Exceptionally strong combined ratio, beating our estimates in all segments, helpedby mild weather, favourable reserve development, and lower CAT losses. Top line,Distribution EBITA and RSA all better than expected. Increasing operating EPS estimates1% in 2H/21 and 2022, reflecting improving underwriting performance. Target increasesto $200 on 2.45x Q3/22E BVPS, from $190, on 2.35x Q2/22E BVPS; the increased multiplereflects increased confidence in IFC's ability to deliver on RSA acquisition.
Key Points
Strong beat across the board. Q2/21 operating EPS of $3.26 was well above our $2.29estimate and $2.39 consensus, underpinned by exceptionally strong underwriting profit(Combined ratios beat across all segments) and higher distribution income.
Combined ratio of 86.7% was better than our 91.8% estimate, helped by mildweather, favourable PYD, lower CAT losses, and continued benefit of profitabilityimprovements. The more important underlying loss ratio was 5 points better (53.8%vs. our 58.7% estimate) as benefits of profitability actions in personal auto, hardmarkets (especially in commercial lines), and mild weather all help. Managementcontinues to target upper end of 1-3pts of favourable PYD objective (Q2/21 was 3.9 pts).
Top-line growth was better than expected and DPW was up 27% y/y (or up 6% excl.RSA/BC auto exit), helped by DPW growth of 19% (excl. FX) in the U.S. commercial lineand 12% in the Canadian commercial lines. Management remains bullish on marketconditions, and especially constructive on hardening markets in commercial lines inCanada/U.S. Distribution EBITA once again solid ($118mm vs. our $89mm estimate),helped by exceptionally strong underwriting profitability as it relates to increasedcommissions, with guide to 10-12% y/y growth in H2/21.
One month of RSA was immediately accretive and better than expected, withRSA Canada combined ratio better, 88.1% versus our 90.5% estimate, and RSA UK&Ibetter at 92.4% versus our 95.6% estimate. Entering H2/21 for RSA Canada and UK&Ibusinesses, management is guiding incremental profitability improvement/synergies tobe incorporated in the mid-90s CR range.
Increasing H2/21E and 2022E EPS by 1%, reflecting upward revisions on underwritingperformance. Given conservativeness of guided-to $250mm expense synergies, andthat they exclude the benefit of risk selection improvements/revenue synergies, wecould see further increases in target price multiple as IFC, a proven acquirer, delivers.