Intact Financial Corporation
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Our View: We think IFC delivered very good Q4/22 results. Relative to consensus, while a lower tax rate drove a significant part (but not all) of the higher-than-consensus operating EPS: (1) the 91.5% combined ratio (in- line with consensus) was a strong result, despite pressures in Personal Auto and U.K. Personal Lines; (2) net investment income was significantly higher than consensus and could see positive revisions; and (3) the tax benefit in Q4/22 was not necessarily a one-time item and could benefit future quarters. Relative to our forecast, Q4/22 operating EPS was well ahead of our forecast (see below for details). While Auto’s headline combined ratio was good, the accident year loss ratio showed there remains work to be done and also in U.K. Personal. However, we think IFC’s track record suggests it can successfully rectify these issues (hence our note title). Big picture, while IFC’s shares may not perform as well in a market recovery scenario, we still view IFC as a core holding, reflecting positive company/ industry fundamentals and strong track record of growth and profitability; potential catalyst(s); defensive attributes; and a reasonable valuation.
Key points:
Q4/22 operating EPS was $3.34, well ahead of our $2.58 forecast and $3.03 consensus (range: $2.58 to $3.38), with the variance to our forecast driven by higher-than-forecast underwriting income, net investment income and distribution/other income as well as a lower-than- forecast tax rate.
Personal Auto results were mixed and are 25% of DPW (was 45% five years ago). On the plus side, Personal Auto’s combined ratio was 95.8% in Q4/22 (+2.8pts Q/Q), which given seasonality, was a good result in our view. However, conservative prior reserving saw positive prior year development (PYD) of +7.2pts, such that the accident year loss ratio was 78.9%, +6.8pts Q/Q and +12.4pts Y/Y. While Alberta’s recent rate freeze announcement for 2023 isn’t ideal, IFC already had a 5% rate increase approved in late 2022 that it will be able to implement in 2023. Furthermore, IFC has also received approval for rate increases in Ontario and IFC expects industry premiums to grow by mid-single digit in 2023.
10% dividend increase ($4.40/share annualized) matched our forecast.
Other takeaways: (1) IFC increased its annual cat loss guidance to $700MM/year (was $600MM), which is below our $765MM forecast in 2023 and 2024. The increase reflected recent re-insurance renewals (higher retention levels and co-participations), revised long-term trends, higher DPW base, etc.; and (2) some disclosures regarding upcoming IFRS 17 implementation in 2023 include a $2.39/share increase to BVPS.
Maintaining Outperform rating and target of $231. Conference call today at 11am ET; dial in: 1-888-664-6392 or (416) 764-8659.