On today’s Breakouts report, there are 22 stocks on the positive breakouts list (stocks with positive price momentum), and just three stocks are on the negative breakouts list (stocks with negative price momentum).
Last week, we discussed insurer Definity Financial Corp. in the Breakouts report. Year-to-date, Definity Financial is the top performing stock in the S&P/TSX Financials (sector) index with a price return of 33 per cent.
Discussed today is another top performing stock operating in the insurance industry – Intact Financial Corp. Year-to-date, its share price has rallied 22 per cent with the stock closing at a record high of $201.21 on Sept. 9.
A brief outline on Intact Financial is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based Intact Financial is an industry leader. The company is Canada’s largest property and casualty (P&C) insurance provider. The company has four core business segments: personal auto (e.g. auto insurance, which is the company’s largest business segment), personal property (e.g. home insurance), commercial lines and specialty lines.
In 2021, the operating direct premiums written (DPW) pro forma breakdown was 30 per cent from personal auto, 24 per cent from personal property, 23 per cent from commercial lines and 23 per cent from specialty lines. Operating DPW represents premiums for new and renewed policies written, normalized for the effect of multi-year policies.
In terms of geographic breakdown, in 2021 operating DPW (pro forma) was 66 per cent from Canada, 24 per cent from the U.K. and International and 10 per cent stemmed from the U.S.
A key measure to monitor is the combined ratio, which is simply a measure of profitability (the lower the ratio, the higher the profitability). The combined ratio is calculated by adding the claims ratio (claims divided by net earned premiums) and the expense ratio (underwriting expenses divided by net earned premiums) together.
According to Bloomberg, the Caisse de dpt et placement du Qubec, a longer-term shareholder, owns 6 per cent of the shares outstanding.
Quarterly earnings results
After the market closed on July 28, the company reported better-than-expected second-quarter financial results.
Net operating income per share (NOIPS) came in at $3.14, down 4 per cent year-over-year, but surpassing the consensus estimate of $2.71. The operating combined ratio was 90.7 per cent. Operating DPW growth was 36 per cent driven by the RSA acquisition (completed in 2021) combined with 4 per cent organic, or internal, growth. The balance sheet remains strong with a debt-to-total capital ratio of 20 per cent. At quarter-end, book value per share stood at $80.86, up 4 per cent year-over-year. Operating return on equity (ROE) for the trailing 12-months stood at 15.4 per cent.
On the earnings call, chief financial officer Louis Marcotte said, “In summary, with a strong capital position on target leverage and prudent reserves, we have the balance sheet to tackle an uncertain future with potential challenges and opportunities. We have delivered solid performance so far this year and continue to mitigate the impact of inflation. The rate environment is favorable in all lines of business and interest rates are a potential tailwind. This bodes well for future earnings.”
The following trading day, the share price rallied 4 per cent on high volume with over 1.1-million shares traded. To put this in perspective, the three-month historical daily average trading volume is approximately 580,000 shares.
Investment thesis highlights
- Industry leadership: Canada’s leading P&C insurer with an estimated 21 per cent market share.
- Reliable and growing dividend with 17 consecutive annual dividend increases since 2005.
- Strong balance sheet.
- Solid financial results (strengthening combined ratio, DPW growth). Management targets net operating income per share (NOIPS) growth of 10 per cent annually over time.
- Acquisition growth. Completed 18 acquisitions since 1988. Upside from potential future acquisitions in a fragmented market.
- Management anticipates realizing at least $250-million of pre-tax annual run-rate synergies in 2024 from its 2021 acquisition of RSA Insurance Group PLC ($175-million of run-rate synergies have been realized as of June 30, 2022).
- Favourable “hard” market conditions. A hard market in the insurance industry is characterized by reduced competition, stricter underwriting standards and rising premium rates. Consequently, profitability generally rises during ‘hard’ markets.
- Recession resistant (not recession proof) business.
- Fair valuation.
Dividend policy
Management is committed to returning capital to its shareholders. Since its initial public offering, the company has announced a dividend increase every calendar year. Since 2005, the dividend has increased at a compound annual growth rate of 11 per cent.
The company pays its shareholders a quarterly dividend of $1 per share or $4 per share yearly, equating to a current annualized yield of 2 per cent.
Analysts’ recommendations
This stock is covered by 13 analysts, of which 12 analysts have buy recommendations and one analyst (Nigel D’Souza from Veritas Investment Research) has a “sell” recommendation.
The firms providing research coverage on the company are: ARC Independent Research, Barclays, BMO Nesbitt Burns, CIBC World Markets, Cormark Securities, Desjardins Securities, Morgan Stanley, National Bank Financial, Raymond James, RBC Capital, Scotiabank, TD Securities and Veritas Investment Research.
Financial forecasts
According to Refinitiv, the consensus net operating earnings per share estimates are $12.02 in 2022 and $12.96 in 2023.
Consensus earnings per share forecasts have been rising. For instance, three months ago, the Street was forecasting NOIPS of $11.71 for 2022 and $12.71 for 2023.
Valuation
The stock is commonly valued on a price-to-book value (P/BV) basis.
According to Bloomberg, the stock is trading at a P/BV multiple of 2.2 times the 2023 consensus estimate, slightly above its five-year historical average of 2 times but below its peak multiple of approximately 2.5 times during this time period.
The average one-year target price is $214.46, implying the stock price may appreciate nearly 7 per cent over the next 12 months. Individual target prices are as follows in numerical order: $174 (from Nigel D’Souza at Veritas Investment Research), $200, two at $210, two at $215, $219, two at $220, $221, $225, $229 and $230 (from National Bank’s Jaeme Gloyn).