Heading into third-quarter earnings season for Canadian property and casualty insurance companies, National Bank Financial analyst Jaeme Gloyn expects “continued outperformance” from the sector, seeing its outlook remaining “robust.”
“As outlined in our 2022 P&C Outlook in February 2022 and reiterated in April 2022 and July 2022, we believe the sector remains well positioned for the near term given hard market conditions and rising interest rates that support improved investment income (in particular for FFH),” he said. “We maintain our view that pricing trends will continue to outpace loss cost trends overall, even for Personal Auto lines, as driving behaviour has yet to complete its path to normalization and auto repair/parts price increases still lag U.S. trends. In addition, we see continued strong momentum in U.S. specialty lines markets.”
In a research report released Wednesday, Mr. Gloyn reiterated his view that “there’s something for everyone” in the sector.
“Small to Mid-Cap Growth? Look to TSU and DFY. Large-Cap Value/GARP? Look to FFH and IFC,” he said.
“TSU remains at the top of our pecking order given a rapid growth outlook but is also an attractive value play with upside to specialty insurance peer valuations. Although one of the best performing Financials stocks year-to-date, FFH remains the best value idea in our coverage. FFH also offers investors rapid top-line growth and leverage to a higher interest rate environment. As it relates to IFC and DFY, we continue to believe share price acceleration is contingent on proof of execution. We see no reason to adjust our view that both companies will continue to deliver.”
He raised his target prices for three of his four stocks in the sector. In order of preference, his changes are:
1. Trisura Group Ltd. ( “outperform”) to $65 from $62. The average on the Street is $55.71.
“From our perspective, TSU currently trades at a cheap 23 times consensus 2022 EPS and 19 times consensus 2023 EPS,” he said. “This represents a significant discount to U.S. specialty insurance peers trading at an average P/E of 35 times on 2022 EPS (30 times on 2023), and only a slight premium to DFY trading at 21 times (18 times on 2023) and IFC trading at 17 times (16 times on 2023), even though consensus forecasts TSU will deliver more rapid earnings growth and stronger profitability. Our target valuation premium reflects i) our view TSU will execute on our robust revenue/earnings growth forecasts, ii) premium valuations in the insurance peer group, and iii) premium valuations ascribed to specialty lines-focused companies delivering consistent double-digit ROE/EPS growth.”
2. Fairfax Financial Holdings Ltd. ( “outperform”) remains $1,100. Average: $919.29.
“Although one of the best performing Financials stocks year-to-date, FFH remains the best value idea in our coverage,” he said. “Still trading below book value at 0.84 [times, the market is pricing FFH at an ROE of 6 per cent. We believe FFH can deliver sustainable long-run ROE of at least 10 per cent through a combination of consistently strong underwriting growth/profits and improving total investment return performance, in particular as interest rates move higher.”
3. Intact Financial Corp. ( “outperform”) to $238 from $230. Average: $217.50.
“IFC continues to merit a premium valuation as we expect the company will i) successfully integrate and operate RSA’s Canada and UK&I operations (delivering on synergy upside), and ii) produce roughly mid-teens OROE through 2023 and beyond,” he said. “While risk to Personal Auto profitability has risen given inflationary forces seen in the United States, we believe rate increases will continue to outpace loss cost trends. Persistent hard market conditions also increase the likelihood IFC will deliver earnings outperformance in the near term.”
4. Definity Financial Corp. ( “outperform”) to $45 from $39. Average: $41.68.
“While DFY appears overvalued based on simple P/B to ROE regression, we believe further valuation upside will materialize as DFY proves out execution to drive ROE to 13 per cent or more,” he said. “That said, execution risks on this path, a higher exposure to personal auto (42 per cent of premiums), and valuation that is approaching full value keep DFY at the bottom of our pecking order.”