CCS.PR.C: DBRS Upgrades to Pfd-2(low)

DBRS has announced that it:

has today upgraded the Non-Cumulative Preference Shares rating of Co-operators General Insurance Company (CGIC or the Company) to Pfd-2 (low) from Pfd-3 (high). DBRS has also assigned an Issuer Rating of A (low) and a Financial Strength Rating (FSR) of A (low) to the Company. All trends are Stable. All the rating actions are detailed in the table below. The rating actions taken today follow the publication of DBRS’s new methodology, “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (December 2015) (Global Insurance Methodology).

DBRS’s upgrade of CGIC reflects the evaluation of the Company’s fundamentals using the Global Insurance Methodology, which places greater value on the Co-operators’ sizable controlled distribution model as well as property and casualty (P&C) product diversification. CGIC is the main subsidiary of Co-operators Financial Services Company (CFSL). They both form part of The Co-operators Group Limited (the Group), a co-operative financial services organization with complementary interests in 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 fifth in property & casualty insurance products in Canada with a 5.1% market share based on 2014 direct written premiums. The Company is beginning to benefit from recent management initiatives to reduce costs, support better underwriting results and cultivate deeper customer relationships. CGIC has been improving its customer segmentation and, consequently, its ability to differentiate pricing, which creates a more favourable platform for enhancing its earnings ability. The earnings ability evaluation considers the return on equity performance of the Group at the CFSL level where the earnings from CGIC are partially offset by lower earnings from the associated life subsidiary.

Besides its good franchise strength, the Company has a risk profile that reflects its business mix of home, auto and small business insurance and a conservative bond portfolio invested mainly in government debt. CGIC’s capitalization benefits from its low financial leverage. It has no long-term debt and has low levels of short-term borrowing and preferred shares, yielding a low financial leverage ratio and high fixed-charge coverage ratios. The low leverage is viewed positively as CGIC is owned by a co-operative and is therefore largely dependent on internal capital generation. High combined ratios that are near 100% or higher in recent periods, partly driven by the expense of technology development projects, have affected the overall profitability of the Company. Successful implementation of these projects could strengthen CGIC’s earnings ability.

The Stable trend reflects an excellent capital solvency position and an expectation that earnings will improve modestly. A sustained erosion of CGIC’s market share or a prolonged period of higher combined ratios could place negative pressure on the ratings. Conversely, the identification and effective penetration of new market segments could result in positive ratings pressure.

The new methodology is discussed in the post DBRS Releases and Applies New Insurance Company Methodology.

Co-Operators has only one series of preferred share currently outstanding, CCS.PR.C.

It will be noted that, unusually, this is the operating company issuing preferred shares despite the presence of a holding company, Co-operators Financial Services Limited, which was confirmed at BBB.

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