Intact Financial Corp INTAF

TD

[retiredcf]

P&C Insurance Q4/22 Outlook

Personal Auto Continues to Normalize, but at a Moderating Pace Introducing TSU 2024 Estimates

Canada's P&C insurance companies are scheduled to report Q4/22 results on February 7 (Intact Financial [IFC-T]) and February 9 (Definity Financial [DFY- T] and Trisura Group [TSU-T]). We forecast IFC and DFY reporting operating EPS of $3.38 (down 11% y/y; 9% higher than consensus) and $0.57 (up 35% y/y; 5% lower than consensus), respectively. The overarching themes for the quarter and 2023 include:

• Normalizing claims conditions in personal auto are expected to continue to pressure underwriting income this quarter; however, the pace of deterioration should slow. We forecast the underlying claims ratio in personal auto increasing ~450bps y/y at IFC and ~250bps y/y at DFY in Q4/22E. This is materially lower than the ~970bps and ~445bps y/y increase we saw at IFC and DFY, respectively, in Q3/22. For DFY specifically, we are excluding the ~$24mm inflation reserve charge the company booked in Q4/21 in the y/y comparison. The increase in the claims ratio continues to reflect the impact of higher frequency (normalizing driving patterns) and the inflationary impact on severity. Importantly, however, as both companies were conservative in reserving throughout the pandemic, we expect personal auto to remain solidly profitable.

• We expect book value per share to fall 2% and 4% y/y for IFC and DFY, respectively, reflecting the impact of higher interest rates on the securities portfolio (unrealized losses). During the quarter, interest rate movements were more muted, resulting in an ~2% sequential increase for both insurers. Excluding OCI (eliminates the AFS and currency impact), we estimate BV/share will be up 1-2% sequentially and 13% y/y for IFC and 5% y/y for DFY.

  IFC Outlook: Over the past 12 months, IFC's performance has materially outpaced that of the Canadian banks, lifecos, and U.S. P&C companies. The P&C sector is typically perceived as more defensive in challenging macro environments, and the downturn in 2022 was no exception. Reflecting an expectation of peak inflation and a Fed-pivot, the P&C companies have underperformed the more risk-on sectors (banks and life companies) in the first 2-3 weeks of 2023. We believe, however, that as we get deeper into the reporting season, the market's attention will again shift to fundamentals, which we believe will continue to support IFC.

  DFY Outlook: We expect high-single-digit plus DWP growth y/y (well above industry- average), a lower expense ratio (shift to digital channels – Sonnet), and higher leverage to drive an absolute and relative improvement in DFY's operating ROE. We believe an investment in Definity offers exposure to a stable business model with good upside potential if the company can grow through acquisitions (recent regulatory changes further support this notion).

January 24, 2023