DBRS Morningstar Confirms All Credit Ratings on Trisura Group Ltd. and Its Operating Entities; Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the Senior Unsecured Notes of Trisura Group Ltd. (Trisura or the Company) at BBB as well as the Financial Strength Rating of A (low) on its operating entities, all with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings and trends reflect Trisura’s strong specialty insurance franchise that has delivered substantial growth and profitability in recent years despite its Q4 2022 writedown related to one of its U.S. reinsurance fronting program counterparties. While it serves as a reminder of the potential operational and counterparty risks present in the reinsurance fronting business, DBRS Morningstar views this event as an isolated incident and considers the Company to have taken appropriate steps to prudently manage its risk exposure in response.

Trisura’s financial position remains solid with ample capital buffers and liquidity, a conservative use of financial leverage, and good financial flexibility as demonstrated by successful equity capital raises in 2022 and 2023. Trisura is poised to benefit from higher yields on its investment portfolio, which includes a large portion of high quality corporate bonds, while it continues to generate substantial value from its relationships with distributors and reinsurers.

CREDIT RATING DRIVERS
DBRS Morningstar would upgrade the credit ratings if the Company continued to demonstrate enhanced risk management practices and to report healthy growth, profitability, and capitalization levels, particularly amid a weaker operating environment. Conversely, DBRS Morningstar would downgrade the credit ratings if Trisura were to face problems with its risk management practices or the quality of its reinsurance counterparties. In addition, the credit ratings would be downgraded if there were a sustained decline in profitability and capitalization metrics.

CREDIT RATING RATIONALE
Trisura’s position in the specialty commercial insurance market in Canada and in the reinsurance fronting market in the U.S. has allowed it to deliver strong and 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 with approximately 10% of direct premiums written in this segment. 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.

Trisura has limited product risk given the favourable claims profile of its specialty insurance lines and the low retention on its U.S. fronting business. Still, the Company’s business is exposed to other operational risks, as seen through its recent writedown of reinsurance recoverables, and prudent management of its relationships with distributors and reinsurers is critical. 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 exposures with a large cash position providing ample liquidity.

Despite the reinsurance recoverables 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 before rebounding to 13.6% for 2023 year to date. Adjusting for the writedown and run-off of the problematic reinsurance fronting program, ROE remains high relative to peers at approximately 20% over that period. The Company is well capitalized and raised an additional $50 million of equity in 2023, thus continuing to show good access to capital while keeping leverage low at 12.4%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) factors
Environmental concerns regarding Climate & Weather Risks are relevant to the credit ratings of Trisura as a property and casualty (P&C) insurer but did not affect the assigned credit 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
This factor had a significant impact on the trend assigned to Trisura. While the Company's governance structure and risk management processes are adequate for its size and its business profile, the large Q4 2022 writedown related to a disagreement with one of Trisura’s reinsurance counterparties highlighted some of the operational and counterparty risks of the reinsurance fronting business. The Company was transparent in its response to the incident and has taken necessary actions to further enhance its risk governance structure especially in the U.S. Trisura’s board and its committees have sufficient independence, diversity, and financial services expertise to provide an adequate oversight to the Company.

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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

The Grid Summary Grades for Trisura are as follows: Franchise Strength – Good/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 14, 2023; https://www.dbrsmorningstar.com/research/417109). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023; https://www.dbrsmorningstar.com/research/416784) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.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 www.dbrsmorningstar.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.

DBRS Morningstar 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. DBRS Morningstar’s outlooks and credit ratings are under regular surveillance.

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

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