CIBCEQUITY RESEARCH
February 27, 2023 Earnings Update
INTACT FINANCIAL CORP.
Opportunistically De-risking The U.K. Balance Sheet
Our Conclusion
We view the U.K. pension bulk annuity transaction as a net neutral. Key
points are: 1) it reduces balance sheet risk and book value volatility; 2) it is
negative from an accounting perspective (i.e., reduces book value), but
neutral from an economical perspective (i.e., no impact to operations); and,
3) U.K. transaction flexibility improves. There is no impact to our $225 price
target and Outperformer rating.
Key Points
Updating EPS and BVPS estimates: We are updating our 2023 and 2024
estimates based on the company’s estimated impacts – 5% reduction to
BVPS and 1.5% reduction to net operating income. The net operating income
impact will diminish over time as cash flow can be redirected from pension
payments to debt reduction.
Transaction is about balance sheet de-risking: As part of the RSA
acquisition, Intact assumed £6.5B of U.K. pension plan liabilities, which we
view as a deadweight liability. While the plan was in an accounting surplus
position (£200MM), it did represent a potential source of financial risk while
providing no enterprise value to Intact (closed plan with most members no
longer being employees). The bulk annuity transaction removes market- and
demographic-based risks.
Negative accounting impacts, but cash flow neutral: The transaction
releases £150MM of capital and eliminates future annual pension obligations
of £75MM. The capital benefit and elimination of future payments are roughly
equal to the £500MM contribution Intact will make as part of the bulk annuity
transaction.
Flexibility to transact in the U.K. increases: The bulk annuity transaction
implies that Intact will not have to negotiate with pension plan trustees should
it decide to exit lines of business in the U.K. Retaining the pension liabilities
would not have prevented Intact from exiting lines of business in the U.K., but
it would have necessitated discussions with the pension plan trustees. The
bulk annuity transaction removes that obligation.
Positive read-through for Great-West Life: GWO provides bulk annuity
solutions in the U.K. and other jurisdictions through its Capital & Risk
Solutions group. We believe transaction activity in 2023 will be higher than
normal due to the increase in interest rates and a movement away from
levered LDI strategies that caused a near liquidity crisis for U.K. pension plan
sponsors in 2022. The Intact transaction, which was completed with one of
GWO’s competitors, demonstrates the potential for a surge in bulk annuity
demand this year with timing of this transaction driven by the increase in
interest rates