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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debentures for
Co-operators Financial Services Limited (CFSL or the Company) at BBB. All trends are Stable.

The confirmations of CFSL’s ratings at BBB reflect the Financial Strength Rating of A (low) for Co-operators General Insurance Company (CGIC), the major operating subsidiary of CFSL. The Company’s dependence on the rating of CGIC reflects the high proportion of earnings (81% at YE2015) derived from this subsidiary. Among other factors, the two-notch differential between the ratings of CFSL and CGIC 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 insurance through CGIC and life insurance through the Co-operators Life Insurance Company (CLIC). The Company also has a majority stake in Addenda Capital Inc., a large institutional fund manager with $28 billion in assets at Q3 2016. As part of a larger financial services group, CGIC enjoys a strong franchise in the co-operative space and ranks sixth for property and casualty insurance products in Canada with a 5.5% market share based on 2015 direct written premiums. Although underwriting profitability at CGIC has been relatively low (106% combined ratio at 9M 2016), the Company is increasing efforts in improving pricing, enhancing customer service through an omni-channel strategy and investing in digital technology and a common claims, billing and production infrastructure that all have the potential to translate into a higher and more stable earnings pattern. CLIC is one of the top ten life insurers in Canada, with a market share in the 1 to 3% range for most of its business lines, except for individual disability insurance, where it is in the mid single digits. CLIC has struggled to maintain its market position as without the support of the group, it lacks the critical scale necessary to achieve profitable growth. Both insurance subsidiaries benefit from a well-diversified distribution model and the ability to leverage cross-selling opportunities across the group.

CFSL’s ratings benefit from management’s conservative approach to capitalization. CFSL has low levels of long-term debt and preferred shares (issued by CGIC), resulting in a low financial leverage ratio (11.8% at 9M 2016). The low leverage is viewed positively considering that CFSL is owned by a co-operative and is therefore largely dependent on internal capital generation. Reflecting the earnings of its subsidiaries, the Company’s profitability has been inconsistent and return on equity remains largely in the low single digits (1.9% at 9M 2016). Nonetheless, CFSL’s fixed-charge coverage ratios (7.8 times at 9M 2016) are reasonable as a result of low fixed costs, despite low profits.

The Stable trend considers the Company’s conservative risk management, strong capital position and good strategic initiatives.

RATING DRIVERS

Negative ratings pressure could arise from a significant decline in liquidity at the holding company or operating businesses, a downgrade of CGIC, or suspension of dividends from CGIC. Conversely, improved market share and profitability for the operating businesses or an improved rating for CGIC could result in positive ratings pressure.

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

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.

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

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.