DBRS Confirms Co-op General Preference Shares at Pfd-3 (high)

DBRS has today confirmed its rating on the Non-Cumulative Preference Shares of the Co-operators General Insurance Company (Co-op General or the Company) at Pfd-3 (high), with a Stable trend. 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. Although 2010 financial results did not demonstrate any financial improvements as a result of these changes, DBRS believes that the underwriting results in H1 2011, excluding catastrophe losses, have begun to demonstrate the favourable impact of these changes as well as that of the recent auto insurance reforms in Ontario.

Return on equity (ROE) declined slightly in 2010 to 6.1% from 6.6% in 2009 and remains well below the Company’s target of 12%. However, results for the first six months of 2011 improved to an 8.1% ROE from 4.4% a year ago. In 2010, the Company’s combined ratio remained flat at 103.4% versus 103.1 % in 2009 but still improved slightly from the 106.4% reported in 2008. Ontario auto results have started to reflect the regulatory changes enacted in Q3 2010, with the related improvements largely offsetting the significant losses related to the Slave Lake wildfires ($31 million catastrophe loss in Q2 2011) and other storm activity in Q2 2011. As a result, the Company’s overall combined ratio remained flat in H1 2011 versus H1 2010 at 102.2%. Although Co-op General seems to have garnered a greater benefit from the Ontario auto reforms than some of its competitors, overall results are consistent with those of the industry. These combined ratios are well above the Company’s target of 95% to 99%. However, DBRS estimates that, excluding the Slave Lake losses, Co-op General would have reported a combined ratio below 100% for H1 2011. With respect to Ontario auto, the Company is cautiously optimistic that the regulatory changes are having a positive impact.

The Company’s capitalization is appropriate for the rating category, with an 18.9% total debt plus preferred-to-capital ratio as of June 30, 2011. The corresponding Minimum Capital Test (MCT) ratio is 242%, 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 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, Co-op General 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 quality 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 Capital Inc. in 2008 and The CUMIS Group Limited 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.