Intact Financial Corp.
(IFC-T) C$169.01
Q2/21E Preview Event
IFC will report Q2/21 results on July 27 (CC: July 28; 11:00 a.m.). We forecast operating EPS of $2.49 (consensus: $2.41), up 6% y/y against a very strong Q2/20. The Q2 results include one month of RSA's operating earnings which will be reported in Corporate (both underwriting and investment income). Our estimates include a modest $19mm or $0.12/share for RSA in Q2/21. The current quarter estimate does not contemplate any expense synergies.
Impact: NEUTRAL
Excluding the one month contribution from RSA, we expect NEP to be flat y/y as hard market conditions in personal property and commercial insurance (Canada and the U.S.) are offset by the impact of premium relief in personal auto and a stronger C$ (impacts U.S. premiums). Premium relief announced in 2020 and the BC exit are expected to drive NEP in personal auto down 2% y/y. The ongoing effects of COVID-19 should continue to reduce frequency but to a lesser extent than last year. We model for underlying current year claims to increase 4% y/y, taking the core claims ratio up 349bps y/y to 57.2%. Looking beyond 2021, management continues to believe that weak industry profitability in personal auto will lead to corrective measures (e.g. pricing and other approaches to reduce claims).
Conversely, hard pricing conditions in personal property and Canadian commercial insurance support our forecast for another strong quarter in Q2/21 and growth in 2021. In personal property specifically, management guided to a sub-95% combined ratio even in periods of elevated CATs. Our estimate calls for a Q2/21 combined ratio of 85% reflecting modest CATs and management actions.
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. We continue to rate IFC BUY