Intact Financial Corp INFFF

TD

[retiredcf]

P&C Insurance Q1/22 Outlook

The IFC Over the Banks Call Has Run Its Course
Personal Auto Underwriting Revenue Expected to Decline Sharply

Intact Financial (IFC-T) and Definity Financial (DFY-T) report Q1/22 results on May 10 and 12. We forecast IFC and DFY reporting operating EPS of $2.24 (down 7% y/y; 12% lower than consensus) and $0.45 (down 23% y/y; 6% higher than consensus), respectively. The overarching themes for the quarter and 2022 include:

• We expect personal auto underwriting income to decline 40%+ for both insurers in Q1/22 reflecting the gradual normalization of frequency and higher severity. We expect underlying claims ratios to increase by 400bps-plus y/y in Q1/22. Exacerbating the issue, we expect weak top line growth (low to mid- single-digit organic growth) to take underwriting income down by 35-65% in 2022. Canadian personal auto underwriting income is estimated to account for 12% and 37% of 2022E underwriting income for IFC and DFY, respectively.

• Personal property could see lower underwriting income this quarter on higher claims, but the momentum from last year should carry through 2022. Our estimates contemplate organic top line growth of 5% y/y for IFC and 17% 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 (growing both units and the benefit of firm pricing conditions). Underlying loss ratios are expected to remain strong; however, higher catastrophe losses could hurt underwriting profits. We expect solid underlying results in commercial lines in Q1/22 with DFY's results characterized by 18% y/y growth in DWP, while IFC's acquisition of RSA and firm pricing conditions support solid growth.

  IFC Outlook: Over the past three months, IFC's performance has outpaced that of the Canadian banks and lifecos, and has approximately matched that of U.S. P&C companies. This outperformance has led us to no longer favour IFC over the banks and lifecos, although we remain bullish on the name given the company's industry advantages and track record as well as strong BVPS growth. In the IFC section of this report, we argue that IFC can continue to 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 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.