Our View: Q2/22 operating EPS was well ahead of our forecast and consensus, with the positive variance to our forecast largely driven by distribution/other (On Side Restoration) income, although underwriting income was slightly ahead of forecast. Intact is one of our best ideas as the Company continues to deliver strong fundamentals and industry conditions remain favorable. We also believe there are potential catalysts, the shares are the most defensive in our coverage universe and shares are attractively valued (2.25x P/BV). Increasing target to $219 (was $216) and maintaining our Outperform rating.
Key points:
Q2/22 operating EPS of $3.14 was well ahead of our $2.66 forecast and consensus of $2.71 (consensus range of $2.25 to $3.00). Q2/22 direct premiums written (DPW) of $5.8B were marginally below our $5.9B forecast $6.0B consensus.
Q2/22 combined ratio was 90.7%, better than our 91.4% forecast and consensus of 92.6% (range of 91.1% to 94.8%). On a segmented basis, combined ratios were: (1) Personal Auto (Canada) at 89.8%, better vs. our forecast of 91.5% and consensus of 91.4%; (2) Personal Property (Canada) at 97.5%, worse than our forecast of 91.1% and consensus of 92.8%; (3) Commercial Lines (Canada) at 86.0%, better than our forecast of 90.3% and consensus of 91.8%; (4) U.S. Commercial P&C at 91.2%, slightly worse than our forecast of 89.2% and consensus of 90.8%; (5) UK&I Personal P&C at 88.2%, much better than our forecast of 97.5%; and (6) UK&I Commercial P&C at 93.5%, worse than our forecast of 89.7%.
Other key takeaways: (1) IFC reached $175MM run-rate synergies from the RSA deal (vs. $250MM guidance to be reached in 2024) with operating EPS accretion so far of +15%, ahead of IFC’s high single-digit target guidance; (2) IFC increased 2022 distribution income guidance to $425MM from $400MM+; and (3) IFC gave some preliminary comments regarding the adoption of IFRS 17 in 2023. P&C insurers should be far less impacted by IFRS 17 vs. life insurers, primarily due to the shorter-term of the insurance contracts. Specifically, IFC said the preliminary impact to BVPS is expected to be low single digit. It should bring more noise to EPS as certain equity investments would be marked-to-market through net income (not Other Comprehensive Income), but that operating EPS, BVPS and regulatory capital are not expected to be materially impacted.
Increasing our 12-month target to $219/share (was $216), but maintaining our Outperform rating. The higher target largely reflects higher-than-forecast Q2/22 BVPS. Conference call today at 10am EST; dial- in: 1-888-664-6392 or (416) 764-8659.