Release Date: November 08, 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 a solid underlying performance across all lines of business despite significant catastrophe impacts.
- The company achieved a 12.2% increase in underlying gross written premiums, reflecting strong growth momentum.
- Operating net income reached $14.6 million, with an operating ROE of 10.7% and robust book value growth per share of 17.9% year-over-year.
- The commercial insurance segment showed strong growth with gross written premiums up 12.6%, driven by strategic segment expansion and firm market conditions.
- Definity Financial Corp (DFYFF) maintained a robust financial position with shareholder equity surpassing $3 billion and nearly $1.4 billion of financial capacity.
Negative Points
- Catastrophe events had a significant impact on underwriting performance, contributing to a 17-point impact on the combined ratio.
- The exit of Sonnet Alberta personal auto business negatively impacted growth by 5.5 points in the third quarter.
- The personal property line reported a high combined ratio of 124.9% due to catastrophe losses accounting for more than 46 points.
- The company faces ongoing challenges with elevated theft and regulatory constraints in the auto insurance sector.
- The reinsurance renewal season is expected to be tough, with potential increases in attachment points and costs.
Q & A Highlights
Q: Can you quantify the impact of non-sustainable items on the expense ratio and provide guidance on future expectations?
A: Philip Mather, CFO, explained that the only non-sustainable item was the reduction in contingent profit commission costs and incentive accruals due to catastrophe losses. The sustainable impact comes from expense efficiencies and structural reductions from the broker platform acquisition. The current operating expense ratio is around 12%, with a goal to reduce it by 1 point over the next couple of years.
Q: What is driving the growth in commercial insurance, and how is Definity maintaining its competitive position?
A: Fabian Richenberger, EVP of Commercial Insurance, noted that commercial insurance remains attractive, with growth driven by strong digital capabilities and service propositions. Despite increased competition in some segments, Definity achieved a 12.6% growth rate in Q3, with half of this due to rate and inflation adjustments. The company aims to maintain a low 90s combined ratio and grow at twice the industry rate.
Q: Why hasn't the guidance for distribution income increased despite strong performance?
A: Philip Mather, CFO, stated that Q4 is typically weaker due to subdued premium activity. While acquisition activity and organic growth are strong, contingent profit commission income is expected to be lower due to catastrophe losses, particularly in Ontario and Alberta. This offsets the positive factors, keeping the guidance unchanged.
Q: What is the timeline for achieving a 12-14% ROE, and what are the key levers?
A: Philip Mather, CFO, indicated that significant progress is being made across three levers: expense optimization, Sonnet achieving breakeven, and claims transformation. The company expects to reach breakeven for Sonnet by 2025, with full benefits from claims transformation in 2-3 years. A 12% ROE by 2026 is a reasonable target, assuming no continued high catastrophe activity.
Q: Can you provide insights on the upcoming reinsurance renewal season and its potential impact?
A: Philip Mather, CFO, mentioned that while Canada has seen significant catastrophe losses, global reinsurance results are strong. Definity's good reinsurance experience and active control of gross losses should lead to favorable renewal terms. The company is considering maintaining its aggregate cover, depending on mutually agreeable terms.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
