TEXT-S&P assigns 'A-' rating to l'Union Canadienne

Wed Dec 19, 2012 11:32am EST

Overview
     -- L'Union Canadienne (UC) is a Quebec-based property-casualty insurer.
     -- UC is considered strategically important to Royal & SunAlliance's 
(RSA) Canadian operations, which acquired UC on Oct. 1, 2012.
     -- UC's credit profile is also supported by good competitive position, 
good operating performance, and adequate capitalization. 
     -- We are assigning our 'A-' financial strength and counterparty credit 
ratings to UC; the outlook is stable.

Rating Action
On Dec. 19, 2012, Standard & Poor's Services assigned its long-term 'A-' 
counterparty credit and financial strength ratings to Canada-based property 
and casualty insurer L'Union Canadienne, Compagnie D'Assurances (UC). The 
outlook is stable.

Rationale
Standard & Poor's counterparty credit and financial strength ratings on UC 
reflect our view of UC as strategically important to Royal & SunAlliance's 
Canadian operations (RSA Canada); its good operating performance, which is 
expected to improve over the near term; and strong investments. These 
strengths are partially offset by UC's competitive position that is 
constrained by narrow geographic focus and lack of scale in commoditized 
business lines; and adequate capitalization with small equity base.

Standard & Poor's views UC as strategically important to RSA Canada. On Oct. 
1, 2012, RSA Canada acquired UC from Co-operators General Insurance Company 
for approximately C$150 million. The acquisition enhances RSA's presence in 
Quebec by providing it with significant presence in the personal lines market, 
which complements its commercial lines portfolio in Quebec, strengthening RSA 
Canada's ability to provide a full product suite across Canada and provide 
better service to its customers. Quebec is Canada's second-largest province, 
constituting 23% of its population. Under our criteria, ratings on 
strategically important entities could incorporate up to a full category of 
support but are limited to one notch below the ratings on core entities. The 
financial strength ratings on core entities of RSA group are A+/Negative. Our 
ratings on UC incorporate our view of its stand-alone credit profile and 
support from RSA group.

UC has a good competitive position in Quebec's property-casualty insurance 
market with an approximate 4% market share and direct premiums written (DPW) 
of approximately C$280 million in 2011. But these strengths are constrained by 
UC's narrow geographic focus, lack of scale, size, and any significant market 
influence within its product lines, and reliance on third-party broker 
network. We believe UC would benefit from the membership in the RSA group over 
the medium term. RSA Canada is one of the largest players in Canada with 
multidistribution capabilities and access to significant resources. Combined, 
RSA Canada and UC would account for approximately 6% market share in Quebec 
with further growth opportunities from market synergies. 

In our view, UC's operating performance is good, but its underwriting 
performance has lagged that of its peers and low interest rate environment has 
pressured earnings as well. Over the past five years (2007-2011), the average 
combined ratio was about 102%. The relative underperformance is primarily 
driven by UC's commercial lines business. The underwriting losses continued in 
2012, with UC's year-to-date third-quarter combined ratio at 104% largely due 
to large losses in commercial lines and some weather-related losses. Remedial 
measures are expected to benefit the performance in the near term but net 
income could remain pressured, which further could pressure capitalization. 

We view UC's capital position as adequate based on our capital model. The 
operating leverage (ratio of premiums-to-equity) at about 2.7x is considered 
relatively high and our view is further constrained by the company's small 
shareholders' equity base of C$94 million as of third-quarter 2012, which 
increases the risk of potential capital deterioration due to aggregation of 
risks, especially given limited earnings capacity. UC's clean balance sheet, 
strong investment portfolio, adequate reserves, and sufficient reinsurance 
protection along with support from RSA Canada partially offset our concerns. 

Outlook
The outlook is stable. We believe UC will benefit from its membership in RSA 
and its greater brand recognition over the medium term. Also, profitability 
initiatives, risk analytics support from RSA Canada, and operating 
efficiencies from the integration would likely benefit the underwriting 
results over the near-to-medium term. We expect premiums written to decline 
slightly for 2012 and by mid-to-high single digits for 2013 due to pull-back 
from unprofitable business segments partially offset by rate actions and 
increased cross-sell opportunities within RSA Canada. For 2012, we expect the 
combined ratio to be about 104% and a slightly negative rate of return (RoR) 
excluding gains/losses. For 2013, excluding the impact from change in discount 
rate and restructuring costs, we expect the combined ratio and RoR (excluding 
gains/losses) to be in the range of 98%-102% and 1%-5%, respectively. 
Furthermore, we expect capitalization to be maintained at the 'BBB' level as 
measured by our capital model.

The ratings would likely be pressured if operating performance or 
capitalization were to deteriorate significantly from our expectations; or if 
we have reason to believe that support available from RSA Canada is lower than 
anticipated. An upgrade is possible if there is consistent improvement in 
competitive position, operating performance, and capitalization to levels 
supportive of a higher stand-alone credit profile. In addition, positive 
rating movement can be considered if, in our view, group support strengthens 
as assessed under our group ratings methodology criteria. 

Related Criteria And Research
     -- Interactive Ratings Methodology, April 22, 2009
     -- Group Methodology, April 22, 2009
     -- Refined Methodology And Assumptions For Analyzing Insurer Capital 
Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

Ratings List
New Rating; CreditWatch/Outlook Action

L'Union Canadienne, Compagnie D'Assurances
 Counterparty Credit Rating
  Local Currency                        A-/Stable/--       
 Financial Strength Rating
  Local Currency                        A-/Stable/--       



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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