Definity Financial Corp.
(DFY-T) C$37.08
Q1/23: Strong Top Line; Pressure in Personal Auto Event
DFY Q1/23 operating EPS of $0.54 was flat y/y and below our estimate of $0.58 (consensus: $0.58) reflecting weaker underwriting income offset by stronger net investment income (up ~60% y/y). Higher net investment income reflects higher reinvestment rates and the benefit of trading into higher yielding securities (drives realized losses, but improves investment income). DFY appropriately (our view) treats the impact of discounting (under IFRS 17) as non-operating. TTM operating ROE (ex-AOCI) was 9.8% (estimate: 10.0%) and BV/share ex-ACOI was up 15% y/y.
Impact: MIXED (Strong Top Line; Pressure in Personal Auto)
GWP was up 11% y/y reflecting continued strong growth in commercial, up 20% y/y. The growth in commercial is consistent with the company's commitment to grow in this higher-margin business and firm pricing conditions. GWP in personal property were also strong, up 12% y/y, and softened to 5% y/y growth in auto. Growth in Sonnet has slowed (but remains good), with premiums up 7% y/y. Management attributes the slower growth at Sonnet to lower levels of online shopping.
Underwriting income of $39.5mm was down 32% y/y, reflecting a ~290bps increase in the combined ratio (CR) to 95.3% (forecast 93.8%). Underwriting expenses were up 7% y/y. Excluding catastrophe losses and reserve development, the CR increased ~80bps y/y. Personal auto reported an underwriting loss of $3mm (earnings of $13mm last year), in part reflecting lower favorable reserve development. The underlying claims ratio (UCR) increased by ~510bps, reflecting elevated thefts, higher frequency, and inflation. We forecasted underwriting income of $7mm. Seasonality (Q1 is a weak quarter) and pricing actions should return the business to profitability in the near term. Underwriting income in commercial lines also declined y/y largely reflecting elevated catastrophe losses, while personal property saw underwriting income increase 34% y/y on lower CATs. Underlying claims ratios were relatively stable with last year and mostly in line with our forecasts.
TD Investment Conclusion
Our $42.00 target price, combined with NTM dividend of $0.56/share, implies a total upside of 15%. We believe an investment in Definity continues to offer exposure to a stable business model with good upside potential, if the company can grow through acquisitions.