Every once in a while, I come across an interesting grant in the Canadian markets.

In early September, Intact Financial (TSX: IFC) granted its CEO hundreds of thousands of stock options. That number of options isn’t uncommon but the value is much more deceiving in this case because Intact stock trades at ~$270 per share.

To my American readers, this type and size of payday isn’t all that shocking. Yet, to people who follow the Canadian markets, option grants such as these are rare, especially when we take a closer look at the details.

On September 5th, Intact granted its CEO 419,992 stock options with a 10-year term and $276.66 strike price. This is notable for a few reasons:

• Intact rarely gives executives stock options

  • As of recently, Intact has only granted options once when it was coming off the heels of its RSA Insurance Group acquisition in June 2021. Three executives, including the CEO, were provided large stock option grants as a means to “…strengthen retention of key talent, to drive performance, and to align recipients’ interests with those of shareholders over the mid- to long-term…”. The CEO’s grant at the time totaled 406,778 stock options with a strike price of ~$161.

  • This time around, there is no publicly available reason for giving out such a large grant to the CEO.

• The value of the grant is significant relative to the CEO’s typical compensation

  • Depending on the Black-Scholes inputs, this grant could be worth $10-15MM on an accounting basis.

  • Intact’s CEO generally earns: ~$1.4MM salary, ~$3MM bonus, ~$2MM in pension/other, and ~$9MM in a mix of ROE-based PSUs and time-vested RSUs.

  • This one-time grant is nearly equivalent to a year’s worth of his compensation.

• The timing of the grant is different than the typical grant schedule

  • Intact generally provides executives with equity grants in mid/late May but this grant was made 3-4 months later than normal.

• There are high price hurdles for the award to fully vest

  • “25% of the options (104,998) will vest if each of the four specified price hurdles are met prior to September 5th, 2030, being $415.00, $461.11, $507.22, $553.33.”

  • In achieving the lowest and highest hurdle, the options would be worth ~$14.5MM and~$116.2MM, respectively.

Some possible explanations for the grant include:

• Intact’s CEO is extremely bullish on the stock (and future acquisitions) and requested the grant from the board

  • Intact currently trades at ~2.6x book value and ~15x earnings. Relative to other publicly-traded insurers, Intact generally commands a premium market valuation.

  • Over the past 10 years, Intact has deployed $12B on M&A and generated a “~20% average IRR”.

  • Given these facts, it would be hard to argue that the stock and/or the M&A track record aren’t being properly appreciated by investors but it is a possibility.

• The board needed to ensure that they retain the CEO for the long-term

  • Intact’s CEO has held that position since 2008 and has generated significant value through acquisitions. The stock has CAGR’d at ~13% since then, which is incredibly strong.

  • As of the 2024 proxy, his common stock and PSUs currently held are worth ~$150MM.

  • At the ripe age of 54, Intact’s CEO is still relatively young and has many more years to compound shareholder capital.

Retaining a top executive can be an incredibly strong motivator for atypical board behaviour. Given the tremendous amount of value that the CEO has created since he took over, Intact’s board likely felt that they needed to retain him at all costs; what better way to do that than by dangling a hefty options package in front of him.

A grant such as this one looks quite bullish from the outset; however, upon digging deeper, we can conclude that this action likely wasn’t CEO led.

While I can appreciate the nature of the award itself, I think institutional investors should be questioning the board on whether the option package was truly necessary. Would the CEO really have left if he didn’t receive it? Does such a large option grant distort some of his future behaviour?

Guess we’ll find out soon enough.

“♡ Like” this piece if you think ISS and Glass Lewis should give Intact’s board a peepee slap.