Intact Financial Corp T.IFC

TD

[retiredcf]

P&C Insurance Q4/21 Outlook

NEW OPINION: IFC Offers Better Risk/Reward Trade-off than Banks DFY: Measure Success by Top-line Growth, Not Combined Ratio

Intact Financial (IFC-T) and Definity Financial (DFY-T) will report Q4/21 results on February 8 and 10, respectively. We forecast that IFC and DFY will report operating EPS of $3.10 (down 3% y/y; 17% higher than consensus) and $0.54 (down 15% y/ y; slightly above consensus), respectively. The overarching themes for the quarter and going into 2022 include:

• We expect personal auto underwriting income to decline for both insurers, reflecting the gradual normalization of frequency and higher severity. We expect underlying claims ratios to increase by 400bps-plus y/y in both Q4/21 and in full-year 2022. Exacerbating the issue, we expect weak top-line growth (low- single-digit organic growth) to take underwriting income down by over 50% in 2022. Canadian personal auto underwriting income is estimated to account for 36% and 53% of 2021E underwriting income for IFC and DFY, respectively.

• Personal property should continue to exhibit strong momentum, with organic top-line growth of 5% y/y for IFC and 15% y/y for DFY. The latter's stronger organic growth reflects management's stated objective to take market share as well as the success of DFY's digital strategy. Underlying loss ratios are expected to remain in line with a very strong Q4/20; however, much higher catastrophe losses could hurt underwriting profits. We expect solid underlying results in commercial lines in Q4/21, with DFY's results characterized by 15% y/y growth in DWP, while IFC's acquisition of RSA and disciplined underwriting support a near doubling of underwriting profit y/y.

  IFC Outlook: While we remained positive on IFC throughout 2021, we favoured the life insurance companies and banks. Reflecting IFC's significant underperformance, upside to our target price is much higher for IFC than any of the banks. In our view, relative valuation and the risk/reward trade-off favour IFC over the banks. In the IFC section of this report, we argue that IFC can deliver solid and sustainable BV/share growth despite the expected normalization in personal auto. Furthermore, the sale of the Codan Denmark business (next three months) may open the door for IFC to join the banks and life insurance companies in returning capital to shareholders.

  DFY Outlook: We believe the most appropriate way to value the stock is to apply a probability-weighted valuation tied to several possible scenarios. One such scenario captures standalone top-line growth and, eventually, improving operating ROE. We expect 10% DWP growth y/y (well above industry-average), a lower expense ratio (shift to digital channels – Sonnet), and higher leverage to drive an absolute and relative improvement in DFY's operating ROE and support the sharp move in the stock since the IPO.