Morningstar DBRS Confirms Definity Financial Corporation’s Issuer Rating at BBB (high) and Definity Insurance Company’s Financial Strength Rating at “A”; Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Definity Financial Corporation’s (Definity or the Company) Issuer Rating at BBB (high). Morningstar DBRS also confirmed the Issuer Rating and the Financial Strength Rating of Definity Insurance Company, Definity’s insurance operating subsidiary, at “A.” The trend for all credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect the Company’s consistent premium growth in recent years and the progress made in diversifying the business to be less reliant on auto policies, both of which have contributed to a steady improvement in the Company's overall performance. Indeed, the combined ratio, and ultimately net earnings, have steadily improved over the past five years, and Morningstar DBRS expects the improved financial performance to continue.

The credit ratings and Stable trends also consider the Company’s good risk profile, which includes a conservative investment portfolio with a moderate exposure to equity risk. Definity maintains good liquidity in the form of highly marketable investment assets, recurring premium inflows, and available contingent liquidity sources. The Company’s resilient capitalization reflects its zero long-term leverage, capital flexibility, and appropriate regulatory solvency ratio.

CREDIT RATING DRIVERS
Definity’s credit ratings would be upgraded if the Company continues to strengthen its overall profitability and franchise, while maintaining an appropriate level of regulatory capital, leverage, and liquidity.

Conversely, the credit ratings would be downgraded if there were a sustained material deterioration in the Company’s risk profile and capital metrics.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Good
Definity has good franchise strength and is well established in the Canadian property and casualty (P&C) insurance market. The Company operates primarily in Ontario, which accounted for 60% of its Q1 2024 gross written premiums. Other geographic areas include British Columbia (11%), Québec (8%), the Atlantic provinces (7%), and Alberta and the Prairies (14%). The Company's product mix is diversified, with personal auto representing 43% of Q1 2024 gross written premiums, personal property representing 25%, and the remaining 32% consisting of various commercial lines products (auto, property, and liability). Definity has invested heavily to position its business for future growth with a focus on strengthening the Company's distribution channel network, diversifying its product range, and implementing scalable systems. The Company continues to invest in improving its direct underwriting platforms and making it more scalable.

Risk Profile Building Block Assessment: Good
The Company has a good risk profile. Much of the risk relates to the planning and execution of its strategic goals. These plans, while beneficial in the long term, carry some execution risk because of their size and complexity. Definity has prudently managed its investment portfolio mix, avoiding nonliquid assets such as real estate or other alternative assets. The Company has appropriate reinsurance to mitigate the impact of large claims losses caused by occasional extreme natural catastrophe events. Definity has taken measures to reduce any channel conflict that may arise from having both direct and broker channels, primarily by launching its Sonnet platform under a separate, independent operating brand.

Earnings Ability Building Block Assessment: Good
Morningstar DBRS views the Company’s earnings ability as good. Definity’s revenue stream comprises a diversified, balanced, and stable group of products and business lines and has demonstrated prudent growth characteristics over the past five years. The Company’s underwriting profitability profile is aligned with its peer group, and Morningstar DBRS expects this to continue because of the ongoing favourable pricing environment for most P&C insurance lines of business. Definity's premium growth trend is positive and is likely to continue as a result of the Company's ongoing business growth initiatives. Definity's various actions to improve profitability and reduce earnings volatility have been effective. The Company's net earnings results improved significantly over the past five years to 2023 and are trending well so far based on Q1 2024. Morningstar DBRS expects the positive results to continue because of the ongoing favourable pricing environment for most nonregulated P&C insurance lines of business.

Liquidity Building Block Assessment: Strong/Good
Morningstar DBRS considers Definity's liquidity position to be strong/good. The invested assets portfolio comprises primarily cash and equivalents, equities, and high-quality fixed income investments. The Company’s liquid assets are more than enough to cover all policyholder liabilities, ensuring adequate policyholder protection. Most products are short term in nature and Definity can reprice its insurance policies annually on renewal if premiums prove inadequate compared with claims experience. Definity has a $800 million unsecured committed credit facility that remains mostly undrawn.

Capitalization Building Block Assessment: Strong/Good
Definity has strong/good capitalization and asset quality. Definity Insurance Company’s Minimum Capital Test ratio was 206% as at Q1 2024 (205% as at YE2023), which is above the supervisory target ratio of 150% set by the regulators. The Company still does not have any long-term debt in its capital structure, resulting in zero long-term leverage. Since its demutualization, Definity's capital flexibility has improved because publicly traded companies can raise additional capital from the stock markets when needed.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Environmental concerns regarding climate and weather risks are relevant to the credit ratings on Definity and its affiliate as a P&C insurer but do not affect the assigned credit ratings or trends. As part of its P&C product offering, Definity 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. Definity reinsures certain risks with reinsurers to limit the Company’s maximum loss for catastrophe events or other large losses. The placement of ceded reinsurance is mainly on an excess-of-loss basis (per event or per risk), but some proportional cessions are made for specific portfolios. Morningstar DBRS considered this factor as part of product risk when assessing the Company’s risk profile.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (April 15, 2024), https://dbrs.morningstar.com/research/431180. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030, in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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 dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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