DBRS Confirms Co-operators General Insurance Company at Pfd-3 (high), Trend Stable

DBRS has today confirmed its ratings on the Non-Cumulative Preference Shares of Co-operators General Insurance Company (CGIC or the Company) at Pfd-3 (high) with a Stable trend. The Company is the cornerstone of The Co-operators Group Limited, a co-operative financial services organization with complementary interests in life insurance and investment management. As part of a larger financial services group, the Company enjoys a strong franchise in the co-operative space, which ranks it among the top five providers of general insurance products in Canada. The Company is positioned to benefit from recent management initiatives to reduce costs, contain underwriting risk and cultivate deeper customer relationships. The Company is demonstrating the discipline to pull back from unprofitable business even at the cost of lost revenue. More customer segmentation and differential pricing create a more favourable platform for improved future profitability.

In the meantime, more random factors have combined to improve the Company’s recent reported results. A mild winter in early 2012 and relatively light catastrophic experience in the first half of 2012 helped to return the Company to underwriting profitability in late 2011 and into 2012. In addition, the 2010 Ontario auto insurance reform seems to have succeeded in reducing claims in personal auto lines. Despite the recent improvement in underwriting performance, the Company’s five-year average combined ratio remains above 100% (underwriting loss territory), above that of the industry’s profit leaders.

In line with the improvement in underwriting profitability, return on equity has recovered to low double digits, which is in line with the Company’s targets. Investment income remains pressured by lower interest rates, although realized gains in market values of securities have supported investment results in recent periods. Financial leverage remains modest, with the preferred shares representing just 17.4% of capitalization. The corresponding fixed-charge coverage ratio has averaged between seven and eight times, which is strong for the rating category. The Company’s consolidated regulatory minimum (MCT) capital ratio is 269%, which is well in excess of the Company’s minimum target of 180% ($437 million of excess capital). Strong regulatory capital ratios at its major operating subsidiaries permit the regular flow of dividends up to the Company which, in addition to its own operating earnings, are available to meet its preferred share obligations. Liquidity is generally not a concern in the general insurance industry as premiums are written and invested in relatively liquid assets.

Strategically, the Company remains well diversified by product, geography and distribution channel, with increased exposures to the more rapidly growing Western Canada market. It is correspondingly well 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, CGIC is expected to remain price competitive as it targets lower expense ratios in the medium term. The Company’s decision to sell its L’Union Canadienne broker-sold business in the Province of Québec removes a channel conflict in that province, which should allow for more rapid expansion of the Company’s agency distribution platform.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Canadian Property and Casualty Insurance Companies (March 22, 2011). Additional reference is made to Rating Holding Companies and Their Subsidiaries (September 5, 2012).

This rating is endorsed by DBRS Ratings Limited for use in the European Union.