Morgan Stanley Says Canadian Auto Insurer Could Feel The Heat From Cannabis Legalization

Canadian smokers celebrate the legalization of recreational marijuana Wednesday. Unlike many of its peers, Intact Financial Corporation (OTC: IFCZF) may not enjoy the high, according to Morgan Stanley. 

The Analyst 

Analyst Kai Pan maintained an Overweight rating on Intact Financial's Canadian stock with a U.S. dollar equivalent price target of $87.77.

The Thesis

While studies exploring the connection between car crashes and marijuana legalization are inconclusive, Pan said Canadian auto insurers could be exposed to a potentially heightened risk of accidents. (See the analyst's track record here.) 

“Will auto claims frequency increase?” Pan asked in a Wednesday note. “Will claim severity move higher given the potential combined use of alcohol and marijuana? Will insurers be able to effectively segment and price the cannabis risk? Can insurers increase rates before they observe the loss impact? These are among the looming issues the industry will have to address.”

Intact Financial, as Canada's largest auto insurer, is not insulated from the risk, but appears better suited to evade it, the analyst said. Morgan Stanley forecast that Intact’s personal auto combined ratio will improve to the mid-90-percent range by the end of 2018.

“Given its long-term outperformance vs. peers (5 points better combined ratio), sophisticated data and analytics and strong claims management, we think the company should be better positioned in addressing this challenge,” Pan said. 

Price Action

Over-the-counter Intact Financial shares were trading down 0.71 percent at $79.24 premarket Wednesday. 

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