DBRS Confirms BBB Ratings of Co-operators Financial Services Limited with a Stable Trend

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

The confirmation of CFSL’s ratings at BBB reflects the Financial Strength Rating of A (low) for Co-operators General Insurance Company (CGIC), CFSL’s major operating subsidiary. 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 Company’s reliance on the upstreaming of earnings from its operating companies. The Company’s dependence on CGIC’s rating reflects the high proportion of earnings derived from this subsidiary.

CFSL’s core areas of operation are property and casualty (P&C) 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. (Addenda), a large institutional fund manager with over $28 billion in assets as at H1 2017. CGIC enjoys a strong franchise in the co-operative space and ranks fifth among P&C insurance providers in Canada with a 5.7% market share based on 2016 direct written premiums. Although CGIC’s underwriting profitability has been negative (104% combined ratio in the first nine months of 2017), the Company is increasing its efforts to improve operational efficiency, enhance customer service through an omni-channel strategy, as well as investing in digital technology, common claims, billing and production infrastructure, which could translate into an improved and more stable earnings pattern.

CLIC is one of the top ten life insurers in Canada with a market share in the 1.0% to 3.0% range for most of its business lines, except for individual disability insurance, where it is in the mid-single digits. CLIC experienced challenges in maintaining its market position. It mainly sells through credit unions and the co-operative group distribution network, lacking the critical scale necessary to achieve significant growth without the support of The Co-operators Group Limited (the Group). Both insurance subsidiaries benefit from a well-diversified distribution model and the ability to leverage cross-selling opportunities across the Group.

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 a 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 on the issuer page at www.dbrs.com.

The applicable methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith, Senior Vice President, Head of Insurance – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG and Sovereign Ratings

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.

For more information on this credit or on this industry, visit www.dbrs.com.