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