National Bank Ahead of first-quarter earnings season for Canadian diversified financial companies, National Bank Financial analyst Jaeme Gloyn reaffirmed his “favourable” outlook for the Property and Casualty insurance sector, citing “persistent hard market conditions across most business lines and higher interest rates driving sustainably higher investment income.”
“While increasing vehicle theft, elevated catastrophe activity and inflationary pressures could potentially weigh on profitability, these risks support continued rate increases in the near-term and profitability long-term,” he added. “Moreover, we expect personal lines insurers Intact and Definity to show improved profitability as earned rates exceed inflation and both firms benefit from benign weather conditions,” he said. “Reflecting this favorable view, we expect IFC and DFY will deliver above consensus results in Q1-24 (approximately 6 per cent above).”
Accordingly, he raised his target prices for both companies’ shares in a report released late Monday. His changes are:
- Definity Financial Corp. ( “outperform”) to $60 (Street-high) from $59. The average on the Street is $47.45.
- Intact Financial Corp. ( “outperform”) to $247 from $245. Average: $237.
Mr. Gloyn also noted his top pick for 2024, Fairfax Financial Holdings Ltd. , has “performed well” year-to-date, rising 21 per cent versus a 2-per-cent gain for the TSX financials index and a 14-per-cent gain for its insurance peers.
“We expect continued outperformance through 2024 driven by three catalysts ... i) significantly increased operating income, ii) valuation re-rate, and iii) potential S&P/TSX 60 Index inclusion,” he said. “While we expect softer than consensus results in Q1-24, largely due to unrealized losses on fixed income assets, robust underwriting performance and outlook commentary will support our longer-term view.”
Mr. Gloyn increased his target for Fairfax shares to a Street-high of $2,100 from $2,000, keeping an “outperform” rating. The average is $1,844.76.
The analyst also raised his Trisura Group Ltd. “up the pecking order” while maintaining a $65 target and “outperform” recommendation. The average is $54.88.
“We believe the story is significantly de-risked, setting up 2024 as solid recovery year,” he said. “Trading at approximately 16 times 2024 consensus EPS, we see TSU closing the valuation gap to specialty insurance peers that trade at an average 21 times. Therefore, we move TSU up to a clear #2 in our pecking order, behind only Fairfax. Notably, AM Best revised Trisura’s ‘Outlook’ to stable (from negative) and costs associated with the run-off program will move firmly in the rear-view mirror with Q1-24 results. This de-risking shifts focus to operating performance, where we forecast high-teens operating EPS, adjusted ROE, and low-twenty’s book value per share growth in 2024. Looking ahead, the recent acquisition of First Founders, and importantly, their treasury listing, provides a good set-up for double-digit growth in Surety as TSU penetrates the U.S. market. In addition, we expect TSU to continue to capitalize on its unique positioning to generate sustained more than 20-per-cent growth in Canadian fronting. While the 10-per-cent rise in share price since TSU reported Q4-23 results could limit upside in the quarter, valuation remains attractive in our view and we expect solid execution.”
Mr. Gloyn’s other target adjustments are:
Goeasy Ltd. (GSY-T, “outperform”) to $210 from $195. Average: $208.33.
- TMX Group Ltd. (“sector perform”) to $40 from $37. Average: $38.