Definity Financial Corporation
Inflation Avengers: Definity War. Excellent Q4/22 + 10% dividend increase
Our View: DFY delivered yet another strong quarter with double-digit gross written premium growth (+11.3%) and a low-90s combined ratio (91.7%). In particular, given investor focus on inflation in Auto claims costs, we think DFY battled it out delivering a very good 94.2% Auto combined ratio, lower both Q/Q and Y/Y. We think the recent share price decline (likely reflecting investor concern regarding the Alberta government freezing Auto rates for 2023) is overdone as Q4/22 results demonstrated DFY has done a good job navigating Auto claims inflation, but also DFY got approval in H2/22 for a 5% rate increase to allow them to still increase rates in Alberta this year. Trading at 1.7x P/BV, we view DFY as attractively valued with positive company/ industry fundamentals; potential catalyst(s); and defensive attributes. We increase our target to $49 (was $46) and maintain our Outperform rating.
Key points:
Q4/22 operating EPS of $0.68, was well ahead of our $0.38 forecast and $0.57 consensus (range: $0.38 - $0.67) with the variance primarily due to much-higher-than-forecast underwriting income in each segment.
Quarterly dividend increased by +10% to $0.55/share annualized, which was right in line with our forecast. DFY also announced a dividend reinvestment program (DRIP) effective immediately with the first eligible dividend being the March 2023 dividend. The discount on the shares will be set by DFY and be no greater than 5% of the average market price.
Gross written premiums (GWP) of $943MM (+11% Y/Y) were right in line with our $942MM forecast and in line with $940MM consensus. GWP for each segment were generally in line with our forecast.
Segmented combined ratios: (1) Personal Auto – 94.2%, well ahead of our 100.4% forecast and 98.0% consensus, due to a lower-than-forecast claims ratio; (2) Personal Property – 90.4%, much better than our 96.8% forecast, but in line with 90.6% consensus, due to a lower-than-forecast claims ratio; and (3) Commercial – 89.3%, much better than our 94.8% forecast and 92.5% consensus, due to a lower-than-forecast claims ratio.
2023 targets include: (1) GWP growth of upper single digit to ~10%; (2) maintain a mid-90s combined ratio; (3) operating ROE in the upper single digit to below teens; (4) ~$150MM of net investment income; (5) ~$40MM of operating income from its broker investments; and (6) catastrophe losses of ~4% of net earned premiums, up Y/Y from 3.6% in 2022. In addition, DFY submitted to the federal Minister of Finance its application to convert to the Canada Business Corporations Act.
Increasing target to $49 (was $46) and maintaining Outperform rating.
Our increased target reflects higher-than-forecast Q4/22 BVPS. Conference call today at 11am ET; dial-in: 1-888-664-6392 or (416) 764-8659.