DBRS Morningstar Assigns Issuer Rating of BBB to Definity Financial Corporation; Stable Trend

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of BBB to Definity Financial Corporation (Definity, or the Company). The trend is Stable.

KEY RATING CONSIDERATIONS
The assignment of the Issuer Rating is aligned with the standard holding company notching as per the DBRS Morningstar methodology. Specifically, Definity’s Issuer Rating is positioned two notches below the Financial Strength Rating (FSR) of its major operating subsidiary, Economical Mutual Insurance Company (Economical; rated A (low) with Stable trend by DBRS Morningstar). Among other factors, the two-notch differential reflects the structural subordination of the holding company’s creditors to the operating company’s policyholders and creditors in an insolvency situation, while recognizing the reliance of the Company on the upstreaming of earnings from its operating companies. Economical’s ratings were assigned on August 26, 2021.

In DBRS Morningstar’s view, the demutualization enhances Economical’s financial flexibility by being able to access the equity markets and enable it to make acquisitions to more rapidly build scale and market share.

RATING DRIVERS
As Definity is the holding company for Economical, its Issuer Rating will move in tandem with Economical’s FSR. The rating drivers for Economical are as follows:

If Economical is able to materially improve overall profitability while maintaining its current market positioning and strong regulatory capital ratios, the ratings would be upgraded.

Conversely, the ratings would be downgraded if there is a sustained deterioration in Economical’s overall profitability, capitalization, or market positioning.

RATING RATIONALE
Definity’s main operating subsidiary, Economical, is the seventh-largest property and casualty (P&C) insurance company in Canada. Economical has a 4.4% market share in Canada’s fragmented P&C market, where only one insurer has a market share greater than 10%. In demutualizing, the Company expects that the new structure will enable it to compete more effectively, especially in an industry that is rapidly consolidating. With a stock structure rather than the mutual structure, the Company will be able to raise capital more effectively, enabling it to make acquisitions in order to grow its scale and market share.

Economical’s premium growth trend is positive and DBRS Morningstar anticipates that this trend is likely to continue as a result of business growth initiatives. Economical’s historical combined ratio is not optimal in today’s low interest rate environment, as companies need to generate more earnings from underwriting profits to offset lower income generated from invested assets. However, the combined ratio improved significantly in 2020 to 94.6% (105% in 2019) driven by pricing and underwriting actions taken to improve profitability, lower frequency in automobile claims, and benign weather.

Most products sold are short term in nature, with Economical retaining the ability to reprice its insurance policies annually on renewal if premiums prove inadequate compared to claims experience. The Minimum Capital Test ratio for Economical was 272.04% as at Q3 2021 (268.3% as at YE2020), which is well above the supervisory target ratio of 150% set by the regulators. This regulatory capital level provides capacity to withstand reasonably severe adverse events while supporting the underwriting of new business.

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.

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). 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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