October 25, 2022 Earnings Update

Q3 Preview: Expecting Solid Results Despite Hurricane Losses
Our Conclusion

Intact remains one of the best performing stocks in our coverage universe this year (+23%). While the valuation multiple now appropriately reflects macro economic conditions and strong fundamental results, we think the stock can continue to outperform on a relative basis. We will be looking for firm results in Personal Auto, solid results in UK&I and continued BV growth to support our thesis. No change to our $225 price target and Outperformer rating.

Key Points
Q3 model adjustments. We have updated our estimates mostly for higher
catastrophe losses (cat) and a weaker GBP. Our cat loss assumption is
revised from $160MM to $205MM in light of Hurricanes Fiona and Ian. Our operating EPS estimate is reduced from $3.02 to $2.84. We have also updated our estimates to included $172MM of losses on AFS bonds versus $912MM last quarter. Our revised BVPS estimate of $81.66, implies Q/Q growth of only 1%. We have revised down our 2023E operating EPS as we have fine-tuned combined ratio assumptions across several business segments. We still forecast a ~15% operating ROE in 2023. 
Personal auto results will remain a key focus. We continue to get lots of questions related to potential downside from cost pressures. Management is confident in its ability to manage cost pressures, including premium rate increases. Conservatism in reserving for prior claims should provide a buffer. We model a personal auto combined ratio of 91.3%, up from 85.1% in Q3/21, mostly on a normalization in accident frequency. An update on realized and expected personal auto rate increases will also be important.

UK & International trending to target. Results from the UK&I segment
have exceeded consensus expectations for the most part. Consistent profit improvement with a combined ratio around the mid-90s with a path to the low 90s will strengthen the argument to keep the UK&I business versus selling. We assume a combined ratio of 96.2% up from 93.9% a year ago, mostly on lower reserve releases.

Avoiding major market-related losses. IFC’s valuation premium tends to
expand in periods of high market volatility due to lower balance sheet risk. We do expect modest mark-to-market losses on fixed income investments this quarter and U.K. securities holdings adds some incremental risk. We will need to see book value growth for the stock to continue to push higher.

Valuation at a modest premium. Intact is trading at 2.5x P/BV versus a
five-year trailing average of 2.3x. The current forward P/E ratio of 15.6x is
also above the five-year trailing average of 15.0x.

Intact is scheduled to report on November 8 after market close with a
conference call the following day at 11 a.m. ET (1 888 664-6392).