DBRS Morningstar Changes Trends on Co-operators General Insurance Company to Positive from Stable; Financial Strength Rating Confirmed at A (low)

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

KEY RATING CONSIDERATIONS
The change in the trend to Positive from Stable reflects CGIC’s consistent premiums growth in recent years, and its improved trend in underwriting performance and profitability, due in part to actions taken by management, and fewer claims events compared with prior years. DBRS Morningstar expects the improved financial performance to continue, although not at levels seen in H1 2021. The Positive trend also reflects the Company’s strengthened regulatory capital position.

The ratings confirmation reflects the Company’s established presence in the Canadian property and casualty (P&C) insurance market where it offers a diversified mix of insurance products to individuals and mid-market businesses. Confirmation of the ratings also reflects CGIC’s risk profile, which remains low. The Company maintains prudent attachment points for its reinsurance cover, helping it smooth profits and transfer risks that are beyond its risk appetite. CGIC maintains good liquidity in the form of a highly marketable investment portfolio, recurring premium inflows, and the availability of contingent liquidity sources, and leverage remains low, enhancing financial flexibility.

RATING DRIVERS
The ratings would be upgraded if the Company were to maintain its recent improvement in underwriting profitability while retaining strong regulatory capital ratios.

Conversely, the ratings would be downgraded if there were (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%, combined with a sustained material decline in overall profitability, and (3) a significant decline in the regulatory capital ratio.

RATING RATIONALE
DBRS Morningstar views CGIC’s franchise strength as good, which reflects the size and diversity of its core operations. CGIC has a strong and diversified distribution channel strategy, which has facilitated the steady growth of revenue over the years. The Company enjoys good brand awareness for automobile, home, farm, and commercial insurance products across Canada. CGIC is indirectly owned by the co-operative movement through 46 co-operative members and ranks fourth among P&C insurance companies operating in Canada, with a 6.2% market share (YE2020), 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. .

Risk management and risk mitigation are integrated within the Company’s business plan and embedded throughout the organization. CGIC has a well-established enterprise risk-management framework that reflects its operational and product complexity. 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 external candidates.

CGIC’s earnings have improved in recent years with the Company reporting 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 have rebounded with the Company reporting positive net earnings for 2019 ($174 million) and 2020 ($290 million). CGIC reported net income of $383 million as of H1 2021 with a very high ROE of 36.6%.

Liquidity remains solid based on 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 85.6% of the bond portfolio consisting of bonds rated “A” and above as at H1 2021. Highly liquid federal, provincial, and municipal government bonds comprised 67% of the bond portfolio as at H1 2021. The Company's claims payments are funded by current revenue cash flow, which typically exceeds cash pay-out requirements. CGIC had $19.0 million in available credit facilities as at December 31, 2020, which was undrawn.

CGIC’s financial leverage ratio of 8.6% as at H1 2021 consists only of preferred shares. DBRS Morningstar views the low leverage positively because the Company has unused debt capacity, enhancing financial flexibility. CGIC also maintains high regulatory solvency ratios, as evidenced by the Minimum Capital Test ratio of 258% as at June 30, 2021, and 232% as at YE2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577