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IFC held its Investor Day on November 19, 2019 at which time management provided its strategic roadmap for the next decade.
Summary
- This high quality Canadian insurance company has grown successfully through multiple acquisitions and is now one of Canada’s largest P&C insurance companies (~17% market share).
- Since growth opportunities in Canada are limited in that the top 5 P&C insurers in Canada have a 48% market share, in 2017 IFC expanded into the US specialty insurance market so as to avoid direct competition with much larger and well entrenched P&C companies.
- I currently view IFC as being richly valued and the shares I recently acquired were for the purpose of replacing those held in a Registered Education Savings Plan which I had to sell.
Introduction
Other than continuing to automatically reinvest dividends received from current holdings, I have significantly pulled back on the acquisition of new shares. The reason for this is that I view the companies of interest to me as being richly valued.
On the rare occasion where I have acquired new shares for accounts within the FFJ Portfolio and for accounts in which I do not disclose details, I have written articles disclosing my purchases. In addition, I provide a monthly update on the holdings within the FFJ Portfolio.
The purpose of this article is to disclose the recent sale AND purchase of Intact Financial Corporation (IFC) shares.
In my previous May 7, 2017 article I disclosed that I had initiated a position in IFC when it was formerly an ING Group subsidiary. My subsequent IFC article was written August 17, 2018.
I acquired shares in early 2009 through a Registered Education Savings Plan (RESP) for our daughter with the intent of owning these shares for the very long-term. At the time I initiated a position I knew that one day I would need to liquidate this holding since the conditions of the RESP are that funds be used to cover educational expenses.
For the past few years I have been in a position where I MUST withdraw funds from the RESP; this site contains information related to education assistance payments (EAPs) and registered educations savings plan (RESP) contributions.
This year we were required to withdraw the annual education assistance payment of $24,432. Since these proceeds must be used to cover education related expenses AND I do not want to reduce my IFC exposure, I have deployed funds currently sitting in cash to purchase IFC shares in an undisclosed account. Fortunately, IFC’s share price pulled back slightly subsequent to my recent sale of IFC shares so I have been able to acquire a slightly greater number of IFC shares without having to lay out additional funds.
Business Overview
IFC’s 2018 Annual Report contains a wealth of information should you be interested in learning more about the company.
Subsequent to the release of the 2018 Annual Report, IFC announced the acquisitions of On Side Restoration (see here and completed October 1, 2019) AND The Guarantee Company of North America and Frank Cowan Company (see here and completed December 9, 2019).
Over the past decade, IFC completed 8 significant ‘manufacturing’ acquisitions and more than 100 distribution acquisitions and deployed $9.5B of capital. It nearly tripled the annual premiums generated and market share has grown fivefold to nearly $20B.
IFC’s business mix is more balanced than 10 years ago with the addition of specialty lines. In addition, IFC is building a leading presence in the North American specialty market.
Market share in Canada went from 11% to 17% between 2009 and 2019 and management has indicated there is still plenty of market share to be gained.
On November 19, 2019, IFC held its Investor Day. Included in senior management’s presentation to the investment community is a review of the past decade and plans for next decade.
Financial Results
IFC’s Q3 2019 results and results for all previous quarters for the past several years can be accessed here.
IFC’s Q4 and FY2019 results are scheduled to be released February 5th, and therefore, there is little value in analyzing YTD results as at the end of Q3.
Credit Ratings
IFC’s current credit ratings can be found here.
Moody’s has assigned an A1 rating which is the top tier of the upper medium grade within the investment grade category. Fitch rates IFC AA- which is one notch higher than the Moody’s rating; it is the lowest tier within the high-grade category. These ratings certainly appeal to a conservative investor such as me.
On October 9th, Moody’s announced its completion of a periodic review of IFC’s ratings. In its decision to leave IFC’s ratings as is, Moody’s indicated the following key rating considerations:
‘Intact Financial Corporation's Baa1 senior debt rating and the A1 insurance financial strength ratings of its property & casualty subsidiaries reflect the insurer's formidable market position as Canada's largest property and casualty insurer, good underwriting profitability with consistently favorable prior year reserve development as well as solid and predictable levels of internal capital generation. The rating also considers Intact's ownership of the OneBeacon Insurance Group and OneBeacon's focused strategy targeting customized P&C insurance to niche markets in the US. These strengths are partially offset relatively high financial leverage, an active acquisition strategy, high gross exposure to large catastrophe events, regulatory risks from Ontario motor insurance and a reliance on third-party broker distribution.’
Dividend and Dividend Yield
IFC’s dividend history can be found here.
On December 31st, IFC distributed its 4th consecutive $0.76 quarterly dividend. With shares having closed at $142.34 on January 23rd, the trailing dividend yield is ~2.14%.
If recent dividend history is any indication, I think we can realistically expect IFC to announce a $0.06/quarter/share dividend increase for shareholders of record mid-March (likely March 16th).
Should IFC’s share price remain at the $142.34 level and the quarterly dividend be increased to $0.82, shareholders would receive a dividend yield of ~2.30%.
IFC has historically had no trouble in generating sufficient free cash flow from operations to service its dividend obligations.
At IFC’s 2019 Investor Day, IFC’s Deputy Senior Vice President, Investor Relations & Group Treasurer stated:
‘Turning to dividends, continuing to increase our dividend annually is a core pillar of our framework. We’ve done so for 14 consecutive years since we IPO’d and we will continue to focus on sustainable dividend increases annually. This should closely align over time with the net operating income per share (NOIPS) growth trajectory.’
Valuation
As previously indicated, IFC will be releasing FY2019 results and FY2020 guidance on February 5th. Based on the information currently available, however, the current mean FY2019 adjusted EPS estimate from 13 analysts is $5.88 and the current mean FY2020 adjusted EPS estimate from 14 analysts is $8.07.
These estimates take into consideration adjusted EPS for the first 3 quarters of FY2019 which amounted to $3.97; IFC generated $3.82 for the same timeframe in FY2018.
Using the current $142.34 share price and the $5.88 mean adjusted EPS guidance we get a forward adjusted PE of ~24.21.
As at the end of Q3 2019, IFC had generated EPS of $3.45 versus $3.12 in the same timeframe in FY2018. In the Q3 Earnings Release it was stated that $1.58 was Q3’s average EPS estimate from the analysts which follow IFC. If IFC were to generate $1.58 in EPS in Q4 then FY2019 EPS would come in at $5.03 ($3.45 + $1.58). Using the current $142.34 share price we get a lofty PE of ~28.3.
Final Thoughts
I continue to view IFC as a high quality insurance company with attractive long-term prospects. Having said this, I am of the opinion IFC is currently richly valued.
I did, however, recently purchase IFC shares. This purchase was made solely for the purpose of replacing the shares I HAD to sell which were held in a RESP; the ‘replacement’ shares I purchased were at a lower price than those I recently sold so I was able to slightly increase my exposure without having to ‘fork out’ new money.
I will continue to monitor IFC in the hope that shares become more attractively valued as this is a company in which I am prepared to increase my exposure.
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long IFC.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
