DBRS Confirms Co-operators Financial Services Limited Issuer Rating at BBB; Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Debentures rating of Co-operators Financial Services Limited (CFSL or the Company) at BBB. All trends are Stable. All the rating actions are detailed in the table below. The rating actions taken today follow the publication of DBRS’s new methodology, “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (December 2015).

The confirmation of CFSL’s rating at BBB reflects the newly assigned Financial Strength Rating (FSR) of A (low) for Co-operators General Insurance Company (CGIC), the major operating subsidiary of CFSL (see related DBRS press release entitled, “DBRS Upgrades Co-operators General Insurance Company to Pfd-2 (low); Assigns Financial Strength Rating of A (low); Stable”). Among other factors, the two-notch differential reflects the structural subordination of the holding company’s creditors to the operating company’s creditors in an insolvency situation and recognizes the reliance of the Company on the upstreaming of earnings from its operating companies.

CFSL’s core areas of operation are property and casualty as well as life insurance. CFSL participates in these businesses through its ownership of CGIC and Co-operators Life Insurance Company and a majority stake in Addenda Capital Inc., a large institutional fund manager. As part of a larger financial services group, CGIC enjoys a strong franchise in the co-operative space and ranks fifth for property and casualty insurance products in Canada with a 5.1% market share based on 2014 direct written premiums.

CFSL has low levels of long-term debt and preferred shares (issued by CGIC), resulting in a low financial leverage ratio. Reflecting its subsidiaries, the Company’s profitability has been inconsistent and return on equity remains largely in the low single digits. Nevertheless, CFSL’s fixed-charge coverage ratios are reasonable due to low fixed costs, despite low profits. The low leverage is viewed positively considering that CFSL is owned by a co-operative and is therefore largely dependent on internal capital generation.

The Stable trend considers the Company’s conservative risk management and good capital position. Negative ratings pressure could arise because of a significant decline in liquidity at the holding company or operating businesses or because of a downgrade of CGIC. Conversely, improved market share in the operating businesses could result in positive ratings pressure.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015), which can be found on our website under Methodologies.

DBRS will publish a report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report or for more information on this industry, visit www.dbrs.com or contact us at info@dbrs.com.