Intact Financial Corporation
U.S./International drive much better than forecast Q3/21 EPS
Our view: IFC reported another excellent quarter driven by better-than- forecast underwriting income (primarily from the U.K./International and U.S. Commercial segments) and to a lesser extent, distribution income. IFC increased the dividend by 10% and we think could announce another dividend increase when it reports Q4/21 results (we forecast an additional +10% dividend increase). Our Outperform rating reflects our view that the shares offer attractive valuation upside driven by continued positive fundamentals; a favorable industry backdrop; strong defensive attributes; and potential catalysts (e.g., de-risking of the RSA acquisition). We increase our price target to $200 (was $195).
Key points:
Q3/21 operating EPS of $2.87 was well above our forecast of $1.93 and consensus of $1.75 (consensus range of $1.40 to $2.55), with the variance primarily due to much higher-than-forecast underwriting income (U.K./ International, U.S. Commercial, Personal Property) and to a lesser extent higher-than-forecast distribution income.
Quarterly dividend increased +10% to $3.64 annualized (was $3.32). Last week OSFI lifted its return of capital ban for federally regulated financial institutions, allowing IFC to increase its dividend for the 16th consecutive year since its IPO in 2004. We think IFC could announce another dividend increase when it reports Q4/21 results (we forecast an additional +10% dividend increase).
Q3/21 combined ratio was 91.3%, which was much better than our 95.0% forecast and consensus of 95.9% (range of 93.3% to 96.9%). On a segmented basis, combined ratios were: (1) Personal Auto (Canada) at 85.1% (vs. our forecast of 86.2% and consensus of 91.3%); (2) Personal Property (Canada) at 93.5% (vs. our forecast of 99.0% and consensus of 99.2%); (3) Commercial Lines (Canada) at 91.2% (vs. our forecast of 92.0% and consensus of 92.1%); (4) U.S. Commercial P&C at 92.8% (vs. our forecast of 97.6% and consensus of 96.8%); and (5) UK&I P&C at 93.9% (vs. our forecast of 104.1% and consensus of 101.4%).
Other key takeaways: (1) IFC indicated the RSA acquisition generated +8% NOIPS accretion during the quarter; (2) IFC expects hard market conditions to persist for Commercial lines in Canada, U.S. and U&KI and softer pricing conditions for Personal lines for UK&I (pending regulatory change) and Personal Auto in Canada (reduced driving environment); and (3) IFC believes that its strong performance combined with the sale of RSA’s Danish business should result in its debt-to-capital ratio returning to 20% well within its 36-month target.
Increasing 12-month price target to $200/share (was $195) and maintaining Outperform rating. Our higher price target reflects slightly higher financial forecasts.