TSX:DFY - Post Discussion
Post by
retiredcf on Feb 26, 2023 3:17pm
TD
Definity Financial Corp.
(DFY-T) C$35.00
Q4/22: Personal Auto Underlying Results Surprisingly Good Event
DFY reported Q4/22 operating EPS of $0.67 (up 59% y/y) vs. our estimate of $0.57 (consensus: $0.57). The quarter included an ~$0.10/share reinsurance recovery (our estimate). While recoveries of this nature could reoccur, we do not view this as normal-course earnings.
TTM operating ROE (ex-AOCI) was 10.2% (estimate: 9.7%). DFY raised the quarterly dividend by 10% (forecast 8%). DFY submitted its application for conversion to a CBCA, which should allow DFY to raise materially more debt and potentially make a more EPS-accretive acquisition.
Impact: POSITIVE (in context of IFC's personal auto results)
DWP was up 11% y/y and 1% higher than expected. Commercial lines premium rose 17% y/y (estimate: +14% y/y), reflecting the company's commitment to growing in this higher-margin business and firm pricing conditions. Personal auto and property DWPs were up 6% y/y (estimate: +8%) and 13% y/y (estimate: +11%), respectively. Growth in Sonnet has slowed (but remains good), with premiums up 12% y/ y. Management attributed the slower growth at Sonnet to lower levels of online shopping. The strong momentum in commercial lines is supportive of DFY's IPO message. Price increases across all lines support the notion that markets remain firm.
Underwriting income of $70.2mm was up $30mm y/y and $21mm higher than forecasted. However, Q4/21 included a $30mm inflation reserve, and Q4/22 included the aforementioned CAT reinsurance recovery. Excluding these two items, we put Q4/22 underwriting income at ~$50mm, in line with our forecast and down 29% y/ y. On an underlying basis and excluding the inflation reserve (Q4/21), the underling claims ratio was 61.1%, up 210bps from Q4/21 and only 50bps higher than our forecast.
The underlying claims ratio in personal auto of 70.5% was solid and better than our forecast of 71.2%, and only deteriorated modestly from 68.7% last year (ex. the inflation reserve). Underlying claims ratios in property and commercial remain strong.
TD Investment Conclusion
Our $45.00 target price, combined with NTM dividend of $0.55/share, implies a total upside of 30%. We believe an investment in Definity offers exposure to a stable business model with good upside potential if the company can grow through acquisitions.
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