Intact Financial Corporation - Stock Analysis

At the time of my November 11, 2020 post, Intact Financial Corporation (IFC) had just announced its intent to acquire RSA Insurance Group PLC with Tryg A/S. In that post, I disclose the purchase of additional IFC shares.

I also wrote a guest post at Value of Stocks on February 14, 2021.

After these posts, the following significant events have occurred:

  • IFC closed the purchase of RSA Insurance Group plc on June 1, 2021; and
  • Scandi JV Co 2 A/S, which is co-owned by Intact and Tryg A/S following the acquisition of RSA Insurance Group plc, has entered into a definitive agreement to sell Codan Forsikring A/S's Danish business to Alm. Brand A/S Group for a total cash consideration of ~$2.52B. IFC will receive ~$1.26B (50% of the proceeds). It intends to use these proceeds to repay short-term debt raised to acquire RSA and for general corporate purposes. The sale is subject to receipt of the relevant approvals or clearances from regulatory and antitrust authorities and is currently anticipated to close during the first half of 2022.

Following the November 9th release of Q3 and YTD2021 results and the November 10 earnings call, I briefly revisit IFC.

For the sake of full disclosure, I acquired an additional 100 shares on November 8 to increase my exposure in a 'Core' account in the FFJ Portfolio.

NOTE: All dollar values expressed below are Canadian dollars.

Intact Financial - Stock Analysis - Recent Events

RSA Acquisition

A year after IFC's announcement of its intention to acquire RSA, we see that RSA is already accretive to IFC's results.

The underwriting results for the Personal lines within the UK, Ireland, Europe and Middle East (UK & Int'l) business have been weak with a Combined ratio of 97.9%. Although the UK & Int'l Personal lines combined ratio was elevated, the combined ratio for the Personal and the Commercial lines was solid at 93.9%, after absorbing 10.3 points of catastrophic losses (refer Q3 2021 Supplementary Financial Information).

The combined ratio is a measure of profitability by which to gauge how well an insurance company is performing in its daily operations; the ratio is the division of the sum of incurred losses and expenses and by the earned premium.

  • A ratio below 100% indicates the company is making an underwriting profit.
  • A ratio above 100% means it is paying out more money in claims that it is receiving from premiums. 

Intact Financial - Stock Analysis - Financial Results

Q3 and YTD2021 Results

Please refer to IFC's financial reports and filings for an in-depth review of Q3 and YTD results.

IFC - Q3 2021 Key Highlights

Source: IFC - Q3 2021 Earnings Presentation - November 10, 2021

 

IFC - Operating Income Q3 2021 - November 2021

Source: IFC - Q3 2021 Earnings Presentation - November 10, 2021

Intact Financial - Stock Analysis - Credit Ratings

IFC has a proven and consistent capital management strategy. Its adjusted debt-to-total capital ratio is currently 23.9% as of September 30, 2021 because of the debt incurred to fund the RSA acquisition.

IFC's target capital structure is:

  • Equity-to-total capital ratio: 70% (currently ~66%)
  • Preferred shares-to-total capital ratio: 10% (currently ~10%)
  • Debt-to-total capital ratio: 20% (currently ~24%)

When the RSA acquisition was announced in November 2020, IFC stated the plan was to reduce debt-to-capital to 20% within 36 months of closing the acquisition.

as noted earlier in this post, IFC expects to receive ~$1.26B from the sale of Codan DK in the first half of 2022. These proceeds are expected to be applied toward the repayment of short-term debt raised to acquire RSA and for general corporate purposes thus improving IFC's adjusted debt-to-total capital ratio.

IFC - Capital Management Strategy - November 2021

Source: IFC - Q3 2021 Earnings Presentation - November 10, 2021

IFC's credit ratings are accessible here. While we see multiple ratings, I focus on the senior unsecured debt ratings assigned to Intact Financial Corporation because this is the publicly-traded company in which I have acquired shares.

The assigned ratings do differ slightly but all ratings are stable and are investment grade; they are either the lowest tier of the upper-medium grade or the top tier of the lower medium grade.

The ratings assigned to IFC define it as either having a STRONG or an ADEQUATE capacity to meet its financial commitments.

Despite the slight variance in ratings, all ratings are acceptable for my conservative nature.

