Intact Financial Corporation
Increasing price target to $197 following strong Q2/21 results
Our view: IFC reported another strong quarter driven by better-than- forecast underwriting income and distribution income. Although IFC’s share price has improved in recent months, our Outperform rating reflects our view that the shares still offer a potential double-digit total return and should appeal to investors looking for a blend of positive fundamentals, defensive attributes plus potential catalysts (e.g., de-risking of the RSA acquisition).
Key points:
Q2/21 operating EPS of $3.26 was well above of our forecast of $2.50 and consensus of $2.39 (consensus range of $1.95 to $2.55). The better- than-forecast EPS was largely driven by better-than-forecast underwriting income (combined ratio of 86.7% was much better than our 91.2% forecast) and to a lesser extent higher-than-forecast distribution income.
Q2/21 combined ratio was 86.7%, which was much better than our 91.2% forecast and consensus of 91.1% (range of 90.0% to 92.1%). A word of caution on segment results as our forecasts integrated RSA as of June 1 into each of IFC's segments (e.g., Canada Auto, Canada Property and Canada Commercial), but Intact's Q2/21 results included all of RSA (including the Canadian business) in the Corporate & Other segment. As a result, IFC results for Personal Auto, Personal Property, Commercial Canada and RSA UK&I are not apples-to-apples, but given it was only 1 month of operations from RSA and that in Canada, RSA is smaller compared to Intact, the noise is lessened. Taking this into account, on a segmented basis, combined ratios were: (1) Personal Auto at 82.4% (vs. our forecast of 89.4% and consensus of 89.3%); (2) Personal Property at 83.4% (vs. our forecast of 85.7% and consensus of 89.2%); (3) Commercial Lines (Canada) at 89.6% (vs. our forecast of 92.6% and consensus of 92.5%); (4) U.S. Commercial P&C at 90.3% (vs. our forecast of 98.3% and consensus of 93.3%); (5) RSA UK&I (1 month) at 92.4% (vs. our forecast of 96.7%); and RSA Canada (1 month) at 88.1%).
Other key takeaways: (1) Intact expects distribution EBITDA in H2/21 to be ~+10-12% Y/Y; (2) largely reflecting the RSA transaction, IFC increased its annual catastrophe loss guidance to $570MM from $300MM; (3) IFC noted that RSA added $0.06 to operating EPS in June, resulting in high- single-digit NOIPS accretion for the month; and (4) Intact entered into a reinsurance contract where the reinsurer assumes 50% of negative reserve development regarding RSA’s UK&I claims liabilities for accident years 2020 and prior. The maximum amount recoverable under the reinsurance agreement is 50% of £400MM and does have certain exclusions/limitations (e.g., first-party COVID-19-related claims).
Increasing 12-month price target to $197/share (was $196) and maintaining Outperform rating. Our higher price target reflects slightly higher financial forecasts.