DBRS Morningstar Confirms Ratings on Trisura Group Ltd. at BBB and Insurance Affiliates at A (low); All Trends Stable

DBRS Limited (DBRS Morningstar) confirmed all ratings on Trisura Group Ltd. (Trisura or the Company) and its related entities, including Trisura’s Issuer Rating and Senior Unsecured Notes rating, at BBB and the Financial Strength ratings of Trisura Guarantee Insurance Company and Trisura Specialty Insurance Company, the operating subsidiaries of Trisura, at A (low). DBRS Morningstar also assigned a Financial Strength rating of A (low) to Trisura Insurance Company, another operating subsidiary of Trisura. The trends on all ratings are Stable.

KEY RATING CONSIDERATIONS
The ratings and trends reflect Trisura’s growing market position and profitability in the Canadian specialty insurance and U.S. fronting program businesses. The Company has shown strong execution against its growth and strategic objectives while managing risk appropriately and capitalizing on recently favourable specialty insurance market conditions. Trisura has a prudent liquidity and financial leverage profile and maintains financial flexibility, including a demonstrated ability to gain access to capital markets.

Trisura’s strong recent underwriting performance is supported by higher premium rates in some product lines and favorable claims experience which may not persist in the long-term. With its growing reinsurance fronting business, Trisura is also taking on increased reinsurance counterparty risk, which, in combination with the credit risk from its investment portfolio, could expose the Company to losses under a severe credit downturn scenario.

RATING DRIVERS
DBRS Morningstar views Trisura as being in the upper quartile of its rating category. The ratings would be upgraded if the Company were to expand its market share, resulting in continued strong financial results.

DBRS Morningstar would downgrade Trisura’s ratings if underwriting profitability or fronting profit margins were to deteriorate materially for a sustained period. The emergence of significant credit losses would also result in a ratings downgrade.

RATING RATIONALE
The Company is an internationally diversified underwriter of specialty insurance products and operates through two core business segments. Trisura has a respectable market position in the Canadian commercial specialty insurance market, supported by an efficient channel distribution strategy, with appropriate product and geographic business diversification. In particular, the Company is strong in the Canadian surety insurance market where it has reached the number four position. Trisura has been able to maintain and gradually increase its market share by effectively retaining and expanding the broker distribution networks that serve its target niche markets. The Company’s market position should continue to strengthen over time as it expands geographically and through organic growth across its major lines of business.

Trisura's recent financial performance has been strong, with revenue growth supported by strong property and casualty insurance market conditions and market share gains both in the Canadian and U.S. markets. Profitability has also substantially improved because of favourable underwriting results and increasing fee income on fronting programs. Specifically, Trisura reported net income of $62.6 million in F2021, or almost double the previous year, benefitting from its increased scale and from favourable specialty market conditions that saw, in some lines, a combination of the following: substantial rate increases, lower-than-expected claims, and increased reinsurer capacity and demand for fronting programs.

The Company has an appropriate enterprise risk management framework that reflects its operational and product complexity. Trisura is exposed to above-average credit risk through its portfolio allocation of high-yield fixed-income assets, through its surety insurance coverage, and through a sizable reinsurance counterparty risk exposure. Specifically, Trisura’s exposure to BB or lower-rated bonds represents a relatively high 14% of the total bond portfolio or 6% of total invested assets.

Trisura has recently exited the life reinsurance business through the transfer of its runoff annuity reinsurance portfolio. This transaction has now simplified the Company's operations and removed earnings volatility and interest rate risk arising from the annuity portfolio’s asset-liability matching.

Trisura maintains ample liquid assets on its balance sheet, as well as access to committed banking lines of credit. The Company has demonstrated access to both debt and equity capital and has made prudent use of financial leverage while maintaining comfortable regulatory capital levels. Indeed, even with a recent debt issuance, leverage is still conservative at 17.3%, while Trisura’s regulatory Minimum Capital Test ratio of its Canadian operating subsidiary was 229% as at YE2021.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Trisura are as follows: Franchise Strength – Moderate; Risk Profile – Good/Moderate; Earnings Ability – Strong/Good; Liquidity – Good/Moderate; Capitalization – Strong/Good.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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