National Bank National Bank Financial analyst Jaeme Gloyn sees the P&C Insurance sector remaining “well positioned” for 2022, citing “persistent hard market conditions and rising interest rates that support improved investment income.”
In a research report released Thursday, he reaffirmed his view that “pricing trends will continue to outpace loss cost trends overall, even for Personal Auto lines as driving behaviour has yet to complete its path to normalization and auto repair/parts price increases still lag U.S. trends.”
“FFH (up 10 per cent) and IFC (8 per cent) are two of the top three performing stocks in the S&P/TSX Financials Index year-to-date,” said Mr. Gloyn. If DFY (up 13 per cent) were included in the index, it would be THE top performing Financial stock. While our top pick in the sector, TSU (down 33 per cent), has lagged considerably following a profit hiccup in Q4-21 results, we expect solid Q1-22 results to set the stock back on an upward trajectory .. We view TSU’s current trading multiple as unduly cheap.”
The analyst believes “there’s something for everyone” in the sector, pointing to Trisusa Group Ltd. and Definity Financial Corp. for small-to-mid-cap growth and Fairfax Financial Holdings Ltd. and Intact Financial Corp. for large-cap value or growth-at-a-reasonable price (GARP).
“That said, the lines of value, GARP, and even momentum, are blurring,” he said. “TSU remains at the top of our pecking order given a rapid growth outlook but is also an attractive value play with upside to specialty insurance peers. Although one of the best performing Financials stocks year-to-date, FFH remains the best value idea in our coverage. But, FFH also offers investors rapid top-line growth and leverage to a higher interest rate environment. As it relates to IFC and DFY, we continue to believe share price acceleration is contingent on proof of execution. We see no reason to adjust our view that both companies will continue to deliver: IFC on integration of RSA and DFY on its strategic growth objectives.”
Mr. Gloyn made a pair of target changes in the note:
* Definity (DFY-T, “outperform”) to $37 from $36. The average on the Street is $36.09.
“DFY is a land grab story with an ROE expansion kicker. While the current trading multiple of approximately 1.6 times P/B appropriately values this growth and ROE upside story today, we expect continued solid execution will gradually drive the valuation multiple higher,” he said.
* Trisura ( “outperform”) to $65 from $58. Average: $53.71.
“We reiterate that significant valuation upside remains as i) the U.S. fronting platform continues to prove out its industry-leading growth trajectory and expands its share of TSU profitability and ii) Canada boasts strong momentum as market share gains, new products and persistent hard markets support equally impressive growth,” he said.
Mr. Gloyn maintained his $1,000 target for Fairfax Financial (FFH-T, “outperform”) and $225 target for Intact Financial (IFC-T, “outperform”). The averages are $864.76 and $208.67, respectively.
Elsewhere, Desjardins Securities’ Doug Young raised his Definity target to $37 from $33 with a “buy” rating.
“While we expect decent 1Q22 results for both Intact Financial (IFC) and Definity (DFY), normalizing conditions (ie increased driving) likely resulted in higher combined ratios, lower operating earnings and lower ROEs vs 1Q21,” he said. “Both companies’ stocks have outperformed the banks and lifecos so far in 2022, and both names provide defensive characteristics in what’s proving to be a tough macro environment. Besides the normal areas, the big focus will be on what impact inflationary pressures are having, and are expected to have, on results.”