More CIBCEQUITY RESEARCH
May 2, 2023 Earnings Update
INTACT FINANCIAL CORP.
Q1 Preview: Noisier Quarter Expected, But Growth Drivers Unchanged
Our Conclusion
We remain positive on Intact for solid expected EPS growth versus banks,
driven by both a strong top-line and strong margins. We also like the
defensive attributes of the business in the current macro environment. We
estimate a P/BV of 2.6x on Q1 estimated BVPS, which puts the multiple near
the top end of the historical range. No change to our $225 price target and
Outperformer rating.
Key Points
EPS estimates revised lower. We have revised our Q1-23 operating EPS
estimate from $3.06 to $2.93 (consensus is $2.95), mostly to account for
higher claims losses in personal auto. We have also revised our Q2-23
operating EPS estimate lower, mostly to account for the April ice storms.
Overall, our 2023E operating EPS declines nearly 4% while our 2024E is
largely unchanged.
Personal auto could prove more challenging in Q1. Data points on repair
costs and used car prices suggest that claims inflation could be higher than
previously assumed. Accordingly, we have revised our Q1 combined ratio
assumption from 93% to 98%. Premium rate increases and lower inflation
over time should see margins improve through 2023. We are modeling a full-
year combined ratio of 94.8% in 2023 and 94.0% in 2024.
IFRS 17 will add some noise. Accounting changes are expected to have
minimal impact on operating EPS (slightly positive) and a ~3% positive
impact on BVPS. There will be some changes that reduce comparability to
prior period results, but the primary financial metrics will remain the same
(unlike lifecos). The two biggest impacts are: i) the deferral of additional
premium acquisition expenses (slightly EPS positive); and ii) a change in the
accounting for claims reserve discounting, resulting in higher underwriting
income and lower investment income (net earnings impact is zero).
Transaction impacts to be recorded this quarter. Intact announced a U.K.
pension risk transfer transaction and exit of U.K. motor insurance this
quarter. The expected BVPS impact is negative 5% plus £35MM of non-
operating costs. Capital relief is estimated at £210MM. These transactions
come with an upfront cost but reduce earnings risk and improve capital
efficiency.
UK&I expected to show improvement this year: The UK&I segment
delivered a combined ratio of 97.0% in 2022. With the exit of UK motor,
management is targeting a mid-90s combined in 2023. Improved results in
Q1 would help the story given disappointing results in recent quarters.
Intact is scheduled to report May 10 after market close