Post by
retiredcf on May 15, 2023 1:20pm
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EQUITY RESEARCH
May 12, 2023 Rating Change - Upgrade
DEFINITY FINANCIAL CORP.
Shortfall In Auto Now In The Books; Upgrading To Outperformer
Our Conclusion
We are upgrading our rating on Definity from Neutral to Outperformer
effective May 12. We think the worst quarter for personal auto should now be
behind us and expect sequential improvements in the combined ratio.
Results in other lines of business remain strong and management is
executing on its organic growth strategy. Excess capital remains a big
positive. We also like the stability of the P&C insurance business in a period
of elevated macro risk. No change to our $39.50 price target.
Key Points
EPS estimates move higher on distribution income. Our operating EPS
for 2023 and 2024 increases following higher-than-forecast distribution
income in Q1 and the recently announced acquisition of McFarlan Rowlands
(increases expected distribution income by 1.5x). For 2023 we are
forecasting premium growth of 10%, a CR of 95.4%, catastrophe losses
equal to 3.9% of premiums and net investment income of $158MM. Our
2023E operating ROE is 9.8%.
Personal Auto remains in focus. The CR of 100.9% was worse than
expected as inflationary pressures continue to pressure claims. Management
expects profitability to improve as 2023 approved rate increases (10%)
increasingly flow into earned premiums. Management expects to run this
business in the high-90s in 2023 and our forecasts reflect a combined ratio of
98.3%, improving to 97.4% in 2024.
Personal Property lifted by hard markets and low CATs. The CR 91.1%
was a strong result for the quarter. Management expects markets to remain
firm through 2023, and to deliver a mid-90s CR for the year. We forecast a
CR of 94.8% for 2023 with 11% premium growth.
Commercial insurance remains best use of capital. The commercial CR
of 90.9% was in line with expectations, and with net earned premiums
increasing 14.6% Y/Y. Management noted that the $10.5MM of CAT losses
in the quarter reflected more normalized results and expects to continue
running the business in the low 90’s as markets remain hard. We forecast a
CR of 93.6% and net earned premium growth of 18% in 2023.
Investment income increases as yields stay elevated. Investment income
came in at $41M, up 59% Y/Y as investments continue being rolled into
higher yielding assets. We forecast a full year result at $158MM, fairly
consistent with guidance of $160MM.
Acquisition potential. Definity has $554MM of excess capital and $292MM
of debt capacity (+$586MM when it converts to a corporation). The McFarlan
Rowlands acquisition will use $188MM of excess capital, leaving plenty for
future acquisitions, which is supportive of DFY’s valuation.