National Bank Heading into fourth-quarter earnings season for Canadian diversified financial companies, National Bank Financial analyst Jaeme Gloyn is maintaining his favourable outlook for the property and casualty (P&C) insurance sector, pointing to “persistent hard market conditions across most business lines and higher interest rates driving sustainably higher investment income.”
“While we remain cautious on the effects of inflationary pressures, levels of catastrophe losses and the increasing incidence of vehicle thefts, we believe the insurance sector remains well positioned for 2024, given persistent hard market conditions,” he added. “We observe hard markets across commercial lines and firming markets in personal lines. U.S. Excess and Surplus lines markets continue to post solid mid-teens premiums and filings growth. For personal lines insurers IFC and DFY, we continue to observe lower inflationary pressures in Canada vs. the U.S.. Looking into 2024, we expect price increases will continue to outpace loss cost trends, particularly in Personal Auto where we believe an inflection point is imminent (or already reached). In addition, still high interest rates likely drive increased investment income again in 2024. Also, the potential for M&A catalysts in 2024 amplifies an already strong set-up for 2024.
“Notably, we see solid performance, with strong top-line growth and steady combined ratios from insurance peers that have reported Q4 2023 results thus far.”
In a research report released Monday, Mr. Gloyn said he expects three catalysts to drive share prices higher: “significantly” increased operating income; valuation re-rate, and potential S&P/TSX 60 Index inclusion.”
“We believe solid Q4-23 results and robust outlook commentary will support this view,” he added.
He focused on a pair of “topical names (with upside),” expecting auto insurers will likely show “signs the inflection point of earned rates exceeding inflation costs has appeared.” They are:
* Trisura Group Ltd. with an “outperform” rating and a Street-high $64 target, rising from $62. The average is $51.43.
“We expect strong operating performance and clean financials - two keys on the path to rebuilding investor confidence,” he said. “In particular, we expect costs tied to the Q4-22 run-off program and industry-related issues with Vesttoo will remain manageable, in line with management’s previous guidance. In addition, we do not foresee any “new risks” emerging with Q4 results. We expect management will reiterate a solid top-and bottom-line growth outlook in 2024. We believe these factors will lead to a favourable AM Best rating outcome sometime in 2024. Lastly, our Q4-23 estimates are below consensus as we build in conservatism for what can be a seasonally weaker quarter. Overall, we see potential for TSU to deliver a solid recovery year in 2024 following a transition year in 2023 (including our softer view of Q4-23). At approximately 14 times 2024 consensus EPS, significant upside remains to specialty insurance peers that trade at an average 21 times.”
* Goeasy Ltd. with an “outperform” rating and $190 target, up from $185 but below the $191 average.
“:We expect GSY will deliver another quarter of solid execution on loan growth, revenue yields and credit quality despite the persistent overhang of recession risks and a strained Canadian consumer,” he said. “In fact, we expect management will upgrade its three-year guidance given the strong results in recent quarters (including Q4-23). Moreover, we anticipate GSY will deliver shareholders a healthy dividend increase, potentially above the 2023 EPS growth rate of 22 per cent year-over-year. That said, the two-month share price jump of 33 per cent could limit upside.”
Mr. Gloyn made these other target adjustments:
- Definity Financial Corp. ( “outperform”) to $57 (Street high) from $54. Average: $43.75.
- Fiera Capital Corp. (, “sector perform”) to $6 from $5.50. Average: $6.46.
- First National Financial Corp. “sector perform”) to $41 from $39. Average: $42.
- IGM Financial Inc. ( “outperform”) to $46 from $44. Average: $41.17.
- Intact Financial Corp. (“outperform”) to $240 from $235. Average: $226.07.
- TMX Group Ltd. ( “sector perform”) to $37 from $34. Average: $34.