DBRS Confirms Rating on Co-operators Financial Services at BBB

DBRS has today confirmed the rating on 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 three core areas of operation: property & casualty insurance, life insurance and institutional money management. CFSL participates in these businesses through its ownership of Co-operators Life Insurance Company (CLIC), Co-operators General Insurance Company (CGIC, rated Pfd-3 (high); see separate press release published today), and its majority interest in Addenda Capital Inc. (Addenda), a large institutional manager of fixed-income investments and the eleventh largest pension fund manager in Canada. The Company continues to create a more diversified financial services group through broadening of distribution channels and product offerings, and to achieve revenue and expense synergies as part of its vision of being the preferred provider of financial services to the Canadian co-operative movement.

CFSL’s financial profile has recently become less conservative, with consolidated debt plus preferred-to-total capitalization of over 28.2% at the end of June 2011, up from 22.3% at the end of 2008, reflecting a $150 million senior debt issue that was completed in March 2010. The estimated unconsolidated debt plus preferred share-to-capitalization ratio, at 17.8% at the end of 2010 (up from 10.7% as of the end of 2009), remains within bounds for a financial holding company of this rating and credit profile, especially where there is little financial leverage in the related operating subsidiaries. Double leverage as calculated by DBRS increased to 120.5%, but remains reasonable given the Company’s limited access to equity capital and the regulated nature of its major operating subsidiaries.

The consolidated debt service coverage ratio had been declining as the Company’s financial leverage increased. However, improved profitability in H1 2011 has reversed the trend – at current leverage and profitability, consolidated debt coverage is approximately 4.7 times, up from 3.7 times for 2010. On an unconsolidated basis, expected normalized cash flow from dividends and interest payments from subsidiary companies more than cover the Company’s estimated fixed charges. Both major subsidiaries have excess capital and liquidity, which ensures that the Company’s debt service requirements can be met on a timely basis. Addenda represents an additional potential source of cash flow, given its generally limited appetite for growth capital.

While CFSL’s rating is limited by the corresponding ratings at its operating subsidiaries, the diversification of the Company’s consolidated product spectrum and distribution channels also supports the rating. Within the CFSL group there are also strategic revenue and expense synergies associated with shared costs, distribution and cross-selling opportunities inside the broader franchise, as framed by the common values and vision of the co-operative movement.

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

The applicable methodology is Rating Parent/Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.