Scotia Capital analyst Phil Hardie acknowledged he’s “a bit cautious” heading into the earnings season for Canada’s P&C insurance companies due to an unsettling market tone brought on by the spectre of a recession as well as risks from supply chain disruptions, transitory inflationary pressures, and unrest in Eastern Europe.

However, he thinks the sector “appears well-positioned for times of uncertainty and is well-aligned to the way investors are looking to position themselves within the financial sector.”

“A number of the stocks in the P&C insurance sector have generated significant outperformance this year,” said Mr. Hardie. “We believe the sector benefits from a combination of (1) defensive positioning, (2) positive industry trends, and more recently, (3) potential M&A activity coming back on the radar as a potential catalyst. Given Intact and Definity’s strong stock performance, valuation has likely become the primary investor holdback. While this may limit near-term upside, we remain constructive, given the potential for M&A as embedded optionality. Further, given heightened uncertainties and market volatility, investors appear to be willing to embrace a ‘winning by not losing’ mantra over the near term, and so we see limited near-term downside risk in the names.”

Keeping “sector outperform” recommendations for stocks in his coverage universe, he made these target changes:

* Definity Financial Corp. to $42 from $39. Average: $40.86.

“We view Definity as an evolutionary story, but what we believe truly sets it apart from its publicly traded peers are the themes related to excess capital and M&A, and what they mean for the ROE outlook and the stock’s valuation,” he said.

Fairfax Financial Holdings Ltd.  to $910 from $950. Average: $935.95.

“We see attractive opportunities for investors to buy Fairfax shares given its discounted valuation does not likely reflect the company’s underlying earnings power. We believe the stock should garner a sustainable re-rate on the back of the organic expansion of its insurance operations that likely enhance its ROE and growth rate potential of its book value, as well as potentially adding greater consistency to both metrics,” he said.

* Intact Financial Corp. to $221 from $215. Average: $215.86.

“Intact is our ‘Go-To’ Defensive Quality name, and we believe it can be attractive for large-cap investors looking for a high-quality name to reduce portfolio beta that trades at a reasonable valuation,” he said. “We remain constructive on Intact, given its defensive characteristics, solid growth outlook, and sustainable mid-teen ROEs supported by a favourable pricing environment. The RSA acquisition offers a number of strategic and financial benefits; and integration and execution will be a key investor focus over the next 24 months. We continue to see upside potential for IFC’s stock as management delivers on targeted synergies and accretion opportunities.”

* Trisura Group Ltd.  to $55 from $49. Average: $55.71.

“We view Trisura as a unique and diversified Specialty P&C insurance platform that provides a high-growth business with an attractive risk profile. TSU’s unique hybrid fronting platform should enable it to generate a more consistent and capital-efficient earnings stream than traditional insurers, resulting in a superior ROE and risk profile than that of more traditional insurers. As the business continues to transform, we believe these characteristics can support a premium valuation relative to its peers,” said Mr. Hardie.