Q2 Preview: Positive Momentum Should Carry The Quarter Our Conclusion
We remain positive on the outlook for DFY given the potential for personal
auto to outperform in the near term, strong top-line growth, growth in
investment income, and capital deployment potential. There is no change to
our price target and Outperformer rating with this note.
Key Points
No change to Q2 estimate: We are not changing our Q2 estimate with this
note. Our Q2 operating EPS estimate of $0.63 compares to consensus of
$0.62 and implies Y/Y growth of 12%. Given the lack of reported CAT
events, it is possible there is upside to our Q2 EPS estimate on lower-than-
normal CAT losses.
Personal Auto should benefit from past pricing: Definity has taken strong
pricing actions to address past claims inflation. Earned premium rates hit
double digits last quarter (still increasing) while claims inflation has stabilized
in the mid-single digits. There is potential for significant margin improvement
as a result. We are assuming a combined ratio of 95% in Q2, nearly a three
percentage point improvement from a year ago. We forecast strong premium
growth of 11%.
Lower CAT losses could be a source of upside: We are assuming CAT
losses of $56MM compared to $48MM in Q2/23. Neither DFY or IFC have
pre-released CAT estimates, and we have not seen any reports of large
weather events. Our assumption is aligned with full-year guidance for CAT
losses to be equal to 4.5% of earned premiums, and Q2 would typically be
higher dur to seasonality. Every one point reduction in that ratio lifts 2024E
EPS by 9%.
A seasonally weaker quarter for personal property: We typically see a
combined ratio >100% in personal property in Q2. We assume seasonally
higher claims persist despite the potential for lower CAT losses. Our Q2
forecast is 101.5% vs 102.5% in Q2 last year.
Commercial lines expected to shine: Premium growth and margins have
been quite strong for DFY and much of the industry. There is no reason to
think that is broken in Q2. We assume a combined ratio of 91% and premium
growth of 12%. Continued success here is important to the story given the
focus on growing the proportion of premiums from commercial lines.
Net investment income: We forecast $49.4MM of investment income, up
~15% Y/Y and compared to consensus of $48.4MM. Our full-year forecast of
$196.6MM is above guidance of $190MM. While bond yields were little
changed during Q2, we still view guidance as being conservative and look for
potential upside to that number.
Conference call details: DFY will release its second quarter 2024 results
after the market close on August 1. Conference call is August 2 at 11:00 a.m.
ET (416-764-8659 or 1-888-664-6392).