Sonnet: Seeking profitability by 2025

Definity hosted its Q2’23 earnings call on Aug 4, 2023. Select highlights:

• This year, the company proactively implemented rate increases in personal auto, which initially slowed growth but is expected to boost profitability. Their Q2 results, with an operating net income of $64.8 million or $0.36 per share, reflect continued strong performance in 2023, supported by solid operational results, investment income, and enhanced distribution capabilities.
• The company reported a 95.3% combined ratio. The commercial insurance segment was a notable contributor with an unrolling income of $38 million. Meanwhile, despite facing substantial catastrophe-related losses, personal property results remained robust. The personal auto sector exhibited improvement with a core of 97.6% in Q2, influenced by rising claim frequencies, persistent high claim severity, and increased theft incidents.
• In a significant milestone, Definity achieved over $1 billion in premiums in one quarter, marking a historic accomplishment.
• A 9% growth was primarily driven by the commercial insurance and personal property segments. This underscores the company’s effective strategy to diversify away from regulated auto, reflecting a disciplined growth management approach.
• The company has been strategically active in recent acquisitions to bolster its broker distribution platform. In October, they acquired a majority stake in McDougall, marking the beginning of their brokerage expansion efforts. Other acquisitions followed. With these acquisitions, the company sets its sights on transforming this platform into another billion-dollar venture for Definity.
• In Q2’23, Personal Auto saw a 2.6% increase in premiums, primarily due to a rise in average written premiums. This surge was especially pronounced in Ontario, – their most significant portfolio.
• Recently launched a UBI product for Sonnet customers.
• Focusing on the bottom line – reported a combined ratio of 102.5%, inclusive of 17 points of cat losses.
• Commercial Line’s combined ratio was very strong at 84.3% in the second quarter compared to 91.6% in the same quarter a year ago.
• The company has been actively implementing strategies to enhance the profitability of its auto portfolio. This has resulted in a decrease in Average Written Premium (AWP) as they target higher-quality clients. A significant focus has been on expanding the affinity portfolio within Sonnet. These clients typically benefit from a 10% to 15% discount compared to retail rates. However, they offer higher long-term value and present lower loss experiences. To highlight the success in this direction, Affinity has witnessed a 20% growth year-over-year and now constitutes 25% of Sonnet, an increase from 19% the previous year. Furthermore, it now accounts for 32% of the company’s new business. In alignment with their strategic direction, the company has formed a partnership with Tangerine Bank, a prominent digital bank with over 2 million digitally-savvy customers. This collaboration has been fruitful, as these customers exhibit higher conversion and retention rates. Their risk profiles indicate that they’re premium clients. This partnership underscores the company’s commitment to strategic investments that, while leading to a temporary dip in AWP, promise long-term growth potential.
• “Sonnet is a great tool to have for changing customer demographics over time,” said EVP of commercial insurance Fabian Richenberger. “And what we were trying to do is scale this business to a reasonable level and ensure that we could get to breakeven at the IPO we were talking about at the end of 2023. And then given the post-COVID hyperinflationary environment, we’ve moved that out to the end of 2024. And we still believe that is in line.”