Rowan Saunders, president and CEO of demutualized company, Definity Financial Corporation (formerly Economical Insurance), in a recent discussion with Mario Mendonca, managing director of equity research at TD Securities, examined the company’s fourth quarter financial results and looked back at the first full year of Definity’s operation as a publicly traded company.
He says the company is successfully changing its mix of business while all three lines of the company’s business contributed to earnings, despite complications in the operating environment which continue to get more challenging as time goes on.
“We still see lots of opportunities,” Saunders told Mendonca. “We’re not firing on all cylinders yet.”
He says 2022 was the third highest net catastrophe year observed in recent history, the reinsurance market is changing “let’s call it a hard market cycle,” he says, and the company continues to see elevated claims inflation, although this has been normalizing now, coming in flat for a couple of successive quarters, he adds. Mobility and claims are increasing. Saunders also discussed the seasonality of Definity’s business.
In personal auto, the company had rate filings approved as recently as a few weeks ago. “We are finding that generally the regulators are being very constructive. They’re responding to data and the data shows inflation, increased mobility and frequency.” He adds, however, that the company was disappointed about Alberta’s announcement that it would freeze auto insurance rates.
“We know that rate freezes do not work. They didn’t work when they tried this before. This is going to create some dysfunctionality in the marketplace. There’s going to be capacity issues, we think, in the next few quarters,” he told Mendonca. “We’re reallocating marketing and capital to more profitable jurisdictions. So I think there is a way to trade through that. But nonetheless, that is a bit of an outlier province in terms of regulatory intervention. And we do think it’s very politically motivated as opposed to driven by the regulator.” He later says the company is definitely “tapping the brakes on Alberta.”
Going forward, he says different companies will have different approaches to prudence – not every company will have the same level, which will in turn change short term profitability.
Also going forward, he says the company is focused on insurance acquisitions in the next two years. The company likes specialty commercial business and personal lines business which could be added to the company’s Vine platform.
Artificial intelligence (AI) claims at the company is currently in the middle of a multi-year transformation, he adds, and he says the benefits of having operational leverage when the company fully emerges from the demutualization process in a few years will also allow revenue growth to outpace expense growth. “We’ll start to see that expense ratio come down a couple of points.”
Even constrained by demutualization regulations, the company has $650-million available for deployment today. Over time he says the company will consider investing in adjacent businesses, but its current focus is on building underwriting income and other top line efforts, over a move into adjacent spaces. “Never say never, but that isn’t a top priority for us.”
