A Member of Pat McKeough’s Inner Circle recently asked for his advice on Definity Financial, a leading Canadian property and casualty insurer that went public in 2021.
Pat likes the firm’s impressive revenue growth and recent earnings gain. The company demonstrates strong operational performance with robust premium growth across all business lines. However, Pat notes that recent IPOs can expose investors to above-average risks of unpleasant surprises involatile markets.
DEFINITY FINANCIAL CORP. (Symbol DFY on Toronto) is the name for the holding company of Economical Insurance, Family Insurance Solutions, Petline Insurance, and Sonnet Insurance. It is one of the country’s leading property and casualty insurance companies.
Definity was created as part of Economical Insurance’s demutualization plan to convert from a mutual insurance company owned by its policyholders to a company owned by shareholders.
On November 17, 2021, the holding company went public, selling shares of its stock at $22 each.
At the same time as its IPO, Definity closed private share placements with HOOPP (Healthcare of Ontario Pension Plan) and Swiss Re Investments Holding Company. HOOPP now owns 19.9% of Definity, while Swiss Re owns 10.1%.
Economical started the demutualization process nine years prior to going public, with policyholders finally approving the plan in May 2021. Its goal is to become one of the five largest property and casualty insurers in Canada.
Definity offers both personal and commercial insurance products. Its personal insurance lines represent 69% of its revenue. It offers auto, property, liability, and pet insurance products to individual customers. The company’s commercial lines brought in 31% of its revenue. These lines include fleet, individually rated commercial auto, property, liability, and specialty insurance products for businessowners.
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Definity Financial: Acquisitions have helped boost revenue and earnings
Since its IPO, Definity has made a couple of acquisitions to expand its business.
In May 2023, the company, through its subsidiary McDougall Insurance Brokers Limited, purchased McFarlan Rowlands Insurance Brokers Inc. for $232 million. Established in 1896, McFarlan Rowlands is a leading Ontario-based insurance brokerage, with over 200 employees in 18 office locations across southwestern Ontario, and over $200 million in annual premiums.
In addition to its property and casualty brokerage operations, McFarlan Rowlands also has expertise in claims adjusting and life and group benefits brokering.
In October 2023, McDougall completed the acquisition of Alberta-based Drayden Insurance Ltd. for $208 million. Drayden is a large Alberta insurance broker with $125 million in annual premiums. It has eight locations in the Edmonton area with more than 170 employees. Definity made the deal to expand its presence outside of Ontario and into Western Canada.
On June 13, 2024, the company’s Sonnet Insurance brand announced that it would discontinue selling auto insurance in Alberta. It intends to withdraw from the province on December 13, because it can’t grow profitably there.
In the three months ended September 30, 2024, overall revenue rose 11.3% to $1.10 billion from $984.1 million a year earlier.
Excluding one-time items, its earnings fell 18.9% to $18.0 million, or $0.15 a share, from $14.6 million or $0.13. Significant catastrophe losses impacted both quarters. Catastrophe
losses in the third quarter of 2024 increased compared to the same period in the prior
year. In the third quarter of 2024, earnings were impacted primarily by severe rainstorms that led to flooding in Ontario and Québec, a significant hailstorm in Alberta, and the Jasper wildfire.
The company’s combined ratio in the latest quarter was 103.4%, up slightly from 102.5% a year earlier. The ratio represents claims that the company paid out divided by the premiums it took in. The lower, the better.
Definity raised its quarterly dividend by 16.4%, with the March 2024 payment to $0.16 from $0.1375. The shares now yield 1.1%.
The company’s long-term outlook is positive; and, compared to many IPOs, it has a solid base of business. Still, in volatile markets, IPOs can expose investors to above-average risks of unpleasant surprises.
Recommendation in Pat’s Inner Circle: Definity Financial Corp. is a hold.
