February 10, 2021
Intact Financial Corporation
Metromile math and higher forecasts increase our price target to $190
Our view: Despite generating a 19% ROE in 2020, IFC trades at just a 2.1x P/BV (pro-forma RSA). Historically, IFC trading at close to 2x P/BV coincided with challenges within one or more segments, but fundamentals are overall strong. We think IFC’s defensive attributes are well known and why in part the shares have lagged in the market recovery, but what we think is being overlooked is not just positive fundamentals and a P/ BV multiple that is too low given positive fundamentals, but investors have the opportunity to participate in potentially significant additional valuation upside from the pending RSA acquisition as we think this is not fairly reflected in IFC’s share price.
Key points:
Increasing 12-month price target to $190/share (was $183) and maintaining Outperform rating. Our increased price target reflects higher financial forecasts and incorporating our estimate of the positive BVPS impact from the Metromile transaction.
Metromile math: IFC invested in Metromile 5 years ago. Metromile just went public via a SPAC transaction. Based on our analysis of securities filings, we estimate the gain to IFC could be ~$1.00-$1.50/share (at a 2.1x P/BV, this equates to $2.10-$3.15 to IFC’s share price, or +1.4%-2.1% to the current share price).
Q4/20 operating EPS of $3.18 was well ahead of our forecast of $2.37 and consensus of $2.36 (consensus range of $1.96 to $2.55). The better-than- forecast EPS was largely driven by lower-than-forecast claims (combined ratio of 85.6% was much better than our 89.7% forecast) and, to a lesser extent, higher-than-forecast distribution/other income.
Q4/20 combined ratio was 85.6%, much better than our 89.7% forecast and consensus of 90.1% (range of 88.9% to 92.3%). On a segmented basis, combined ratios were: (1) Personal Auto at 82.6% (vs. our forecast of 89.5% and consensus of 91.0%); (2) Personal Property at 73.2% (vs. our forecast of 82.0% and consensus of 81.1%); (3) Commercial Lines (Canada) at 95.3% (vs. our forecast of 93.0% and consensus of 94.1%); and (4) U.S. Commercial at 92.0% (vs. our forecast of 95.6% and consensus of 92.7%).
Other key takeaways: (1) Historically, IFC has increased its dividend when it reports Q4 results, but chose not to this year and plans to increase it later in 2021. Although we believe IFC has sufficient cash at its HoldCo and income from non-OSFI regulated entities (e.g., distribution, On Side, One Beacon) to increase the dividend, we think the decision was made in light of OSFI’s ban on regulated entities increasing their dividend and the ongoing COVID-19 environment; and (2) the RSA acquisition is still on track to close in Q2/21.