September 22, 2022
Intact Financial Corporation
I'm gonna Keep on Outperforming You...cause it's the only thing I want to do: Investor Day takeaways
Our view: While IFC’s investor day addressed all areas of the business effectively, we think the event did a good job regarding things like providing more details on key areas of interest (e.g., growth and improvement plans in RSA’s UK&I business); sizing up growth opportunities and strategies (e.g., Global Specialty Lines); and incremental data points for things that should help future profitability (e.g., progress in Digital). The event helped demonstrate our view of IFC as a best-in-class P&C insurer and how its track record and strategy can help it sustain its track record of significant ROE outperformance vs. the industry. We view IFC as a core holding and is our #2 best idea within our coverage, reflecting positive company and industry fundamentals; potential catalyst(s); strong defensive attributes; and a reasonable valuation. Maintaining Outperform, $219 target.
Key points:
Investor Day key takeaways (see pages 2 to 12 for key slides and additional thoughts):
• Guidance targets:
12-month guidance: (1) CR in UK&I of high 90s for Personal and low 90s for Commercial; (2) CRs in Canada of <95% in each of Auto and Property and low 90s for Commercial; and (3) CR of low 90s for Global Specialty Lines.
Medium to long-term targets: (1) CR in UK&I of low 90s in 2025; (2) in Canada, DPW of $20B and 5pts of CR outperformance in 2027; and (3) in Global Specialty Lines, $10B in DPW and <90% CR in 2030.
Distribution: (1) BrokerLink DPW $5B in 2025 (from $3B today) and 2022 distribution income of ~$165MM; and (2) belairdirect 15% expense ratio aspiration vs. ~20% today.
Canada: (1) $20B of DPW by 2027 vs. $14B 2022 guidance.
UK&I: (1) Targeting low 90s CR vs. 94% in 2021 (rolling 3-year avg.), reflecting CRs of ~95% in U.K. Personal Lines, ~90% in U.K. Commercial Lines, ~90% in Ireland and <90% in UK&I Specialty Lines; and (2) targeting £3B+ of DPW vs. £2.8B in 2021.
Global Specialty Lines: (1) ~$10B DPW (vs. $5.2B LTM) and sustainable <90% CR for 2030.
• RSA synergy target increased to $350MM+ (was $250MM+), driven by the inclusion of loss ratio benefits (this was not included in the initial $250MM+ target), higher investment income, integration benefits and tax benefits. Consequently, IFC expects EPS accretion to be ~20% (was upper teens) and IRR of >20% (was >15%). We think most investors viewed $250MM+ in synergies as conservative, but we think $350MM+ is a positive development.
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RSA UK&I segment updates (see Exhibits 8 to 15 for more details): (1) profit improvements driven by exited lines (niche motor/home partnerships, delegated portfolios, Middle East) that had an aggregate 111% combined ratio (CR), targeted growth (e.g., more direct new business, more Home/Pet and less Motor) and improved underwriting (pricing, claims, efficiencies); and (2) IFC said that its strategy in Personal is not assured and it’s possible they may need to pivot.
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RSA Canada integration update: (1) $120MM in synergies so far; (2) 90% customer retention; (3) 97% of claims internalized; (4) >95% of policies converted; (5) in Q2/23, IFC will start converting specialty lines policies; and (6) the integration is expected to be done in 2025.
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Specialty Lines long-term targets provided: (1) IFC is targeting ~$10B DPW (vs. $5.2B LTM) for 2030, driven by organic geographic growth from the RSA acquisition, expanding distribution, acquisitions, new hires and product expansion; (2) IFC is targeting a sustainable <90% CR for 2030, driven by improved underwriting, technology investments, acquisitions, exiting/remediating underperforming lines and product expansion; (2) IFC estimates the market opportunity is $375B+ with the industry fragmented as the largest players have <5% market share.
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Capital: (1) 5-20% of IFC’s capital margin (capital above IFC’s target regulatory capital level) could be used to fund an acquisition; and (2) IFC targets a $2.0-$2.5B capital margin level.
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Further progress on digital/customer experience initiatives, which we think should improve DPW growth and profitability: (1) across all of IFC’s brands in Canada, 50% of clients use Client Centre and 33% use IFC’s app; (2) IFC’s Rely Network handles 70% of Auto claims and 50% of Property claims, while OnSide Restoration handles 40% of Property claims; (3) Digital represents $850MM of DPW; and (4) >3MM transactions are done online annually.
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UBI/Telematics is helping improve the loss ratio: (1) helps with risk selection as there is a 65pt gap in the loss ratio between the best and worst 1/3 of UBI drivers; and (2) ~300,000 UBI drivers currently and 50% take-up rate in new business via the direct channel.