Intact Financial Corp T.IFC

TD Notes

[retiredcf]

P&C Insurance Q1/23 Outlook

Weaker Personal Auto Until Earned Rates Catch-up with Cost Trend

Canada's P&C insurance companies are scheduled to report Q1/23 results on May 10 (Intact Financial [IFC-T]) and May 11 (Definity Financial [DFY-T]). Trisura Group [TSU-T] is expected to report around the second week of May. We forecast IFC and DFY reporting operating EPS of $2.92 (up 8% y/y; relatively in line with consensus) and $0.58 (up 5% y/y; slightly higher than consensus), respectively. The overarching themes for the quarter and 2023 include:

• IFRS17 impact is expected to be relatively modest for the P&C companies relative to the lifecos. The P&C companies will transition to IFRS17/9 in Q1/23. Upon transition, BVPS is expected to increase 3% at IFC and 5-6% at DFY according to management reflecting changes from PfAD to risk adjustment in calculating claims liabilities. We do not expect a meaningful change to earnings, other than presentation.

• Normalizing claims conditions in personal auto are expected to continue to pressure underwriting income at both companies, however, the pace of deterioration should slow. Combining the current year underlying claims ratio with development (an appropriate approach to capture the conservatism built into the current year reserving), we expect the claims ratio to be up 170bps for IFC and 200bps for DFY y/y reflecting higher severity (inflation) and frequency. As earned rates catch up with cost trends, we expect underwriting income in personal auto to improve. Based on recent comments from management, we expect IFC's personal auto results to improve sooner than DFY's.

  IFC Outlook: Over the past 12 months, IFC's performance has materially outpaced that of the Canadian banks, lifecos, and U.S. P&C companies. The P&C sector is typically perceived as more defensive in challenging macro environments, and the downturn in 2022 was no exception. Reflecting an expectation of peak inflation and a Fed-pivot, the P&C companies have performed in line or worse compared to the more risk-on sectors (banks and life companies) year-to-date in 2023. We believe, however, that as we get deeper into 2023, the market's attention will again shift to fundamentals, which we believe will support IFC over the banks.

  DFY Outlook: We expect low double-digit DWP growth y/y (above industry- average), a lower expense ratio (shift to digital channels — Sonnet), and higher leverage to drive an absolute and relative improvement in DFY's operating ROE. We believe an investment in Definity offers exposure to a stable business model with good upside potential if the company can grow through acquisitions.

April 28, 2023