Intact Financial Corp T.IFC

TD

[retiredcf]

Intact Financial Corp.

(IFC-T) C$169.57

Q2/21: Underlying Results Mostly in Line; PYD Unusually High Event

IFC reported Q2/21 operating EPS of $3.26 (up 39% y/y) vs. our estimate of $2.49 (consensus: $2.39), reflecting strong underlying claims performance, higher distribution results, and unusually high PYD. At 4.9% of opening reserves, PYD was above the top end of guidance (1-3%). We expect management to offer commentary on the unusually high level of PYD on the call. Relative to our estimate, PYD contributed $0.46/share.

Impact: POSITIVE

• DWP and NEP were up ~28% y/y, reflecting 5-6% growth in the existing business and the RSA contribution. Personal auto DWP was up 1% y/y, reflecting no growth in written insured risk (volume) and a modest increase in DWP/written risk (pricing). Our estimates (excluding RSA) reflect no growth in personal auto DWP in 2021; and 5% and 8%, respectively, in personal property and commercial. Hard market conditions continue to support solid top-line growth in personal property and commercial lines. In the U.S., we forecast 9%+ constant currency DWP growth in 2021.

• The underlying claims ratio (excluding CATs and PYD) was 53.8%, better than our estimate of 54.8%, reflecting much stronger-than-expected results in commercial lines. Commercial lines (as well as personal property) continues to benefit from hard market conditions. The underlying claims ratios in personal auto deteriorated by almost 600bps y/y. We expect the ongoing effects of premium relief ($50mm in H2/21), combined with increasing frequency, to take quarterly underwriting income in this line down by ~$50mm. Significant PYD could help to offset the deterioration. U.S. underwriting income was strong and in line with our estimate. RSA's contribution to underwriting income ($57mm) was modestly higher than our forecast.

  TD Investment Conclusion

  We forecast operating ROE falling to 13.0-13.5% from ~17% before the RSA deal. Although a mid-teens ROE appears achievable, we believe it is appropriate to value the stock on the lower operating ROE until we have convincing evidence that through risk selection, reinsurance, and other claims initiatives, management is able to improve the underwriting performance in the acquired businesses — particularly specialty and commercial lines. Applying a target P/B of 2.2x, we arrive at our target price of $190.00. We continue to rate IFC BUY