P&C Insurance Q4/23 Outlook
Strong Underlying Qtr Supported by Rates and Unit Growth
BV/Share Growth Expected to Resume in 2024 As CATs & Rates Fall
Canada's P&C insurance companies are scheduled to report Q4/23 results
on February 13 (Intact Financial [IFC-T]) and February 15 (Definity Financial
[DFY-T]). We forecast IFC and DFY reporting operating EPS of $3.58 (up 23% y/y)
and $0.71 (up 6% y/y), respectively. In both cases our estimates reflect a) positive
underwriting income, b) solid growth in investment income, and c) good growth in
distribution income.
Unlike most of 2022 and 2023, catastrophe losses are expected to be relatively
modest in Q4/23. IFC preannounced $200mm in CAT losses ($152mm related to
the UK&I). IFC's modest CAT losses in Canada suggest that DFY will report very
modest CAT losses in our view. We forecast only $8mm. We expect IFC and DFY to
provide updated CAT loss guidance on the Q4/23 calls. For IFC, we forecast 2024
CAT losses of $880mm, and $150mm for DFY.
We have IFC's underlying claims ratio improving over 300bps y/y, reflecting solid
results in Canada commercial and stronger results in UK commercial and specialty
lines. The exit of UK personal lines (weak results in Q4/22) also supports the
improvement in the underlying claims ratio. For DFY, we forecast the underlying
claims ratio coming in steady with last year.
Falling interest rates, lower CAT losses, and the absence of other charges should
drive book value up noticeably on a q/q basis in Q4/23 in our view. We expect book
value growth to resume in 2024 (on a y/y basis). Our estimates call for growth of
7-8% in 2024E for IFC. Improving book value growth should support the stock in
2024 in our view. Our estimates also call for solid q/q book value growth for DFY and
8% growth in 2024E reflecting lower CAT losses and the recent drop in interest rates
(benefits AOCI on a y/y basis in 2024E).
Outlook on the P&C Insurers: Notwithstanding the near term headwinds on book
value growth from the significant CAT losses, we believe the set up for the P&C
insurers is strong heading into 2024. Over time, we have observed that in periods of
market volatility and particularly when credit risk is rising, markets shift in favour of the
less macro sensitive and demand inelastic (referring to sales) P&C business model.
As we have discussed in our bank coverage reports, we expect credit losses and
asset impairments to migrate higher over the next six months. While P&C insurers will
not be immune to asset impairments, we expect the two P&C companies to exhibit
materially less stress. A better macro picture (on a relative basis), combined with
solid underlying fundamentals (including the ongoing improvement in personal auto
pricing and profitability) suggest to us that the P&C insurers will exhibit solid relative
performance in 2024.