Credit ratings agency downgrades Travelers Canada and Dominion

Global credit ratings agency A.M. Best has downgraded credit ratings for The Dominion of Canada General Insurance Company (Dominion) and Travelers Insurance Company of Canada (TICC) following a sale to Definity Financial Corporation announced last week.

In a statement, A.M. Best says it downgraded Dominion’s financial strength rating to A- (Excellent) from A (Excellent) and the firm’s long-term issuer credit rating to “a-” (Excellent) from “a” (Excellent).

It likewise downgraded Travelers Canada’s financial strength rating to A+ (Superior) from A++ (Superior) and the long-term issuer credit rating to “aa-” (Superior) from “aa+” (Superior).

Further, A.M. Best notes it has “placed Dominion’s Credit Ratings under review with developing implications, while [it] has placed TICC under review with negative implications.” It adds the “ratings of Dominion reflect its balance sheet strength, which A.M. Best assesses as strongest, as well as its marginal operating performance, neutral business profile, and appropriate enterprise risk management (ERM).”

As for TICC, A.M. Best says the ratings “reflect its balance sheet strength, which A.M. Best assesses as strongest, as well as its strong operating performance, neutral business profile, and appropriate ERM.”

Financial concerns

Announcement of a $3.3-billion merger agreement under which Definity would acquire Travelers’ Canadian business – which includes the personal insurance business and most of the commercial insurance business of Travelers Canada, which include Dominion and TICC – triggered AM Best’s “removal of the TRV lift from Dominion and TICC, which have been placed under review,” it said. (TRV is the New York Stock Exchange ticker symbol for U.S.-based parent The Travelers Companies, Inc.)

“And while Dominion will have developing implications, TICC will have negative implications as a result of the higher rating compared with the rating of the new parent company at close,” adds A.M. Best.

That assessment roughly translates into a concern that de-coupling from the significantly stronger capitalization of The Travelers Companies Inc. could have future implications. According to Canadian Underwriter’s 2024 Stats Guide, the MCT/BAAT ratio – a capital ratio reported in financial statements expressed as (Available Capital) ÷ (Required Capital) – for Definity Insurance Company stood at 204.76% in 2023. Dominion’s MCT/BAAT was 406.48%. Data in the guide is supplied by MSA Research.

Meanwhile, the MCT/BAAT ratios for Travelers’ Canadian businesses reported in 2023’s Stats Guide are also solid at 452.20% for Travelers Insurance Company of Canada and 429.98% for all Canadian subsidiary companies under the Travelers banner.

Related: What brokers think of the Definity-Travelers Canada deal

Definity’s acquisition of Travelers Canada and Dominion is expected to make Definity a Top 5 Canadian insurer, according to a commentary from Morningstar DBRS following the merger announcement.

And, while that ratings agency deemed the transaction “credit neutral” and said it “improves Definity’s market positioning and revenue generation,” it also flags some risks.

“Since this is Definity’s first large-scale acquisition, the transaction raises integration and execution risks in the short to medium term,” Morningstar DBRS says.

“While there have been no large-scale integrations…the company’s management has successfully led large reorganization projects in the past, thereby partially mitigating this concern.”