DBRS Morningstar Changes Trend on Trisura Group Ltd. and Its Operating Entities to Stable From Positive; Confirms Ratings

DBRS Limited (DBRS Morningstar) changed the trends on the ratings of Trisura Group Ltd. (Trisura or the Company) and its operating entities to Stable from Positive and confirmed Trisura’s Issuer Rating and Senior Unsecured Notes rating at BBB as well as the Financial Strength Rating of A (low) for its operating entities.

KEY RATING CONSIDERATIONS
The change in trends to Stable from Positive reflects the substantial one-time $64.4 million (tax effected) writedown of reinsurance recoverables related to Trisura’s U.S. fronting business, a business that was historically viewed as lower risk and has been a big driver of growth for the Company. This loss, related to one of Trisura’s larger U.S. fronting programs, suggests potential concerns related to risk management of counterparty credit and collateral positions. Positively, management is confident that this problem is isolated to this one fronting program, and the Company is taking appropriate steps to address any shortcomings.

The rating confirmations reflect Trisura’s solid financial position, including adequate profitability levels in 2022 despite the reinsurance recoverables writedown, a prudent investment portfolio that provides ample liquidity, and a still sound capital buffer following the $144 million equity capital raised last year. Trisura’s franchise continues to generate substantial value from its relationships with distributors and reinsurers.

RATING DRIVERS
DBRS Morningstar would upgrade the ratings if the Company were to demonstrate improvements to risk management and controls in response to the recent writedown of reinsurance recoverables while continuing to report strong profitability and capitalization levels, particularly against weaker economic conditions. Conversely, DBRS Morningstar would downgrade the ratings if Trisura were to experience further issues with its reinsurance programs or its risk management practices. In addition, the ratings would be downgraded if there were a sustained decline in profitability or capitalization metrics.

RATING RATIONALE
Trisura’s position in the specialty commercial insurance market in Canada and in the fronting market in the U.S. has allowed it to deliver strong, profitable growth in recent years. Trisura has a respectable market position in the Canadian specialty commercial insurance market, especially in surety where it ranks fourth at approximately 10% of direct premiums written. Trisura’s U.S. fronting business continues to grow substantially, despite a competitive market, showing the effectiveness of its distribution strategy based on strong relationships with third-party program administrators.

In 2022, Trisura’s U.S. fronting business was involved in a disagreement with the counterparty on one of its fronting programs, which resulted in the writedown of $81.5 million (pre-tax) in reinsurance recoverables. This incident highlights some of the risks with the Company’s fronting business, where prudent management of reinsurance counterparties is critical. While the reinsurance coverage is typically purchased from rated reinsurers or appropriately collateralized, higher costs of third-party catastrophe reinsurance on this program led to the depletion of the collateral which contributed to the writedown. Trisura notes that the conditions that resulted in this loss were unique to this program and that it has no concerns with collectability of collateral on any other program. Overall, DBRS Morningstar views Trisura as having above-average credit risk exposure through the reinsurance counterparty risk on fronting programs as well as through the surety insurance line. Positively, the investment portfolio is well diversified across sector, geography, and risk exposure with a large cash position providing ample liquidity.

Despite the reinsurance recoverable writedown, Trisura has reported strong financial results in recent years, driven by superior underwriting performance and growing fee income from its fronting business. Underwriting margins remain consistently high, while return on equity (ROE) was lower at 5.9% in 2022. Adjusting for the one-time writedown, ROE would have been a very strong 19% and remained superior to its peers. The Company remains well capitalized but will have a reduced ability to fund short-term growth opportunities because of the writedown. In the medium term, DBRS Morningstar expects Trisura to have good organic capital generation, which will provide financial flexibility, especially considering its low leverage.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Environmental concerns regarding Climate & Weather Risks are relevant to the ratings of Trisura as a property and casualty (P&C) insurer but did not affect the assigned ratings or trends. As part of its P&C product offering, Trisura is exposed to weather-related losses from natural catastrophic events such as wind, wildfire, hail, flooding, and other extreme weather events. These events can lead to earnings volatility and increased reinsurance cost. DBRS Morningstar considered this ESG factor as part of product risk when assessing the Company’s risk profile. As of now, Trisura has not adopted the processes of the Task Force on Climate-Related Financial Disclosures.

Governance (G) Factors
DBRS Morningstar’s assessment of Trisura’s risk management framework and oversight up to the board level had a significant impact on the trend changes on the ratings in light of the writedown of reinsurance recoverables in the Company’s U.S. fronting business. The size of the writedown relative to the Company’s capitalization, in particular, indicates the need for enhanced risk governance. Outside of this incident, DBRS Morningstar has no indication of broader risk governance issues with Trisura, and the Company has already put measures in place to improve both its internal counterparty management procedures and its risk oversight function.

There were no Social factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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 (August 31, 2022; https://www.dbrsmorningstar.com/research/402220). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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