DBRS Confirms Co-operators Financial Services Limited at BBB, Trends Stable

DBRS has today confirmed both the Issuer Rating and the Senior Unsecured Debentures rating of Co-operators Financial Services Limited (CFSL or the Company) at BBB with Stable trends. The ratings reflect the contribution from the Company’s core areas of operation: property and casualty (P&C) insurance and life insurance. CFSL participates in these businesses through its ownership of Co-operators General Insurance Company (CGIC, rated Pfd-3 (high); see separate press release) and Co-operators Life Insurance Company (CLIC). The Company also owns a 71% stake in Addenda Capital Inc. (Addenda), a large institutional manager with a focus on fixed-income investments. The Company continues to create a more diversified financial services group through the broadening of its distribution channels and product offerings 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 aggressive following the repayment of $150 million in term debt by the Company in July 2012, largely funded through the proceeds of term debt issued in 2010. The consolidated debt plus preferred shares-to-total capitalization ratio has fallen to 21.9% at the end of September, from 27.1% at year-end 2011. The estimated unconsolidated debt plus preferred shares-to-capitalization ratio, at 9.3%, is very conservative and 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. A $100 million dividend paid from CGIC in Q3 and the $170 million proceeds from the sale of L’Union Canadienne on October 1, 2012, provide the Company with plenty of liquidity and capital resources. There was no double leverage at September 30, 2012. Conservative financial leverage is especially important given the Company’s limited access to equity capital and the regulated nature of its major operating subsidiaries.

While consolidated debt service coverage declined in response to increased financial leverage and weaker earnings in the wake of the financial crisis, it nevertheless seems to have averaged approximately five times, which is acceptable for the rating. On an unconsolidated basis, expected normalized cash flow from dividends and interest payments from subsidiary companies more than cover the Company’s fixed charges, which largely consist of the interest on the remaining senior debentures. Both major subsidiaries have excess capital and liquidity, which helps to ensure that the Company’s debt service requirements can be met on a timely basis. While not a contributor to earnings, given large amortization expense, Addenda also represents a source of cash flow to CSFL through consistent dividend payments, 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 within its 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 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 methodology is Rating Holding Companies and Their Subsidiaries (September 5, 2012).

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