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Intact Financial: Room to run, or fully priced?

Mother Nature appears to be no match for Canada's largest property and casualty insurer, Intact Financial Corp., shares of which are on the upswing despite an increase in weather-related losses.

Devastating floods in parts of Canada last summer and the ice storms that wreaked havoc in the winter have taken their toll, alongside Ontario auto insurance reforms that will require insurers to trim their rates by up to 15 per cent by mid-2015.

Still, investors that hung on to the stock, especially those that bought during the dips, are being rewarded. The shares hit a record high on Monday.

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While that might be a signal for some to sell, many analysts believe the stock has more growth ahead. The weather-related events and Ontario's auto insurance changes are "in the rear-view mirror," said National Bank Financial analyst Shubha Khan.

He likes that Intact has a lot of money to spend, either on acquisitions or buying back shares, and that it's raising premiums and deductibles to deal with increased claims. He also believes the company can offset lower prices in Ontario if the government is successful with its plan to curb insurance fraud, which should reduce claims.

"Even though valuation might suggest the near-term return isn't attractive, longer term the company is generating a healthy return on equity to drive growth," he said.

Mr. Khan is one of six analysts with a "buy" or equivalent recommendation while five have a "hold," according to S&P Capital IQ. The analyst consensus price target over the next year is $74.27.

Intact shares hit a record $70.78 on the Toronto Stock Exchange on Monday, up 25 per cent from its 52-week low of $56.44 in June. That's when parts of Alberta were struck by severe flooding, which contributed to a drop in the company's underwriting income in 2013.

The shares closed Monday at $70.05.

About 17 per cent of Intact's business is in Alberta, 29 per cent in Quebec, 42 per cent in Ontario and 12 per cent in the rest of Canada. About 46 per cent of its revenues are from personal auto insurance, 22 per cent personal property and 32 per cent commercial.

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The company behind products such as Intact Insurance and Grey Power has grown through more than a dozen acquisitions over the past 25 years, including Jevco Insurance Co. in 2012 and AXA Canada in 2011.

Analysts believe the company will continue buying competitors to build scale and conserve costs.

"They have a clear strategy in terms of their ability to outperform the industry," said CIBC World Markets analyst Paul Holden, who has a $76 price target.

He believes any stock selloff that might happen after a catastrophic event, as investors react to a potential boost in insurance claims, is a buying opportunity for the stock.

Todd Johnson, portfolio manager at BCV Asset Management, said his firm owns Intact for the stable business model and the steadily rising dividend, now yielding about 3 per cent.

"It has been a reasonable holding. It hasn't gone straight up … but we like it and think we'll own it for quite awhile," he said.

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Some analysts suggest investors hit the pause button on Intact.

"I just think it's fully priced at this time," said Macquarie Capital Markets analyst Asim Imran, who has a "hold" on Intact.

TD Securities analyst Mario Mendonca also has a "hold" on the stock, citing in a recent note "a number of key issues that could hurt, or at minimum, constrain any improvement in Intact's return on equity over the next 12 to 24 months."

Among them is a possible spring election in Ontario, which, depending on the outcome, could put more pressure on the industry to cut rates further in that province.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More


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