Heading into fourth-quarter earnings season for Canadian property and casualty insurance providers, National Bank Financial analyst Jaeme Gloyn thinks the outlook for the sector “remains robust,” seeing it “well positioned for the near term given hard market conditions and higher interest rates that support improved investment income.”
“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,” he said. “In addition, we see continued strong momentum in U.S. specialty lines markets.”
In a research report released Tuesday titled Business as usual, Mr. Gloyn reiterated his view that “there’s something for everyone” from an investing perspective.
“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,” said Mr. Gloyn. “Although our best performing insurance stock 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.”
Pointing to the “strong performance” from insurance peers that have reported quarterly results thus far, Mr. Gloyn raised his targets for the four companies in his coverage universe. They are:
- Definity Financial Corp. (“outperform”) to $47 from $45. The average on the Street is $42.68.
- Fairfax Financial Holdings Ltd. (“outperform”) to $1,200 from $1,100. Average: $1,052.62.
- Intact Financial Corp. ( “outperform”) to $240 from $238. Average: $223.23.
- Trisura Group Ltd. ( “outperform”) to $69 from $68. Average: $57.93.
“While P&C insurance stocks posted some of the strongest 2022 returns in our coverage, most have lagged the S&P/TSX Financials Index year-to-date (up 8 per cent),” he said. “FFH leads the group at up 8 per cent followed by IFC (up 0.1 per cent), TSU (down 7 per cent) and DFY (down 10 per cent). In our view, fund flows (or ‘risk-on’) is driving some weakness as 2022′s laggards are winning so far this year. We expect another solid quarter of results in Q4-22 to reverse the year-to-date performance, in particular our Top Pick TSU as the company forms a solid track record of massive beats ... As for DFY, we believe consensus is overly punishing the shares for personal auto exposure (given our view risks are manageable) and missing the upside from early CBCA conversion and potential M&A. In fact, our Q4-22 EPS forecast for DFY is 12 per cent above the street (other Q4-22 NBF forecasts are more ‘in line’).”