Double-digit EPS Growth + Capital Optionality Our Conclusion
DFY delivered good Q1 results, but not the blowout quarter we had forecast.
Forward expectations are little changed. The company is delivering double-
digit premium growth, is on track for a mid-90s combined ratio, and is
benefiting from significant growth in investment income. At the same time,
DFY has $1.3B of deployable capital for acquisitions. With the stock trading
at a 15.2x P/E (2025E consensus), there might not be a lot of room for
multiple expansion, but EPS growth with capital optionality keeps us positive
on the name. No change to our $47 price target and Outperformer rating.
Key Points
No major changes to forward EPS estimates. Our 2024E EPS decreases
from $3.04 to $2.83, but that is almost entirely based on the difference
between Q1 actual and our estimate. Our 2025E EPS decreases from $3.14
to $3.09, which is based on small model adjustments.
We remain very positive on personal auto: While the Q1 combined ratio
(CR) was not quite as good as we had forecast, the outlook remains positive.
The earned premium rate hit 10% this quarter and still has another 3% to go
to catch the written premium rate. At the same time, claims inflation has
stabilized. That implies better margin expansion lies ahead (all else equal).
Also, premium growth of 13% (excluding 3 pts from industry pools) is higher
than expected and management expects that can continue for the remainder
of 2024. We forecast a CR of 95% and premium growth of 13% in 2024.
Commercial lines performing very well: It was a good quarter with a CR of
92% and premium growth of 16%. The CR was particularly noteworthy
considering it was achieved despite higher-than-normal catastrophe losses
(6.8 pts). Premium growth may slow marginally due to increased competition
in certain lines of business, but low teens growth is still expected by
management. We model a 90% CR and 13% premium growth for 2024.
Personal property growing at a modest pace: Profitability looked good
this quarter with a CR of 91% and we continue to expect mid-90s for the full
year. Premium growth of 5% for the quarter was lower than we expected
considering firm market conditions. CAT experience over the next two
quarters will ultimately determine how this business performs in 2024 and
perhaps also management’s approach to premium growth. We assume mid-
single-digit growth and a mid-90s CR for this year and next.
No change in investment income guidance: Net investment income of
$48MM was up 18% Y/Y and management maintained its 2024 guidance of
$190MM. Given the Q1 run-rate and the ability to reinvest bonds at higher
rates, we assume some upside relative to guidance ($197MM).
Distribution income also on track to hit guidance: Q1 was a bit softer
than expected, but management came across as confident with its full-year
guidance. We continue to assume that guidance is achieved.