CIBCFebruary 8, 2023
Earnings Update
INTACT FINANCIAL CORP.
Positive Growth Outlook Does Not Change
Our Conclusion
We think risks regarding personal auto have been exaggerated, and we
maintain a positive view on 2023E EPS growth (+13%). Growth is premised
on higher investment income, solid top-line growth, realization of RSA
synergies and growth in distribution income. We also see upside potential
from M&A. We maintain our Outperformer rating and $225 price target.
Key Points
EPS estimates increase marginally. We are increasing both our 2023 and
2024 operating EPS estimates by roughly 1%, mostly due to higher
investment income. Higher assumed CAT losses is a partial offset.
Personal auto risks are not increasing, but dissipating. Peak claims
inflation should be in the past (Q4 was lower than Q3), with multiple data
sources showing that supply chain constraints are improving. At the same
time, the benefit of premium rate increases is gaining momentum in earned
premiums. Management has also been clear that claims reserving remains
conservative and, hence, prior-year development should remain higher than
normal in the near term. We are forecasting a personal auto combined ratio
(CR) of 93.7% in 2023, up only marginally versus 92.9% in 2022.
UK personal lines is the tougher challenge. It was a disappointing quarter
and disappointing year for UK personal lines. Management has a three-part
action plan (rates, risk selection and narrowing market focus) to improve
profitability, but the CR is expected to remain elevated in 2023 (~98%). Our
2023 and 2024 forecasts are consistent with a high 90s CR and, hence,
there might be some upside to our 2024 from management execution. If
management is not successful by the end of 2024, then we believe selling
the business becomes a likely strategic option (Intact is #3 in UK home
insurance).
Investment income continues to be a source of upside. Q4 investment
income was higher than our forecast and consensus. Guidance for $1.1B in
2023 is 9% higher than our prior forecast and there is an argument that
guidance might be conservative. Depending on the path for bond yields, it is
possible that investment continues to surprise to the upside in 2023.
CAT loss guidance revised higher. Intact revised its annual CAT loss
guidance from $600MM to $700MM based on premium growth, loss trends
and higher risk retention in response to the jump in reinsurance rates. We
have revised our 2023 assumptions accordingly (roughly a 3% negative for
estimated EPS) and assume further growth of 10% in 2024. Property
insurance is a highly profitable source of growth over time.
Valuations close to historical average. Intact is trading at 2.4x P/BV,
versus a 10-year average of 2.3x and 14.6x P/E (NTM consensus), versus a
10-year average of 14.5x.