, we'd expect to see continued improvements in those operating ROE run rate levels.

[Mario Mendonca, analyst]

I try to keep track of everything there, given the basis points climbing as you went through it. It seems like what you're suggesting and I clearly want to be corrected on this but it seems like you're suggesting that in 2026, this could be a 12% ROE company. Does that seem a little too ambitious? Or is that about right?

[Philip Mather, executive]

No, I think that's certainly what we'd aim to target. Touch wood, the cat activity that we've seen doesn't continue at the levels that we've experienced. But I don't think that's an unreasonable objective.

[Operator]

Next question will be from Tom MacKinnon at BMO Capital Markets.

[Tom MacKinnon, analyst]

Yes. Question about PYD. It seemed to be a little bit more favorable in the quarter than I think people were expecting. Was there anything related to -- that may have been driving that? If you could just kind of remind us again of your guidance for PYD and how you might think that could be trending just over the next 12 months or so?

[Philip Mather, executive]

Yes. Thanks, Tom. So if I look at the quarter itself, we were just about 2.3%, which is pretty much in line with where we were this time last year. And if I look on the full year-to-date, we're at 1.7%. So that's kind of benchmark in the middle of our kind of historic lens of the 1- to 2-point range that we've seen over the period of time. So you can get individual movements within the quarters. We did get a little bit of additional support on favorable development coming out of the '23 cat losses. So we've seen some support mainly in personal property, which is a little higher than we would normally anticipate, a little bit in commercial lines overall. On the flip side, auto, I think, is more in line with a more normalized view. It's really the comparative there that's a little elevated.

And we are just keeping an eye on some of the BI trends that we're seeing, particularly in terms of Alberta. So you will get some moving pieces on a quarterly basis. But if I step back big picture, we're very comfortable being in the middle of that 1- to 2-point range for 2024 as a whole. No real surprises for us in the quarter, a little bit of support on property losses running off favorably from this time last year in the quarter itself. But on an overall basis, I think that's pretty comfortable. I think looking forward, we don't give explicit guidance on the levels of development. But what we would say is that historic trend we've seen of 1% to 2% of favorable development is a pretty good presentation of our philosophy and attitude towards reserving practices and [indiscernible] not seen any real change in our view in how we're approaching things.

[Tom MacKinnon, analyst]

Yes. And a follow-up with respect to investment income. Now that market yields are below your book yields. I guess, should we be looking at the yield on the portfolio compressing as we go forward? And the only driver really of improving investment income is really just new business growth, if you will?

[Philip Mather, executive]

Yes, I think that's a fair comment. I mean, it's hard to take a pick because the bond yields are pretty volatile at the moment. So they're moving around up and down on a daily basis. And actually, since the end of the third quarter, we've seen those yields move back up closer to the book yield. But I think that's a fair comment. Where we'd see the expansion opportunity on net investment income, is more going to be around new cash flows coming into the portfolio overall. And I think our stance has shifted. In recent years, we were very front-footed in terms of a yield kind of capture philosophy. And now it's fair to say we're more in a yield preservation kind of mindset on how we're managing the portfolio overall. But we're still looking to see some of that positive cash flow come in and drive some upside opportunities as we look forward.

[Operator]

[Operator Instructions] Next will be Lemar Persaud at Cormark Securities.

[Lemar Persaud, analyst]

Maybe, Phil, I'm just wondering if I -- just a point of clarification to start out here. Did I hear that Sonnet is expected to reach breakeven by the end of this year or next year?

[Philip Mather, executive]

Thanks, Lemar. On a run rate basis, we're not expecting it to hit profitability in the calendar year 2024. But our goal is that when we close out the year and we look at the portfolio that's in place that we have confidence that we project out to breakeven performance for the 2025 calendar year. So the goal for us is, as we're looking at that portfolio construction and what we think is the underlying performance and opportunity there in, is getting ourselves to a position at the end of this year that the look forward is a run rate breakeven.

[Lemar Persaud, analyst]

Okay. So there wasn't a change then in the target for the breakeven...

[Philip Mather, executive]

No. No change. But what I would say is that we've got good confidence that we're on the right trajectory there in terms of how things are coming together.

[Lemar Persaud, analyst]

Okay. Perfect. I want to move on to a different type of question here. So I'm just wondering if you could talk about your thoughts on the upcoming reinsurance renewal season. And how could that change your single event and aggregate coverage? Because it sounds like from the MD&A that it could be a tougher renewal season.

[Philip Mather, executive]

Yes. Thanks. So I mean, what I'd say is, I mean, we're still at a reasonably early stage of the renewal process. So it's a little early to be definitive. But discussions so far, I think, are constructive. And I think there's a range of factors at play. I mean, for sure, Canada, has seen a very substantial level of catastrophe activity in the current year and that's translated to a pretty significant loss to the reinsurers. However, the backdrop to that is very good global reinsurance results overall and also a significant market correction that we saw a couple of years ago.

I think the other thing that's definitely important to note is that there's been a wide differentiation, we believe, in terms of the reinsurance experience on different primary carriers. So if you look at our performance overall, aside from the aggregate recovery, which did trigger in the quarter, there's actually very little reinsurance recovery attaching on catastrophe losses. So we've generated a good experience for our reinsurance partners. And we've really done that via the active control of the gross losses. If you look at our attachment points, we're pretty well aligned with our peer group. So it's more been about how we've managed and mitigated the cat loss experience.

And so what I'd say is our expectation is, you've got a number of moving parts that we'd anticipate to see more differentiation for the renewal process, for those who've had a very good experience like we have versus those who've had very significant reinsurance recoveries. So it will be interesting to see how that plays out. But this year, I'd say there's more differentiation than you've seen historically and we'd expect to see that kind of represented. I think the steady march up on attachment points is going to continue. I don't see that trend kind of changing. Our aggregate cover expires this year and we're still in the market to replace that cover but it will depend on, is that a mutually agreeable outcome for kind of both parties.

So there's a number of factors in play there but we'll see how that goes. But we're obviously very pleased that we've been able to manage our cat exposure very effectively this year and that's really borne out of very proactive actions taken over the past several years, have a real focus on that. And that should assist us as we go through our renewal process.

[Lemar Persaud, analyst]

And the goal is to maintain the aggregate cover?

[Philip Mather, executive]

Well, I think on that one, we'll have to see how that goes. I mean, obviously, it's been a 3-year cover that's in place and it's triggered each of the 3 years. You would not normally expect that to happen. But the timing of the acquisition was during what has been an elevated period of cat activity. So, we have an appetite there. We like volatility protection but it has to be on terms that are agreeable to both parties. So that's the decision we'll go through over the next couple of months.

[Operator]

[Operator Instructions] And at this time, Mr. Westfall, it appears we have no questions registered, sir. Please proceed.

[Dennis Westfall, executive]

Okay. Thank you, everyone, for participating today. The webcast will be archived on our website for 1 year. A telephone replay will be available at 2:00 p.m. today until November 15. A transcript will be made available on our website. Please note that our fourth quarter and year-end results for 2024 will be released on February 13. That concludes our conference call. Thank you and have a great day.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.