CIBCHave a $225.00 target. GLTA
EQUITY RESEARCH
July 19, 2022 Earnings Update
INTACT FINANCIAL CORP
Q2 Preview: Expecting A Solid Result
Our Conclusion
IFC has been one of the best performing stocks in our coverage universe
year-to-date (+12%). We attribute this to strong premium growth, a low
correlation between earnings and economic conditions and balance sheet
quality. For Q2 we expect solid organic premium growth (~6%), a combined
ratio of 93%, and double-digit earnings accretion from the RSA acquisition.
The sale of Codan Denmark closed, from which IFC is expected to book a
one-time gain ($2.23/sh). We expect resilient EPS growth in 2023 regardless
of whether recession takes hold or not. We reiterate our Outperformer rating.
Key Points
Q2 model adjustments. We have updated our estimates for: i) higher
catastrophe losses; ii) mark-to-market losses on available-for-sale securities
from rising interest rates ($1.84/share); and iii) slowing premium growth in
U.S. Commercial based on the current renewal rate trends. Our revised
Operating EPS estimate of $2.62 ($2.85 prior) is modestly below consensus
of $2.79. A summary of our estimates is provided on page 3.
IFC has been handling cost inflation well. Inflation has been pressuring
U.S. insurers’ loss ratio for some time, but IFC noted that the impact of
inflation continues to be relatively muted. We model a personal auto
combined ratio of 90.8% in Q2/22, up from 82.4% in Q2/21 due to frequency
normalization, but lower than IFC’s long-term average of 95.5%.
Organic premium growth story continues. IFC posted strong premium
growth (+8%) in Q1/21, driven by strength in commercial and specialty lines
Canada Commercial saw organic premium growth of 13% and the U.S. saw
19% growth. Underlying market conditions remain favourable for Canada
Commercial with average premium renewals in the high single digits (8%-
9%). Our forecasts imply organic premium growth of ~6% in Q2/22.
RSA integration is a potential positive. Management communicated that
the integration is very much on track and retention is largely in line with
expectations. IFC delivered 12% accretion in Q1, and 12% for the 10 months
since the RSA acquisition closed, better than its high-single-digit target for
the first 12 months. RSA secured C$125MM in run-rate synergies at the end
of Q1 versus a target of $250MM by 2024. There is potential upside to target.
Potential loss ratio improvement is not embedded in the projected synergies,
and that represents incremental upside.
Time for defensive attributes to shine. IFC is a high quality, defensive
stock that should print solid earnings through economic cycles. The stock is
trading at 2.2x book value, below its trailing five-year average of 2.3x. The
stock rarely trades below 2.0x implying downside risk versus other financials.
Intact is scheduled to report on July 28 after market close with a conference
call the following day at 10 a.m. ET (1 888 664-6392).