TSX Commentary

Intact Financial (IFC) – $38.24 – Expected ROE improvement should lead to higher P/B multiple
Outperform, Above Average Risk, Price Target: $54.00
Intact will release its Q4 results on February 17. RBC CM expects the company to announce a 9% increase in its quarterly dividend. The results should also highlight Intact’s strong capital position: the company ended Q3/09 with excess capital of $635 million and further debt capacity of $470 million. The company is also likely to establish and conduct share buybacks under a normal course issuer bid in 2010. IFC is well-positioned to benefit from expected improvement in industry profitability. The combination of 1) an erosion in industry capital, 2) lower investment yields and 3) the continued deterioration in underwriting margins should lead to a recovery in P&C insurance pricing over the next 6-12 months, followed by an upturn in underwriting profitability in 12-18 months. Despite recently proposed auto reforms in Ontario, the recent trend of rate increases is expected to continue, as overall industry pricing remains inadequate. The company intends to overcome its recent difficulties in personal property insurance (primarily due to water-related claims) through a combination of improved pricing/segmentation and claims initiatives (targeting a combined 15-point improvement). The payoff will likely flow through to earnings over the next 18 months. Commercial insurance has been the most competitive when it comes to pricing, but there are signs that suggest the market pricing could harden in the near term. The Outperform rating on IFC reflects RBC CM’s view that over the next year pricing conditions will improve, followed by an improvement in underwriting profitability in 12-18 months. As the cycle turns, earnings visibility and attributed P/B multiples should improve. RBC CM expects IFC’s P/B multiple to increase to 2.0x over that period, above today’s 1.5x multiple but below the peak of 2.8x in April 2006.