Price Target CAD 48.00
Definity Financial Corporation
Q3/23 EPS significantly better than forecast and consensus despite challenging cat loss quarter
Our view: Q3/23 operating EPS was ahead of our forecast and well ahead of consensus. Even despite substantial catastrophe losses in 2023 and elevated cat losses in 2022 for the industry, we think DFY has nevertheless done a good job executing on its growth strategy (e.g., double-digit gross written premium growth, mid-90s combined ratio and building its broker distribution business, providing earnings diversification), yet we believe the shares are undervalued, trading at 1.6x P/BV, a 1.0x discount to its closest publicly-traded peer when the typical discount has historically been between 0.4x to 0.7x. Furthermore, in the current uncertain macro environment, we think DFY’s solid defensive attributes should appeal to investors. Maintaining our Outperform rating, $48 target.
Key points:
Q3/23 operating EPS of $0.15 was well ahead of our $0.11 forecast and $0.03 consensus (range: -$0.07 to +$0.11) with the variance to our forecast mostly due to better-than-forecast underwriting income from Personal Property. Consolidated gross written premiums (GWP) of $1.04B (+10% Y/ Y) were in line with our $1.03B forecast and consensus.
Segmented combined ratios: (1) Personal Auto – 98.9%, marginally below our 98.5% forecast, but in line with consensus at 97.9%; (2) Personal Property – 123.3%, better than our 126.4% forecast and much better than consensus at 128.9%; and (3) Commercial – 86.6%, in line with our 86.9% forecast, but better than 89.6% consensus.
Distribution income of $11MM was below our $14MM forecast, driven by lower-than-forecast distribution revenues ($34MM vs. our forecast at $47MM).
Other takeaways: (1) in light of Alberta’s recent announced plans to cap Auto insurance rate increases, DFY indicated it has stopped offering insurance via its Sonnet direct-to-consumer brand; (2) on the CBCA conversion, DFY believes Federal Government approval is very close, but also reiterated that the delayed approval has not altered its willingness to pursue a theoretical transformative acquisition; and (3) DFY appeared more confident about Auto combined ratios as rate increases are more materially being earned into premiums while on the other side, claims inflation appears to be stabilizing.