CIBC Capital Markets on Wednesday said,, given recent media articles on the potential for Intact Financial (IFC.TO) to make an offer for Hiscox, it is sharing its thoughts and estimated accretion.
CIBC has a neutral rating and C$288.00 price target on the shares of Intact Financial.
Hiscox would not be a typical Intact transaction, noted CIBC, but it would advance the company's ambition to become a larger global specialty underwriter through the acquisition of an already high-quality underwriter, it added.
Intact has a track record of acquiring underperforming businesses and improving underwriting results over time, said CIBC and added this has been an M&A advantage for Intact as few, if any, insurers would be able to achieve the same margin improvements and synergies.
"Hiscox is different in that it already operates with strong margins and a mid-teens ROE," said CIBC. "Yes, there will be some cost synergies, but our initial impression is that the magnitude of opportunity to realize synergies is far less than prior large acquisitions. We believe value creation is still evident, but it might be more tied to transaction financing versus operational improvements."
CIBC estimates that a transaction would be mid-single-digit accretive to EPS, high-single-digit accretive to BVPS and roughly neutral to ROE.
According to CIBC, a bid for Hiscox makes sense, and it added that IFC would advance its scale objective in global specialty lines and gain market share in UK commercial lines.
"Management has discussed its ability to execute complex transactions (aka RSA), and we would consider Hiscox to be a complex transaction given that certain businesses are not a strategic fit (reinsurance is the obvious example)," said CIBC.
It further noted that the valuation gap plays to Intact's advantage. Hiscox trades at lower valuation multiples than Intact, said CIBC. Even with the recent surge in the share price, Hiscox is trading at roughly 2.0x P/BV and a P/E of 12.5x (2027E consensus) versus Intact at 2.5x P/BV and 14.4x P/E, respectively, it added.
According to CIBC, a separate buyer would be needed for the reinsurance business.
"Hiscox Reinsurance accounted for ~22% of 2025 premiums written," said CIBC. "Intact does not compete in the reinsurance space and we assume it would have no interest in becoming a reinsurer."
Given the profitability of Hiscox Reinsurance, CIBC assumes it would attract good interest, but multiples in the space are low, it noted.
On how a transaction could be financed, CIBC assumes $1.0B of excess capital is used, along with $4.4B of debt (based on 25% debt-to-total capital) and $4.5B of equity. The estimated equity requirement is very similar to how much Intact raised for the RSA transaction, it added.
CIBC estimates 3%-4% EPS accretion with no improvement in the combined ratio.
"Every 100bps improvement in the combined ratio adds an estimated 1% EPS accretion," added CIBC. "We estimate BVPS accretion of 9% and a neutral impact on ROE."
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