Intact Financial Corp T.IFC.P.C

TD

[retiredcf]

P&C Insurance Q2/22 Outlook

P&C Sector's Defensive Nature Supports Relative Outperformance Deterioration in Auto Fundamentals Favours IFC Over DFY

Canada's P&C insurance companies are scheduled to report Q2/22 results on July 28 (Intact Financial [IFC-T]), August 2 (Definity Financial [DFY-T]), and August 4 (Trisura Group [TSU-T]). We forecast IFC and DFY reporting operating EPS of $2.71 (down 17% y/y; 2% lower than consensus) and $0.23 (down 55% y/ y; 36% lower than consensus), respectively. The overarching themes for the quarter and 2022 include:

• We expect personal auto underwriting income to decline materially for both insurers in Q2/22, reflecting the normalization of frequency and higher severity. We expect claims ratios to increase by 200bps-plus y/y in Q2/22. Exacerbating the issue, we expect weak top-line growth (low- to mid-single-digit organic growth) to take underwriting income down by ~40% in 2022. Canadian personal auto underwriting income is estimated to account for 20% and 40% of 2022E underwriting income for IFC and DFY, respectively.

• We expect book value per share to fall 3% and 7% sequentially for IFC and DFY, respectively. The sharp move in interest rates (the five-year GOC was up 70bps in the quarter) should drive the AFS portfolio down, taking BV with it. The more modest impact for IFC reflects the gain on sale of the Denmark operations as well as IFC's FX exposure. For DFY, the absence of the offsetting FX-effect, as well as the size of the bond and equity AFS portfolio, suggests the hit to book value will be sizable. Excluding OCI (eliminates the AFS and currency impact), we estimate BV/share will be down 2% and up 3% sequentially for DFY and IFC, respectively.

  IFC Outlook: Over the past three months, IFC's performance has materially outpaced that of the Canadian banks, lifecos, and U.S. P&C companies. We believe the significant divergence in performance reflects IFC's (and the P&C sector generally) defensive characteristics, including lower exposure to macro factors as well as the recession-resistant demand for P&C insurance. While relative valuation would call for a shift to the risk-on financials (life companies, in particular) until the market is convinced that inflation has been tamed, we expect the market to favour IFC. In the current environment, capital strength dominates investor thinking. With the sale of the Codan Denmark business, we believe IFC will be among the very few financials capable of buying back stock.