Intact Financial Corp.
(IFC-T) C$162.75
Q1/21E: Premium Relief Expected to have Sign. Impact this Qtr. Event
IFC will report Q1/21 results on May 11 (CC: May 12; 11:00 a.m.). We forecast operating EPS of $1.99 (consensus: $2.14), up 24% y/y, reflecting lower auto-claims frequency, lower catastrophe losses (last year included material COVID-19-related charges), and hard market conditions, partially offset by material premium relief in personal auto.
Impact: NEUTRAL
We expect DWP and NEP to decline 1% and 3%, respectively, as hard market conditions in personal property and commercial insurance (Canada and the U.S.) are offset by significant premium relief. We estimate that premium relief announced in Q1/21 will reduce DWP and NEP by $100mm and that unearned premium relief announced in 2020 will reduce NEP by a further $65mm in each of Q1/21 and Q2/21. Accordingly, we forecast Q1/21 NEP dropping 15% y/y in personal auto. However, the effects of lockdowns are expected to reduce frequency taking underlying claims down by a similar amount. Our estimates call for underwriting income of only $9mm this quarter, down from $56mm last year and an average of $168mm in the last three quarters of 2020.
We expect premium relief to have a modest impact on written and earned premium starting in Q2/21. Accordingly, we forecast underwriting income in personal auto returning to $100mm-plus quarterly after Q1/21. On a full year basis, we expect personal auto underwriting income to fall to $337mm in 2021, from $560mm in 2020. Conversely, hard pricing conditions in personal property and Canadian commercial insurance support our forecast for another strong quarter in Q1/21 and growth in 2021.
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 $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.