National Bank National Bank Financial analyst Jaeme Gloyn reaffirmed his “favourable view” of the Canadian property and casualty (P&C) insurance sector following the conclusion of first-quarter earnings season.
In a research note released Tuesday, he raised his earnings per share projections for 2023 and 2024 and said Fairfax Financial Holdings Ltd. remains atop his pecking order, following by Definity Financial Corp., Trisura Group Ltd. and Intact Financial Corp.
“Trading at approximately 0.9 times, the market is pricing FFH at an ROE [return on equity] of 7 per cent,” said Mr. Gloyn. “We believe FFH can deliver midteen ROE in 2023 and 2024 through a combination of consistently strong underwriting growth/ profits and improving total investment return performance, particularly in a higher interest rate environment. We estimate Fairfax will generate at least $1.5 billion in interest and dividend income in 2023, which translates to 8.0-per-cent ROE on its own. Meaning, you are buying FFH’s interest income stream and getting the rest of the business for FREE. Given the current trading multiple, we believe the market has yet to reflect this attractive risk-reward setup.”
He increased his target price for Fairfax Financial shares to $1,600 from $1,350, keeping an “outperform” recommendation. The average target on the Street is $1,246.74, according to Refinitiv data.
Mr. Gloyn also made these target adjustments:
* Definity to $52 from $51 with an “outperform” rating. The average is $42.86.
Analyst: “We continue to like DFY’s land grab and ROE expansion story. Our premium target multiple reflects the potential early conversion to CBCA, which would allow DFY to optimize its capital structure and pursue larger-scale accretive M&A sooner than previously expected. We believe valuation upside will materialize as DFY proves out execution to drive ROE to 13 per cent or more.”
* Intact Financial to $235 from $242 with an “outperform” rating. The average is $221.31.
Analyst: “Intact trades at and merits a premium valuation given the track record of consistent execution to deliver 10-per-cent EPS growth and outperform its competitors on ROE. Successful integration of RSA, profit improvement plans in the UK&I business, and the recent pension buy-in transaction significantly de-risk the growth and profitability outlook for IFC. While the 2.6 times P/B valuation multiple is deserved, it leaves less upside share price potential than its Canadian P&C peers.”
* Trisura to $60 from $62 with an “outperform” rating. The average is $54.
Analyst: “While we remain long-term positive on one of our 2023 Top Picks, Trisura, we believe share price upside will be somewhat constrained near term as management proves out the stability and consistency of strong core operating performance. Solid, and clean, Q1-23 results marked an important first step. The risk-reward is attractive as TSU trades cheaper than both DFY and IFC, not to mention its U.S. specialty insurance peers.”