Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Definity Financial Corp (DFYFF, Financial) reported record operating net income of $109.1 million, or $0.94 per share, for Q2 2024.
- The combined ratio of 90.1% reflected strong performance across all lines, driven by higher earned rates, low catastrophe losses, and operational expense efficiencies.
- Gross written premiums increased by 14.2%, supported by proactive rate actions and favorable market conditions in personal auto and commercial insurance.
- Net investment income grew significantly, driven by higher interest income and active portfolio management, contributing to an operating ROE of 10.8%.
- The company expects continued M&A activity and organic growth to result in $1.5 billion of managed premiums over the next three to five years.
Negative Points
- The decision to exit the auto business in Alberta due to regulatory challenges and lack of near-term profitability will result in underwriting losses in the exited lines.
- The personal auto segment continues to face elevated theft levels, impacting the overall loss ratio despite improvements in other areas.
- The commercial insurance market is experiencing increased competition in niche segments, which could pressure margins in those areas.
- The company’s expense ratio improvements may not be sustainable without continued discipline and scalability, as real estate cost savings alone are not significant.
- The reinsurance market has hardened, making it potentially cost-ineffective to renew the CAT A cover policy, which could impact future volatility protection.
Q & A Highlights
Q: On personal auto, do you see mid-single digit physical damage inflation staying at this level for a while? What would be the key drivers for it to come down?
A: (Rowan Saunders, CEO) We are seeing favorable momentum and stability in loss cost trends, which is why we are leaning into growth. (Paul MacDonald, EVP of Personal Insurance & Digital Channels) APD inflation seems to be stabilizing at mid-single digits. Theft remains elevated, but overall, we expect APD to stay around mid-single digits due to the increasing cost of vehicle technology and EVs.
Q: Any updates on the CAT A cover policy and its cost-effectiveness for renewal?
A: (Paul MacDonald, EVP of Personal Insurance & Digital Channels) Year-to-date CAT losses are in line with expectations, so the aggregate cover has not been triggered yet. We have an appetite for renewing the aggregate cover, but it must be on effective terms given the hardened reinsurance market.
Q: What is the impact of exiting the Alberta Sonnet business on underwriting profit and operating earnings?
A: (Rowan Saunders, CEO) Exiting Alberta was necessary due to regulatory challenges and rate inadequacy. The portfolio is less than 1.5% of Definity's total, and exiting will help Sonnet reach breakeven by year-end. (Philip Mather, CFO) Expect a few million dollars in losses over the next six quarters, with underwriting losses front-loaded due to new accounting standards.
Q: Can you provide more details on increased competition in the commercial market, especially in niche segments?
A: (Fabian Richenberger, EVP of Commercial Insurance & Insurance Operations) Increased competition is seen in large property schedules and large lead businesses, which are less than 15% of our portfolio. We are focused on sustaining strong margins and growth in core strategic segments like small business and specialty, supported by our digital capabilities.
Q: Are you seeing any early warning signs of liability trends becoming more challenging due to social inflation?
A: (Paul MacDonald, EVP of Personal Insurance & Digital Channels) Social inflation is not a significant issue in Canada. We see persistent mid-single digit trends in casualty lines, with a slight increase in BI trends in Alberta due to litigation costs. (Fabian Richenberger, EVP of Commercial Insurance & Insurance Operations) Our commercial portfolio has low-end exposures, and we are comfortable with our liability trends.
Q: Given expense improvements and better claims management, is the combined ratio for personal auto expected to be at the low end of the guidance range?
A: (Rowan Saunders, CEO) We are outperforming the industry and seeing year-on-year improvement. However, trends like theft and regulatory impacts in Alberta need to be considered. Our target remains mid-95s for the combined ratio.
Q: Can you break down the drivers of the expense ratio improvement?
A: (Philip Mather, CFO) The national broker platform provides a 0.5% structural benefit. We are focused on growing the operating expense base at a lower rate than earned premiums. Real estate savings are modest but contribute to scalability. We aim to reduce the operating expense ratio further over time.
Q: What is the outlook for future distribution income growth?
A: (Rowan Saunders, CEO) We expect continued programmatic bolt-on acquisitions and strong organic growth. The pipeline for smaller transactions is healthy, and we aim to reach $1.5 billion in managed premiums over the next three to five years. We will refresh guidance later in the year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
