Post by
retiredcf on May 09, 2023 8:53am
CIBC
EQUITY RESEARCH
May 8, 2023 Flash Research
DEFINITY FINANCIAL CORP.
Growing The Brokerage Business Through Another Acquisition
Our Take: Positive. Capital deployment is a positive, given the existing drag
on returns from carrying excess capital, and we like the financial attributes of
the insurance brokerage business. The transaction is financially and
strategically positive.
Implications:
1. Financially accretive. Definity stated that the transaction is expected
to be immediately accretive to both operating EPS and ROE. We
estimate operating EPS accretion of roughly $0.05, equivalent to 2%
of our current 2023E.
2. Increasing distribution income enhances quality of earnings.
Distribution income is less volatile, is capital-light and generates
higher ROEs. Transaction multiples tend to be high for those
reasons, but organic growth over time enhances financial returns
and should also result in a higher valuation multiple for DFY.
3. Use of excess is a positive. DFY had $386MM of excess capital and
$272MM of debt capacity as of Q4. We expect capital deployment
will benefit ROE and future earnings growth.
Details: Definity, through its brokerage subsidiary McDougall Insurance, has
acquired McFarlan Rowlands Insurance Brokers for $232MM. The
acquisition will be financed using cash and equity of McDougall Insurance
(DFY is not issuing equity). Definity’s ownership in McDougall remains at
75%.
McFarlan Rowlands is an Ontario-based insurance broker with $200MM in
annual premiums. It has 18 offices across southwestern Ontario with over
200 employees. McFarlan Rowlands is expected to generate approximately
$20MM in annual operating income before financing costs, taxes and
minority interests