Intact Financial Corporation

Intact Financial Corporation (TSX: IFC) is a leading property and casualty insurance company that provides its services in Canada and the US. The group operates under the brand name of Intact Insurance through a network of brokers and its subsidiary, namely BrokerLink.

The Board of Directors announced a quarterly dividend of CAD 0.83 per common share, payable on June 30, 2020.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, IFC impresses with its quarterly numbers. The group posted total revenues of CAD 3,029 million, reflecting a significant increase from CAD 2,655 million in the previous corresponding period. The increase was driven by 14% growth in premiums supported by strong organic growth and positive impact from the acquisition. Income before income taxes stood marginally higher at CAD 146 million, against CAD 137 million in pcp. The improvement was due to lower net claims incurred, while higher underwriting expenses remained a drag. Net income attributable to shareholders declined as Q1FY19 includes an income tax benefit of CAD 22 million. Cash and cash equivalent stood at CAD 1,207 million, while total assets stood at CAD 32,229 million at the end of Q1FY20.

Q1FY20 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology (Illustrative):  Price/Book based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: The stock has given a positive return of ~14% during the last one year, amidst the broader market correction on account of COVID 19 pandemic. The Company is a leading property and casualty insurance company operating in North America and has an enormous market presence. During Q1FY20, the Group reported a decent growth across the segments (auto, property and commercial lines), which is impressive amid the backdrop of current downturn. The Company maintained a strong capital position by taking multiple actions such as reducing its common equity portfolio, issuing medium-term notes, drawing on its credit facility and injecting funds into its insurance subsidiaries.  The stock of IFC corrected ~12% in the last three months, lower than the broader market. The stock is trading above 50 days simple moving average (SMA) of CAD 130.64, indicating a bullish trend. At the current price, the stock offers a healthy dividend yield of 2.5%, which looks impressive considering the current interest rate scenario. We have valued the stock using Price/Book based relative valuation approach. We have considered industry (Financial) average of 2.8x on NTM basis and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the current price of CAD 133.53 as on May 15, 2020.

IFC One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Fairfax Financial Holdings Limited 

Fairfax Financial Holdings Limited (TSX: FFH) is engaged in property and casualty (P&C) insurance and reinsurance along with the associated investment management. The Company operates through several subsidiaries located across America, Europe and Asia.

Q1FY20 Financial Highlights: For the quarter ended March 31, 2020, FFH reported Gross premiums written at US$ 4,775.7 million, against US$ 4,726.6 million in Q1FY19, owing to price increases across the board, strong retention of renewal business and growth in new business. Net premiums written stood at US$ 3,846.4 million, as compared to US$ 3,941.5 million in the previous corresponding quarter. Total Income stood considerably lower at US$ 3,159.1 million, against US$ 5,632.6 million in Q1FY19, due to net loss of investment amounting US$ 1,539.5 million versus a net gain on investment of US$ 723.4 million in pcp. The Company reported a net loss of US$ 1,389 million, as compared to a net profit of US$ 814.6 million in the previous corresponding quarter. The company recorded a lower claim at US$ 2,178 million against US$ 2,399 million in Q1FY19. As of March 31, 2020, the Company reported cash and cash equivalent of US$ 2,483.3 million and total assets of US$ 69,196.4 million.

Q1FY20 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology (Illustrative):  Price/Book based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: We expect the ongoing pandemic would take a toll on the Company’s insurance and reinsurance operations in certain segments where premiums are directly linked with the economic activities. However, re-opening of the economies across the globe would drive the insurance premium and as well as cash flows of the Group. FFH has a tremendous global presence and has a strong business model with ample financial flexibility. To ensure smooth operations, the Company enhanced its liquidity by withdrawing US$ 1,770 million through a credit facility as a precaution. The stock is quoting close to the lower band of its 52-weeks trading range of CAD 662.29 and CAD 319.37. The stock of FFH corrected ~43% in the last six months and currently trading at significantly lower valuations. We believe, the recent price correction offers a good entry point for investors as the long-term view of the business remains strong, and we a recovery in demand as the situation stabilizes. We have valued the stock using Price/Book based relative valuation approach. We have considered Sun Life Financial Inc (TSX: SLF), Great-West Lifeco Inc (TSX: GWO) and Power Corporation of Canada (TSX: POW) etc., as peer group and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 347.04as on May 15, 2020.

FFH One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

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