Revised Targets Following “impressive” second-quarter results, National Bank Financial analyst Jaeme Gloyn saw the commentary from Definity Financial Corp.’s as “encouraging as management expressed confidence in the outlook as the combination of continued firm markets and expense improvements drive the ROE expansion story.”
On Aug. 1, the Toronto-based property and casualty insurer reported operating earnings per share of 94 cents, blowing past the Street’s expectation by 49 per cent (63 cents) as well as Mr. Gloyn’s 65-cent estimate. The result was driven by a “huge” underwriting beat as well as better-than-anticipated distribution and net investment income results.
“Lower CAT losses in the quarter played a large part in the combined ratio beat in Q2; we don’t expect a repeat of this in Q3,” he said. “Management informed us that July was an active month that puts year-to-date catastrophes on pace for their expected level through 2024. Momentum is set to continue in personal auto as the market remains firm (double-digit increases in written rates) and DFY returns to unit growth. Claims inflation has stabilized at the mid-single-digits level as well. Management reiterated the combined ratio target of mid to high-90s but expressed confidence in achieving the low end.
“Profitability improvements appear sustainable as DFY is making progress toward bringing Sonnet to breakeven, expense ratio improvements (another 100 basis points) and claims transformation. Additionally, management highlighted that continued growth of the broker platform could drive further expense ratio improvements beyond the 50 bps year-over-year structural benefit delivered in Q2.”
After increasing his full-year operating EPS projections for 2024 to $2.69 and 2025 to $3.13 (from $2.67 and $3, respectively) to reflect “strong momentum across all business lines,” Mr. Gloyn increased his target for Definity shares to $62 from $60, reiterating an “outperform” recommendation. The average on the Street is $53.18.
Elsewhere, CIBC’s Paul Holden downgraded Definity to “neutral” from “outperformer” while raising his target to $51 from $47, while Desjardins Securities’ Doug Young raised his target to $52 from $47 with a “hold” rating.
“Relative to our estimates and on an underwriting income basis, all divisions beat. Overall, it was a good and generally clean quarter; however, there are no changes to our views,” said Mr. Young.