Have a $225.00 target. GLTA

November 9, 2022 Earnings Update

Remains A High Conviction Name
Our Conclusion

We have made a number of model adjustments, but with a small net impact to estimated EPS. We expect the company will continue to deliver better- than-average margins in personal auto, and that growth in investment income and distribution income will contribute to >10% EPS growth in 2023 and a mid-teen ROE. We maintain our Outperformer rating premised on the growth outlook and low earnings sensitivity to a recession.

Key Points
EPS Estimates: Our 2023 EPS estimate is little changed (<1%). We have
increased our assumptions for investment income and distribution income, but that is offset by a higher assumed combined ratio (CR) for personal auto and modestly lower premium growth for Canada commercial and UK&I.

Personal auto remains resilient. During the earnings call, there was a lot of focus on the achievability of management’s goal of sub-95% CR.
Management is confident in achieving its goal based on pricing adequacy, conservative reserving and claims management. The benefit of premium rate increases should flow into results more meaningfully starting next quarter. We forecast a CR of 93% in 2023 and 94% in 2024.

Solid UK & International results. It was another good quarter for the UK&I
segment with a combined ratio of 93.5%. There were no abnormal
investment losses related to the UK balance sheet and the GBP has
appreciated since end of September. We forecast a 2023 combined ratio of 93%, which gives benefit for profit improvement strategies. Our view is that Intact will keep the majority of this business vs. selling.

Investment and distribution income are growth drivers. Management
increased its 2022 guidance on investment income to $885MM ($865MM
prior) and distribution income to $435MM ($425MM prior). We have updated our assumptions and forecast near 10% growth in 2023 for both line items.

Premium growth falls short. Premium growth was only 2% this quarter and 4% excluding exited business lines. That was below both our expectation and consensus. We have revised our forecasts lower to more accurately capture exited business. Our revised assumptions imply premium growth of 4% for both 2023 and 2024.

Mid-teens ROE should be achievable. We are confident in a mid-teen ROE outlook based on: i) firm to hard market conditions across most lines of business; ii) expanding investment yields; iii) additional synergies to be realized from the RSA acquisition; and iv) growing distribution income. We forecast a 16% ROE in 2023 and 15% in 2024.

Valuation at a premium relative to historical average. Intact is trading at
2.4x P/BV, slightly above its five-year trailing average of 2.3x.