DBRS Morningstar Confirms Ratings of Co-operators General Insurance Company at A (low) and Pfd-2 (low) with Stable Trends

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

KEY RATING CONSIDERATIONS
The ratings confirmation and Stable trends reflect the Company’s resilient franchise, conservative risk profile, good capitalization, and ability to adapt to a challenging operating environment. CGIC is a leading general insurance provider in Canada that has a strong relationship with the co-operative movement. CGIC has sufficient product diversification and an effective multichannel distribution network. Risk management and risk mitigation are integrated within the Company’s business plan and embedded throughout the organization. The investment portfolio is conservative, with declining exposure to equity risk that should result in less earnings volatility. The Company maintains low attachment points for its reinsurance cover, helping it to smooth profits and transfer risks that are beyond its risk appetite. Premiums growth has been steady with an improving trend. Volatile investment earnings, automobile insurance claims, and large property insurance losses partly caused by the increasing frequency of major weather-related events have applied negative pressure on net profit margins. However, underwriting results have improved significantly as of the first nine months of 2020 (9M 2020) because of fewer claims events compared with prior years. CGIC maintains appropriate liquidity in the form of a highly marketable investment portfolio, recurring premium inflows, and the availability of contingent liquidity sources. The Company also maintains good regulatory capital levels and utilizes low leverage, enhancing its financial flexibility.

RATING DRIVERS
The ratings would be upgraded if there is a sustained material improvement in underwriting profitability while maintaining strong regulatory capital ratios.

Conversely, the ratings would be downgraded if there is (1) a sustained material decline in revenue generation resulting in a significant loss of market share and positioning, (2) an extended period of the combined ratio being persistently above 102%, and (3) the occurrence of adverse loss events causing a sustained material decline in regulatory capital.

RATING RATIONALE
DBRS Morningstar views CGIC’s franchise strength as good, which reflects the size and diversity of its core operations. The Company enjoys good brand awareness for automobile, home, farm, and commercial insurance products across Canada. CGIC has a strong and diversified distribution channel strategy that has facilitated the steady growth of revenue over the years. CGIC is indirectly owned by the co-operative movement through 46 co-operative members and ranks fourth among property and casualty (P&C) insurance companies operating in Canada, with a 6.2% market share (YE2019) based on aggregate direct written premiums by industry. The co-operative culture is highly entrenched in Canada, appealing to specific segments of society, especially those living in agricultural and rural communities. Co-operative ownership enhances the Company’s unique profile, providing strong loyalty and brand awareness within the co-operative community.

CGIC has a well-established enterprise risk management framework that reflects its operational and product complexity. Risk management and risk mitigation are integrated within the Company’s business plan and embedded throughout the organization. There is a good separation of the risk-assuming and risk-monitoring functions. The Company’s operations are focused in Canada and, as a result, it does not have international business activity and associated cross-border operating risks. The Board’s structure and risk monitoring processes are aligned with the size and complexity of the Company’s business model. However, members of the Board are selected from within the 46 co-operative organizations that own the Group, which limits potential candidates.

DBRS Morningstar considers CGIC’s earnings ability to be moderate. The Company reported positive net earnings in four of the past five fiscal years. CGIC reported a net loss for 2018 as a result of elevated claims experience exacerbated by fluctuating market conditions, which affected investment income negatively. However, results rebounded for 2019 as the Company reported net income of $174 million and 9M 2020 results have been solid, with a return on equity of 11.1%. CGIC’s full-year combined ratios in recent years have been near 100% or higher (101.1% for 2019), reflecting the high claims experience and elevated expense ratios. Because of the persistently high combined ratios seen in previous years, greater focus on consistent underwriting profitability is viewed as an area that requires more emphasis going forward. Considering the current low yield yet highly volatile equity market environment, maintaining good underwriting results is imperative for achieving sustained net profitability. A prolonged period of high combined ratios would likely put negative pressure on the ratings. Positively, underwriting results have improved significantly, with the Company reporting a very good year-to-date combined ratio of 96.5% for the period ended September 30, 2020.

DBRS Morningstar views CGIC’s liquidity position as good. The factors that contribute to this assessment include a reasonably predictable insurance and claims risk profile, high levels of marketable assets, applicable reinsurance cover commensurate with risk exposure limits, and good asset quality. The Company has a resilient liquidity position, with the balance sheet comprising mainly marketable assets, with 85.7% of the bond portfolio consisting of bonds rated “A” and above as at 9M 2020. The Company's claims payments are funded by current revenue cash flow that typically exceeds cash payout requirements.

DBRS Morningstar views the Company's level of capitalization as good. CGIC currently has no long- or short-term debt on its balance sheet but has preferred shares, generating a financial leverage ratio of 10.2% as at 9M 2020. DBRS Morningstar views the low leverage positively because the Company has unused debt capacity, enhancing its financial flexibility. CGIC also maintains high solvency ratios, as evidenced by the Minimum Capital Test ratio of 232% as at September 30, 2020, and 209% as at YE2019. The Company’s fixed-charge coverage ratio is considered good at 6.1 times as at YE 2019.

ESG CONSIDERATIONS
Environmental concerns related to climate and weather risks are key drivers behind the rating action. As a P&C insurer, CGIC is exposed to catastrophe loss from natural events, such as wind, wildfires, hail, flooding, and other extreme weather events. These events can lead to earnings volatility and increased insurance costs. This ESG factor is primarily considered as part of product risk when assessing the Company’s risk profile, but can also affect Earnings Ability, Liquidity, and Capitalization.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Co-operators General Insurance Company are as follows: Franchise Strength – Good; Risk Profile – Good/Moderate; Earnings Ability – Moderate; Liquidity – Good; Capitalization – Good.

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

The principal methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (July 21, 2020: https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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