Intact Financial - Stock Analysis - Dividends and Share Repurchases

Dividend and Dividend Yield

IFC has typically announced a dividend increase in mid-March. When Q4 and FY2020 results were released on February 9, 2021, however, management informed investors that:

'We intend to increase our dividend this year as we have in the past 15 years. However, given the current regulatory environment, we are postponing our dividend increase to a later quarter in 2021.'

When Q1 and Q2 earnings were released, IFC indicated:

'We intend to increase our dividend this year as we have in each of the past 15 years.'

The December 31st dividend is the only remaining 2021 quarterly dividend. Since management twice stated its intent to increase the dividend in 2021, I envisioned a dividend increase announcement would accompany the release of Q3 and YTD results.

The Q3 earnings announcement does include a dividend increase and IFC's dividend history is updated to reflect this. The $0.08/share increase in the quarterly dividend ($0.83/share to $0.91/share) is a ~9.6% increase.

Following the dividend increase announcement, the forward dividend yield is ~2.1% based on a ~$170 share price.

Share Repurchases

Share repurchases rank 5th in capital priorities behind:

  1. Manage leverage
  2. Increase dividends
  3. Manage volatility
  4. Invest in growth

IFC's weighted-average number of common shares outstanding in FY2011 - FY2020 (in millions) is 115, 131, 132, 132, 132, 131, 133, 139, 140, and 143. In Q1 - Q3 2021, the weighted average was 143, 153.9, and 176.1. This increase is attributed primarily to shares issued for the RSA acquisition. Details of this new financing are found in Note 14 of the Q3 financial statements (page 30 of 45).

Intact Financial - Stock Analysis - Valuation

IFC has generated YTD2021 diluted EPS of $8.46 (Q1 - Q3: $3.51, $3.59, and $1.60). If it generates $1.60 in Q4, FY2021 diluted EPS will be $10.06 giving us a forward diluted PE of ~17 when we use the current ~$170 share price.

In comparison, IFC's PE in FY2011 - FY2020 is 15.86, 14.96, 18.50, 16.64, 16.86, 23.10, 19.41, 20.97, 27.43, and 24.00.

IFC has generated $10.48 in YTD2021 adjusted diluted EPS (Q1 - Q3: $3.97, $4.47, and $2.26). The adjusted earnings exclude the after-tax impact of amortization of intangible assets recognized in business combinations, as well as acquisition and integration costs.

Using the current ~$170 share price and the current forward adjusted diluted EPS guidance from the brokers which cover IFC, the forward adjusted diluted PE levels are:

  • FY2021 - 14 brokers - mean of $10.78 and low/high of $9.45 - $11.95. The forward adjusted diluted PE is ~15.8 using the mean estimate and ~14.2 using $11.95.
  • FY2022 - 14 brokers - mean of $10.98 and low/high of $9.48 - $12.23. The forward adjusted diluted PE is ~15.5 using the mean estimate and ~13.9 using $12.23.
  • FY2023 - 9 brokers - mean of $12.28 and low/high of $10.21 - $13.03. The forward adjusted diluted PE is ~13.8 using the mean estimate and ~13 using $13.03.

Intact Financial - Stock Analysis - Final Thoughts

IFC holds a commanding market share in the fragmented Canadian property and casualty insurance space.

The strategic One Beacon and RSA acquisitions provide IFC with footholds into international markets and new niche markets; additional information is found here. These new growth markets provide IFC with opportunities to use its proven and consistent capital management track record to potentially enhance shareholder returns.

IFC has successfully integrated several acquisitions over the years and I have no reason to think otherwise regarding RSA. It has demonstrated an ability to restore a 70% equity-to-total capital ratio within a very reasonable timeframe after its debt-to-total capital level became elevated following prior acquisitions. I fully expect the proceeds from the Codan DK sale in the first half of 2022 and profits generated from normal business operations will enable IFC to restore its debt-to-capital ratio to 20% within 36 months from the June 1, 2021 closing of the RSA acquisition.

A stock's historical performance does not dictate future performance. It does, however, provide some indication about management's ability to enhance the value of a company over time. Looking at IFC's historical shareholder return, we see success in this regard.

I intend to continue to periodically add to my IFC position given my long-term outlook.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long IFC.

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.