CIBC ReportEQUITY RESEARCH
November 10, 2021 Earnings Update
INTACT FINANCIAL CORP
All Around Strong Quarter Supports Upside Potential
Our Conclusion
We have increased our estimates and price target (from $197 to $200) on the back of strong Q3 results and a positive forward outlook. We maintain our Outperformer rating based on strong business momentum, potential upside with the RSA integration and a lower-than-historical valuation multiple.
Key Points
Revising estimates higher. We are increasing our EPS estimate for 2022 by 6% and for 2023 by 5%. The primary drivers for higher EPS estimates are a sustainably lower combined ratio across multiple business lines and higher distribution EBITA. Our BVPS estimate also increases (1.7% in 2022E). We expect another dividend increase of 10% when Q4 results are reported.
A positive surprise in personal auto. U.S. auto underwriters had been posting negative surprises on higher accident frequency and claims severity. Another quarter of strong auto margins for Intact is evidence that prior actions taken are mitigating claims inflation. That said, there is still a level of normalization in accident frequency that should be expected to take place. We estimate the personal auto combined ratio will end up around 87% in 2021 and then assume that increases to 93% in 2022 (below LT average).
Positive updates on RSA results. Synergies are being realized as
expected with customer retention in Canada ahead of Intact’s expectations. RSA contributed EPS accretion of 8% this quarter. Management remains confident in its ability to deliver at least $250MM of synergies within three years. Results from the U.K. & International segment were much better than expected, which should help alleviate concerns on whether this is a good business or not. We see upside to the stock if management can deliver a low 90s combined ratio in U.K. & International over time (93.9% this quarter). We assume a combined ratio of 95% for 2022 and 93.5% for 2023.
Organic premium growth continues. Organic premium growth came in at 7%, unchanged from last quarter and slightly better than our 6% assumption. Organic premium growth is strongest in U.S. P&C (21%) and Canada Commercial (8%). We expect favourable premium rate conditions will continue to support strong organic premium growth in commercial lines and personal property through at least 2022. We assume little organic growth in personal auto (1%) in 2022, with rate increases more likely to come further down the road.
Guidance on Distribution EBITA is another positive. Management
expects distribution EBITA to be up ~30% in 2021, helped by variable
commissions; 2022 guidance for >$400MM implies growth of ~10%.
Valuation is attractive. IFC is currently trading at 2.2x P/BV [~2.1x including the expected gain on the sale ($1.85/share) of the Denmark business] versus a five-year average of 2.3x and around 2.5x pre-pandemic.