DBRS Upgrades Co-op General Preferred Shares to Pfd-3 (high)

DBRS has today upgraded its rating on the Non-Cumulative Preference Shares of the Co-operators General Insurance Company (Co-op General or the Company) to Pfd-3 (high) from Pfd-3. The trend on the rating remains Stable. The upgrade reflects an updated review of the Company’s strategic market position relative to its peer group in the Canadian property and casualty (P&C) insurance industry. As part of a larger financial services group, the Company enjoys a strong franchise in the co-operative space, the benefits of which have been highlighted by a more comprehensive and integrated management style. Recent management initiatives to reduce costs, to contain underwriting risk and to cultivate deeper customer relationships are evidence of a new approach to the business. While DBRS cannot yet point to specific improvements in financial performance as evidence of the benefits of these changes, especially given the underlying volatility in the industry in the context of the recent financial crisis and the resulting economic slowdown, it believes that the Company is relatively better positioned for future financial performance than it has been historically.

Notwithstanding the Company’s stronger operating platform, financial performance has continued to suffer along with that of the Canadian industry, as competitive market conditions have been aggravated by deteriorating accident benefit claims in the Ontario auto market and more extreme weather conditions that have resulted in higher property losses. Return on equity at 6.6% in 2009, while higher than 2008’s 4.6%, remains well below the Company’s target of 12%. Results for the first three months of 2010 improved to a 10.5% ROE from negative 4.4% a year ago on lower claims costs due to mild winter weather throughout the country. These results are consistent with those of the industry. Recently expanded distribution capacity in British Columbia and in Québec bode well for some organic policy growth, though the slow economy and competitive market conditions continue to limit the rate of growth in rates. DBRS identifies this development as being consistent with the traditional insurance cycle and not related to any systemic weakness at the Company.

Nevertheless, following $250 million of favourable reserve development in 2009, (including the benefit of the release of reserves held against the regulated Alberta minor injury cap which is no longer the subject of a legal appeal), the Company only managed to improve its combined ratio by a few points to 103.1% from 106.3% in 2008. Low claim activity in Q1 2010 reduced the combined ratio further to just over 100%. The 2009 accident year combined ratio is correspondingly very high at over 110%, reflecting higher property claims across the country and higher accident benefit claims in Ontario, notably in the GTA. These combined ratios are well above the Company’s target of 95% to 99%. To address a fundamental lack of underwriting profitability, the Company is focusing on improved underwriting of property risks by further segmenting the population on the basis of potential exposure to water damage caused by terrain or inadequate municipal infrastructure, and by credit scores which are correlated to claim activity. With respect to Ontario auto, major insurance reform in expected to be enacted in mid-year 2010 which will cap minor injury claim costs and provide consumers additional choice over their level of accident benefits, which can be expected to put downward pressure on claims costs. In the meantime, the Ontario auto insurance regulator has been supportive of the Company and the industry, having allowed premium increases of between 5% and 10% in the last year.

The Company’s capitalization is appropriate for the rating category with a 20.6% total debt plus preferred to capital ratio as of March 31, 2010. The corresponding Minimum Capital Test (MCT) ratio is 237%, which is well in excess of the Company’s 175% internal minimum. The Company increased its capital in 2009 with a $115 million preferred share issue following a $92 million payout to its parent in 2008, which restored the MCT to a conservative level above 230% .

Strategically, the Company remains well-diversified by product and by geography with increased exposures to the more rapidly growing Western Canada market. It is correspondingly positioned to take advantage of its strong brand and reputation, especially with consumers who have an affinity for dealing with co-operative and mutually-owned business enterprises. By virtue of its continuing investment in distribution capacity and expense reduction through technology and synergies related to the sale and distribution of affiliated company products, the Company is expected to remain price competitive. Nevertheless, in a mature market, the Company, like the rest of the industry, is challenged to grow its written premium without sacrificing underwriting profitability in order to return to more acceptable and sustainable levels of profitability.

Acquisitions by the Company’s ultimate parent and a related company, including the acquisition of Addenda in 2008 and CUMIS in 2009, are part of a broader growth and diversification strategy, adding strategic heft to the group which should in turn benefit the Company’s market position and profile.

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

The applicable methodology is Rating Property and Casualty Insurance Companies in Canada, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.

This rating did not include issuer participation and is based solely on publicly available information.