Author’s Note: All figures in Canadian currency unless otherwise noted.
An Industry Standout
Owning most insurance stocks over the last decade has been like holding a GIC that gives you heartburn. Readers familiar with dual listed names such as Manulife Financial (MFC) And Sun Life Financial will have noted that these stocks have traded sideways since the Global Financial Crisis. Intact Financial Corp (TSX:IFC:CA) (OTCPK:IFCZF) has been an outlier in this industry, with its stock far outperforming U.S. and Canadian peers.
Intact Financial is the largest property and casualty (P&C) insurance company in Canada, with approximately 20% market share. The company is a top three provider in the UK, Ireland and Denmark through its recent acquisition of RSA. Intact has also built a sizable business in the U.S., where it now derives 10% of revenue. Intact operates across four key segments: personal auto; personal property; commercial auto; and commercial P&C. In addition to providing general insurance products, Intact also offers a suite of and risk management solutions. Having achieved significant scale, Intact has diversified into a number of specialty lines and specialty products including: marine, entertainment, cyber and management liability.
Headquartered in Toronto, Canada, Intact has its roots in a collection of 1800’s era fire insurance organizations in eastern Canada. The company’s modern form evolved out of the purchase of Allianz Canada by ING Groep N.V. (ING) in Canada in the early 2000’s. With a market capitalization of $35B, Intact is the third largest insurance company in Canada by value. Intact trades on the Toronto Stock Exchange under the symbol “IFC” with average daily volume of 335,000 shares.
As an effective compounder of capital, Intact has pursued a classic roll-up strategy to grow through acquisitions in the fractured P&C insurance industry. Since 1988, Intact has completed 18 large acquisitions; averaging one every two years.
This substantial M&A activity has allowed the company to build scale and add geographic diversification. The company’s most recent deal was the purchase of RSA for $5.1B adding a significant presence in the UK and Ireland. As a testament to the company’s focus on growth, the company has deployed more than 3X as much capital to organic and M&A growth as it has to dividend payments and share repurchases.
Another example of an opportunistic acquisition was the 2020 purchase of On Side Restoration, a leading restoration company. This business is a go to solution for restoring damaged homes and businesses in Canada after floods and fires. This tuck-in acquisition adds an element of vertical integration and allows Intact to retain the benefits of payouts on some claims. Intact’s management has continued to identify deal opportunities that create value through synergies and support earnings reliance by diversifying distribution channels and broker networks.
Intact has raised its dividend every year since its IPO 18 years ago. Over this period, the company has grown the dividend at a CAGR of over 9%. Starting with a quarterly dividend of $0.1625 in 2005, quarterly dividends per share are now $1.00. The company’s most recent increase in 2022 was an impressive 10%. Following the company’s pattern of annual increases, investors can expect an increase next quarter for the dividend payable in March. Analysts at RBC Capital Markets model a higher than average dividend increase for 2023 of 12.5% followed by 8.9% increase in 2024.
While the current dividend offers a 2% yield at current levels, the dividend growth rate more than makes up for it. The quarterly $1.00 per share paid out in 2022 represents a doubling of the dividend from 2014. If Intact keeps up its record of dividend increases at its long-term average of 9%, the dividend per share will double to $2.00 per quarter in 2029. This kind of consistently high compound growth creates investor situations with very high yield on costs.
This high dividend growth is sustainable due to Intact’s low payout ratio and high EPS growth. I always like to see a dividend growth profile where EPS growth outpaces dividend growth. For Intact, the company has delivered 10-year EPS CAGR of 12%, ahead of the already impressive 9.6% 10-year dividend CAGR.
In addition to sustainable and visible growth, Intact has a TTM EPS payout ratio of just 27% leaving substantial room for future increases. Not only is this ratio attractive relative to its peers, and the larger financial services sector, this payout ratio is also well below the company’s 5-year average payout ratio of 46.6%.
In addition to dividend increases, Intact is returning cash to shareholders through buybacks. The company’s current NCIB program allows for the repurchase of up to 5,282,458 common shares until February 15, 2023, representing approximately 3% of Intact’s outstanding common shares. As of Q3, 2022, the company had repurchased 817,790 common shares.
Operating Performance & Valuation
Down 6% over the previous year, Q3 2022 NOIPS of $2.70 was slightly below the consensus estimate of $2.76. For Q3 2022, EPS increased 26% YoY to $2.02 due to strong operating results and an impairment charge in 2021. Intact is currently digesting and derisking the RSA acquisition. While there is work to be done with respect to some of the international assets, RSA is now contributing approximately 15% of NOIPS.
The company’s operating efficiency continues to be top tier in the industry with a combined ratio of 92.6%, resulting from strong results in commercial lines despite challenges in the Canadian personal auto division. The combined ratio is an efficiency ratio where lower is better. It is calculated by dividing claims and general expenses by the earned premium. A strong result for a P&C insurance firm is in the mid-90% range. At 19.1% in the most recent quarter, Intact continues to earn a ROE that is 60 bps higher than the industry average.
Intact’s book value per share is $78.90 giving it a P/B ratio of 2.53X, slightly ahead of its 5-year average P/B of 2.38. Of the 13 analysts who maintain price targets, the average one-year target is $221.69, implying a 12% upside and a total return of approximately 14%.
With the company’s strong history of operating excellence and superior returns on equity, the most significant risk is related to Intact’s strategy of growth through M&A. While Management has a good track record of identifying accretive deals that add value through synergies and scale, there is a risk that the company could overpay for an asset. Related, Intact could see multiple reduction if it becomes more difficult to identify acquisition candidates that can add scale as the company continues to grow. As it is more difficult to grow an already large company in mature, albeit fragmented markets. Intact could begin to look for more growth opportunities internationally, which could result in different political and regulatory risks.
Intact has maintained a healthy balance sheet and investment grade credit ratings. As recently as October, 2022, DBRS Morningstar affirmed its debt rating on Intact and increased the trend to positive from stable. DBRS Morningstar changed the trend of Intact’s subsidiary: RSA Insurance Group Limited to positive from stable.
Like all insurance companies, Intact’s investment revenues are sensitive to interest rate changes. Intact is largely able to pass along inflationary price pressure to customers through increasing premiums.
Lastly, all P&C insurance firms are working to understand the impacts of climate change and the impact of natural disasters and other catastrophe risks. Recent hurricanes, forest fires and flooding have led to costly insurance claims in recent years. Intact’s ability to correctly adjust premiums and serve lower risk geographies will be key to its continued long-term success.
Intact has a proven track record of achieving growth through M&A, organic growth and premium increases. As a market leader operating in a fractured industry, Intact has a long runway for continued growth through industry consolidation. With 18 years of consecutive dividend growth in the high single digits, the company has the best long-term dividend growth record and the lowest payout ratio of the large Canadian insurers. With a reasonable valuation, this is an excellent pick for dividend growth and total return.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.