Morningstar DBRS Changes Trends on Definity Financial Corporation and Definity Insurance Co. to Positive From Stable, Confirms Financial Strength Rating at "A"

DBRS Limited (Morningstar DBRS) changed the trends on Definity Financial Corporation (Definity or the Company) and its related operating entity, Definity Insurance Company, to Positive from Stable. At the same time, Morningstar DBRS confirmed all credit ratings, including Definity's Issuer Rating at BBB (high) and Definity Insurance Company's Financial Strength Rating and Issuer Rating at "A."

KEY CREDIT RATING CONSIDERATIONS
The change in the trend to Positive from Stable recognizes Definity's steady organic premium growth, consistent underwriting and improving organic profitability, as well as the Company's improved risk profile, reflecting an increase in investments in highly rated fixed-income assets and a reduction in exposure to equities. The credit rating confirmations reflect the Company's established presence in the Canadian property and casualty (P&C) insurance market where it offers a diversified mix of P&C insurance products. The credit ratings also consider Definity's good risk profile, and the Company's strong/good earnings ability, liquidity, and capitalization.

On May 27, 2025, Definity announced that it had entered into a definitive agreement with Travelers to acquire most of Travelers' Canadian P&C insurance operations, amounting to $1.6 billion in personal and commercial lines premiums. In Morningstar DBRS' view, the transaction is credit neutral. With expected combined annual premiums of approximately $6 billion, Definity is set to become the fourth-largest P&C insurer in Canada, thereby improving its market position in line with the Company's strategic plan of becoming a top five player in the Canadian P&C insurance industry. The acquisition will also expand Definity's product suite, especially with respect to the commercial insurance offerings, and deepen broker relationships while generating substantial run-rate expense synergies. While the acquisition improves Definity's market positioning and revenue generation, there are operational risks associated with integration, as well as higher leverage that reduces financial flexibility. Since this is Definity's first large-scale acquisition, the transaction raises integration and execution risks in the short to medium term. While there have been no large-scale integrations, Morningstar DBRS notes that the Company's management has successfully led large reorganization projects in the past, thereby partially mitigating this concern.

CREDIT RATING DRIVERS
Definity's credit ratings would be upgraded if the Travelers' Canada acquisition is executed successfully, while the Company maintains similar core performance and balance sheet metrics.

The trend would be changed from Positive to Stable if there were material integration issues. Conversely, the credit ratings would be downgraded if Definity experiences a sustained material decline in underwriting, and overall profitability combined with a substantial decline in capital buffers.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Good
Definity has good franchise strength and is well established in the Canadian P&C insurance market. The acquisition of the Canadian business of Travelers is expected to further strengthen the Company's market position, resulting in Definity becoming a top five P&C insurance company in Canada. Definity operates primarily in Ontario, which accounted for 61% of its Q1 2025 gross written premiums. Other geographic areas include British Columbia (12%), Québec (7%), the Atlantic provinces (7%), and Alberta and the Prairies (13%). The Company's product mix is diversified, with personal auto representing 42% of Q1 2025 gross written premiums, personal property representing 25%, and the remaining 33% consisting of various commercial lines products (auto, property, and liability). The acquisition of Travelers' Canadian operations is expected to accelerate the transformation of Definity's commercial insurance platform, while adding additional capabilities in marine, professional liability and other lines of business while increasing the scale of the Company's personal lines of business significantly. Definity has been investing to strengthen its distribution channel network, as well as diversifying its product range, and implementing scalable systems.

Earnings Ability Building Block Assessment: Strong/Good
Definity's premium growth trend has been positive and is expected to increase significantly when the Travelers Canada acquisition is completed. The Company expects the acquisition of Traveler's Canadian operations to be immediately accretive to earnings, generating an estimated $100 million of pre-tax run-rate expense synergies. Definity's current 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. Over the years, Definity's various actions to improve profitability and reduce earnings volatility have been effective. Specifically, Definity has reported consistent underwriting profitability over the past five years. As a result, the Company's net earnings results have improved significantly over the past several years, including solid Q1 2025 results.

Risk Profile Building Block Assessment: Good
Definity has prudently managed its investment portfolio mix by holding a significant amount of highly rated fixed income investments and a moderate amount of equities, while generally avoiding nonliquid assets such as real estate or other alternative assets. Moreover, the quality of securities held in the investment portfolio has improved over the past year, strengthening the risk profile. Meanwhile, 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. However, operational risk is expected to be elevated in the short to medium term because of the risks associated with the execution and integration of the Travelers Canada acquisition. Much of the Company's risk exposure relates to the planning and execution of its strategic goals. These plans, while beneficial in the long term, carry some execution integration risk because of their size and complexity.

Liquidity Building Block Assessment: 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 an $800 million unsecured committed credit facility that remains mostly undrawn as at May 8, 2025.

Capitalization Building Block Assessment: Strong/Good
Definity is well capitalized, reflecting the Company's high-quality investments and appropriate regulatory capital buffers. Definity Insurance Company's (Definity's insurance operating subsidiary) Minimum Capital Test ratio was 215% as at Q1 2025 (204% as at YE2024), 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. However, this is expected to change since it plans to raise debt to finance part of the cost of acquiring the Canadian operations of Travelers. Definity has good capital flexibility because it currently has zero long-term debt, and as publicly traded company, it can raise additional capital from the stock market, if needed.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

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 trend. As part of its P&C insurance 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 Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (September 10, 2024) https://dbrs.morningstar.com/research/439195. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 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 https://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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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

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

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