DBRS Confirms Co-operators Financial Services at BBB

DBRS has today confirmed the rating of the Senior Unsecured Debentures of Co-operators Financial Services Limited (CFSL or the Company) at BBB, with a Stable trend.

The rating reflects the Company’s ownership of Co-operators General Insurance Company (Co-op General), the third largest general insurance company in Canada (see separate press release) and Co-operators Life Insurance Company (Co-op Life), a diversified life insurance company whose products are also distributed through the Co-op General agency sales force. With the 2008 acquisition of Addenda Capital Inc., a large institutional manager of fixed income investments and the tenth largest pension fund manager in Canada, earnings diversification is expected to improve as will the unregulated flow of dividends to the Company with which to meet the Company’s debt service requirements.

In addition to the obvious earnings diversification benefits which these investments provide, shared distribution, corporate values and IT platforms are the foundation for a number of revenue and expense synergies which benefit each subsidiary and the Co-operators Group (the Group) as a whole.

The financial profile of the Company is conservative. The unconsolidated debt plus preferred share ratio at 12.0% is prudent for a financial holding company, especially where there is little financial leverage in actual operating subsidiaries. While the Company’s rating is somewhat limited by the corresponding ratings at the operating subsidiaries, there are a number of strategic revenue and expense advantages to a broader CFSL portfolio of complementary products, including the recent addition of the relatively stable Addenda asset management business.

On an unconsolidated basis, expected normalized cash flow from dividends and interest payments from subsidiary companies covers the Company’s fixed charges by more than three times which is satisfactory for the rating category. The Company’s strategy is focused on growth, both organic and by acquisition while reducing relative exposure to more volatile auto insurance in favour of faster growing life and health insurance and wealth management lines, which will enhance overall Company diversification and earnings stability in the long run. Increasing focus on the value of the customer relationship to both the agent and the Group has become the driver of revenue growth and profitability.

Meaningful penetration of the Quebec market, especially in life insurance and wealth management products, continues to be a challenge but should benefit from the Group’s growing presence in that geographic market, including the Addenda acquisition and four new Quebec-based Group members.

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

The applicable methodology is Rating Parent - Holding Companies: DBRS Rating Approach with the industry specific rating methodologies Rating Canadian Life Insurance Companies (on account of the Co-operators Life Insurance Company subsidiary) and Rating Canadian Property and Casualty Insurance Companies which can be found on our website under Methodologies.

This is a Corporate rating.