DBRS Confirms Co-operators General Insurance Company at A (low), Pfd -2 (low)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Financial Strength Rating of Co-operators General Insurance Company (CGIC or the Company) at A (low) and the Non-Cumulative Preference Shares rating at Pfd-2 (low). All trends are Stable.

The ratings of CGIC reflect the evaluation of the Company’s fundamentals using the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015). CGIC is the main subsidiary of Co-operators Financial Services Company (CFSL), forming part of The Co-operators Group Limited (the Group), a co-operative financial services organization with interests in general and life insurance and investment management. As part of a larger financial services group, CGIC enjoys a strong franchise in the co-operative space and ranks sixth in property & casualty (P&C) insurance products in Canada, with a 5.5% market share based on 2015 direct written premiums. In order to continue competing effectively in the Canadian P&C insurance industry, the Company is investing in strengthening its distribution network, technological infrastructure and ways to cultivate and deepen customer relationships.

CGIC’s ratings benefit from a conservative risk profile. The Company has no long-term debt and has low levels of short-term borrowing and preferred shares, yielding a low financial leverage (13.1% at 9M 2016). Asset quality is similarly good with more than half of the Company’s bond portfolio invested in federal or provincial government bonds. CGIC also enjoys high solvency ratios, as evidenced by a 9M 2016 Minimum Capital Test ratio of 212% (YE 2015 ratio of 225%), an important consideration for the rating considering the Company’s somewhat limited financial flexibility considering its co-operative structure. The risk profile is also positively impacted by Company efforts to expand and enhance its enterprise risk management function and more thoroughly embed it in operations and business planning.

CGIC’s rating is negatively impacted by high combined ratios that are near 100% or higher in recent periods (106% at 9M 2016), impacting the Company’s earnings ability. CGIC has increased its efforts to improve its combined ratios, including improving customer segmentation and, consequently, its ability to differentiate pricing and improve its underwriting results. Additionally, ongoing efforts to improve operational efficiencies create a more favourable platform for reducing expenses and hence enhancing its earnings. Nonetheless, high loss ratios resulting partially from a trend of increasing severe weather-related losses in Canada as well as higher strategic spending continue to put pressure on earnings. The earnings ability evaluation of CGIC considers the return on equity performance at the consolidated CFSL level.

The Stable trend reflects an excellent capital solvency position and an expectation of a modest improvement in earnings as a result of increased efforts in distribution, marketing and customer service.

RATING DRIVERS

CGIC’s ratings may be negatively impact by a significant loss of market share, a prolonged period of high combined ratios resulting in low earnings or a sustained deterioration in capital levels. Conversely, positive ratings pressure may result from the execution of a well-articulated strategy, innovation in products and technology to enhance competitiveness, the identification and effective penetration of new market segments resulting in increased market share, and improved operational performance including stronger underwriting results and expense controls.

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 methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.