Best Affirms Co-operators General, Subs Ratings; Raises Sovereign General Ratings

A.M. Best Co. has affirmed the financial strength rating (FSR) of “A-” (Excellent) and the issuer credit rating (ICR) of “a-” of Canada’s Co-operators General Insurance Company. Best also upgraded the FSR to “B++” (Very Good) from “B+” (Very Good) and the ICR to “bbb” from “bbb-” for Co-operators General’s wholly owned subsidiary, Alberta’s Sovereign General Insurance Company.

Best also affirmed the FSRs of “B+” (Very Good) and the ICRs of “bbb-“of Co-operators General’s other wholly owned subsidiaries, Quebec’s L’Union Canadienne Compagnie D’Assurances (L’Union) (Quebec) and Ontario’s COSECO Insurance Company, as well as the FSR of “A” (Excellent) and ICR of “a” of Saskatchewan-based Co-operators Life Insurance Company.

In addition Best affirmed the ICR of “bbb-” and the debt rating of “bbb-” on C$150 million (US$130.5 million) 5.07 percent senior unsecured debentures due July 2012 of Co-operators Financial Services Limited (CFSL) (Ontario), the interim holding company of Co-operators General and Co-operators Life. The outlook for all ratings is stable.

“The ratings of Co-operators General reflect its superior capitalization and balance sheet strength, profitable operating performance and experienced management team,” said Best. “The ratings also take into consideration the company’s market leadership position driven by its strong brand name recognition, product line and geographic diversification and effective use of its multi-channel distribution system.

“Partially offsetting these positive rating factors are the current downturn in the underwriting cycle for commercial lines products, uncertainty of the long-term effects of regulated pricing and product changes for auto insurance and potential earnings volatility from subsidiary operations.”

Concerning the upgrade of Sovereign, Best said they “are reflective of its improved risk-adjusted capitalization and strong, liquid balance sheet, positive profitability trend, explicit and implicit parental support and its strategic role within the Co-operators group. Sovereign offers primarily mid to small commercial lines coverage through independent brokers across Canada. Leverage ratios have improved from strong organic surplus growth while premium risk growth has remained relatively flat. In addition, the company benefits from cross marketing opportunities and services it receives from affiliated companies.”

However, Best indicated that these “rating strengths are offset in part by Sovereign’s history of reserve deficiencies, moderate exposure to property loss due to earthquakes in western Canada, as well as competitive pricing pressure in its core commercial lines. These concerns are mitigated, in part, by management’s actions to focus on core business by exiting less profitable personal lines and increasing reserves. In addition, surplus is protected by a comprehensive reinsurance program with primarily high quality reinsurers.”

Best also commented that its ratings of “L’Union and COSECO recognize their respective financial strengths and historically profitable operating performance, their strategic roles within the Co-operators group, as well as each company’s individual challenges within their market niches. L’Union serves as Co-operators General’s primary vehicle for distribution of commercial and personal lines products through independent brokers in Quebec, Newfoundland and Labrador, while COSECO offers personal lines products primarily through employer and association groups, as well as on a direct basis.

“The ratings of Co-operators Life reflect its continued strong level of profitability, consistent surplus growth and excellent risk-adjusted capitalization. It also recognizes the premium growth the company has realized in its core business segments in recent years through multi-channel distribution, which offers a wide variety of products to individual, group and credit union markets throughout Canada. Co-operators Life faces challenges cross-selling to the property/casualty policyholder base and competition from larger insurance organizations.”