Intact Financial Corp T.IFC.P.C

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[retiredcf]

Intact Financial Corp.

(IFC-T) C$165.04

Q1/21: Good Quarter, Supported by Unusually High PYD Event

IFC reported Q1/21 operating EPS of $2.40 (up 49% y/y) vs. our estimate of $1.99 (consensus: $2.16), reflecting strong underwriting results in Canadian commercial lines (supported by PYD) and higher distribution income.

Impact: SLIGHTLY POSITIVE

• In Q1/21, premium relief lowered DWP by $75mm (three points) and NEP by $157mm. Canadian DWP were flat y/y, reflecting the impact of premium relief, lower volumes in sharing economy products (commercial auto), and the exit of B.C. auto. U.S. DWP growth was 6% y/y (cc), reflecting hard market conditions, the recent MGA acquisitions, and continued new business. Total company DWP were flat y/y, roughly in line with our forecast. Unearned premium relief of $203mm from 2020 will reduce NEP in 2021 (two points of growth over a full year). The quarter included $75mm of new (2021) written and earned relief. Our estimates do not reflect any further material premium relief.

• Canadian underwriting income was $282mm, up 78% y/y, reflecting $64mm in personal auto (forecast: $9mm), $141mm in personal property (forecast: $126mm), and $77mm in commercial (forecast: $47mm). Much stronger-than- expected results reflect lower frequency in auto (profitability actions, reduced driving), weather, and hard markets. In 2021, we expect the effects of premium relief to lead to uneven quarterly results. However, recent results suggests that underlying fundamentals (unit growth, hard markets, and claims actions) remain strong. U.S. underwriting income of $14mm was much lower than our estimate of $49mm (consensus: $24mm), but up from last year, reflecting higher non-CAT weather-related losses and elevated CAT losses (Texas storm).

  TD Investment Conclusion

  We forecast operating ROE falling to 13.0-13.5% from ~17% before the RSA deal. Although a mid-teens ROE appears achievable, we believe it is appropriate to value the stock on the lower operating ROE until we have convincing evidence that through risk selection, reinsurance, and other claims initiatives, management is able to improve the underwriting performance in the acquired businesses — particularly specialty and commercial lines. Applying a target P/B of 2.2x, we arrive at our target price of $190.00 (previously $185.00). We continue to rate IFC BUY. In the near term, we believe the more interest-rate-sensitive insurers, with materially lower valuations, will outperform IFC.