CIBCHas a $200 target. GLTA
EQUITY RESEARCH
January 28, 2022 Earnings Update
INTACT FINANCIAL CORP.
Q4 Preview: A Great Setup For The Year Ahead
Our Conclusion
We are expecting another good quarter based on organic premium growth, RSA integration, underwriting margins and growth in distribution EBITA. Also we expect IFC to increase its dividend for the second consecutive quarter. The stock is trading at ~2.0x P/BV adjusting for the sale of Coden Denmark, 9% below its trailing five-year average of 2.3x. We think now is a good entry point considering positive business fundamentals, limited implications from higher interest rates and the ability to quickly reprice short-duration liabilities for inflationary forces. We reiterate our Outperformer rating.
Key Points
Estimates revised to reflect higher cat losses. IFC pre-released expected
catastrophic losses of $186MM. We are updating our assumptions to match and our Q4 Operating EPS decreases from $2.86 to $2.67 as a result. Consensus is at $2.62. We assume cat losses of $579MM in 2022
(unchanged), consistent with management guidance for expected annual
claims of $570MM. A summary of our estimates is on page 3.
Organic premium growth has legs. Organic premium growth is being
fueled by hard rate markets and market share gains in the U.S. We expect
those factors to persist through at least 2022 and for opportunities in
specialty lines to result in higher-than-historical organic growth rates for
multiple years. We are modeling 6% organic growth in Q4 and 7% in 2022.
Shifting the narrative on personal auto. One of the primary concerns for
the stock has been the normalization, and even potential overshoot, in auto claims combined with the lack of rate increases. IFC reported better-than- expected margins in personal auto last quarter, and based on guidance we expect Q4 to be another good quarter (alleviating the overshoot concerns). Recent conversations suggest rate increases should be expected in coming months (already happening in the U.S.). We assume a personal auto combined ratio of 88.6% in Q4 and 93.1% in 2022 (long-term average is 95.5%).
RSA acquisition is value enhancing. We expect a positive update on cost
synergies with a run-rate of $85MM exiting Q4 and management pointing to potential upside vs. original estimates ($250MM). It is arguably even more important for management to show financial and strategic progress with the UK&I segment. We assume a combined ratio of 97% this quarter and will look for updates on exiting underperforming business lines.
Valuation is attractive. IFC is currently trading at ~2.0x P/BV [adjusting for
sale of Coden Denmark ($1.85/share)], relative to its five-year average
multiple of 2.3x and around 2.5x pre-pandemic. IFC traded below 2.0x only 2% of the time in the past five years with a trough of around 1.9x.
Intact is scheduled to report on February 8 after market close with a
conference call the following day at 11 a.m. ET (1 888 664-6392).