DBRS Confirms Ratings of Power Financial Corporation at A (high), Pfd-2 (high)

DBRS Limited (DBRS) has today confirmed Power Financial Corporation’s (PWF or the Company) Issuer Rating and Senior Debentures at A (high) and its Preferred Shares ratings at Pfd-2 (high). All trends are Stable.

The confirmation of PWF’s ratings results from the application of DBRS’s “Rating Life and P&C Insurance Companies and Insurance Organizations” methodology (the Global Insurance Methodology) to assign an Issuer Rating of A (high) to Great-West Lifeco Inc. (GWO), PWF’s major operating subsidiary. GWO, a large insurance organization contributing approximately 75% of PWF’s YTD 2016 earnings, is the greatest contributor to PWF’s earnings and overall strength. Hence, the primary methodology used to rate GWO, the Global Insurance Methodology, is consequently the primary methodology for rating PWF. The diversification and overall strength of PWF’s combined subsidiaries, in addition to the assessment of financial strength of the PWF legal entity, has resulted in DBRS’s concluding that the sum of the parts is sufficiently strong for the PWF rating to be at the same level as the GWO rating.

PWF is an investment holding company controlling two major Canadian financial services providers: GWO, one of Canada’s three largest life insurance companies, and IGM Financial Inc. (IGM), Canada’s largest non-bank mutual fund company. Through a 50/50 partnership with Belgium’s Frère Group, PWF also shares a 55.5% equity interest in Pargesa Holding S.A. (Pargesa), a Swiss holding company with indirect interests in a limited number of largely European-based companies through Groupe Bruxelles Lambert. PWF, in turn, is 65.6% owned by Power Corporation of Canada (POW). POW is controlled by the Desmarais family, and the Power group of companies are managed by an inner circle of long-serving professional managers. Similar to POW, PWF benefits from a strong capital position, high liquidity and prudent decision making, with an emphasis on conservative and integrated risk management.

PWF’s business strategy consists of taking long-term investment positions in a limited number of well-positioned businesses that are self-sustaining from a capital perspective. Part of the free cash flow yielded by these investments correspondingly passes through to the Company in the form of a steady stream of dividends, which, in turn, supports the creditworthiness and debt service ability of the Company. The Company’s debt service coverage ratios are strong at 15.9 times for 9M 2016. Similarly, capitalization remains conservative, with PWF having a debt and preferred shares-to-capitalization ratio of 14.6% at 9M 2016, a level that has remained relatively stable over the past few years. On a non-consolidated basis, PWF had about $875 million in cash and short-term securities at September 30, 2016, reflecting the Company’s conservative financial management approach.

Through GWO and IGM, the Company is focused on the manufacture and sale of insurance, protection and wealth management products, and investment products, including mutual funds. The Company’s indirect equity interest in Pargesa provides some modest additional geographic and industry diversification. .

The large proportion of earnings from GWO and IGM therefore expose the Company to the advice-centred distribution model (consisting of career agents and consultants, independent financial advisors and brokers). Consequently, the Company is cognizant of the emerging issues and challenges presented by the low-rate environment, changing regulatory requirements, new technological capabilities and shifts in customer preferences. Nonetheless, PWF’s distribution channels are strong and well diversified, and one of its core operating strengths. The Company believes strongly that there is a large retail market for financial advice, given general demographic trends.

RATING DRIVERS

PWF’s credit ratings could come under pressure if there is any deterioration in the creditworthiness of a major operating subsidiary, from a shift in the Company’s risk profile resulting from a major divestiture or acquisition, or from a material increase in unconsolidated financial leverage giving rise to a deterioration in coverage ratios. Negative ratings pressure may also arise from evidence of governance and control issues. Conversely, the Company may potentially benefit from any upgrades to the ratings of GWO.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2016), Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015) and Rating Companies in the Asset Management Industry (December 2015), which can be found on our website under Methodologies. In addition, the DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016) is used to assess the preferred shares.

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

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.