DBRS Confirms Ratings of Power Corporation of Canada at “A” and Pfd-2, Stable Trends

DBRS Limited (DBRS) confirmed Power Corporation of Canada’s (POW or the Company) Issuer Rating and Senior Debt rating at “A.” DBRS also confirmed POW’s Non-Cumulative First Preferred Shares and Cumulative Redeemable First Preferred Shares, 1986 Series ratings at Pfd-2. All trends are Stable. DBRS’s rating assessment of POW is largely derived from the Company’s 65.5% equity interest in Power Financial Corporation (PWF; rated A (high) with a Stable trend by DBRS), which, in turn, has controlling interests in Great-West Lifeco Inc. (GWO; rated A (high) with a Stable trend by DBRS) and IGM Financial Inc. (IGM; rated A (high) with a Stable trend by DBRS), two of Canada’s largest financial institutions in the insurance and asset management industries, respectively. Since GWO is the greatest contributor to the earnings and overall strength of PWF and, consequently, of POW, DBRS’s “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” is the primary methodology for rating POW.

The ratings for POW are one notch below PWF’s ratings under the holding company criteria because of structural subordination. Additionally, PWF’s Issuer Rating has been set at the same level as GWO’s Issuer Rating of A (high). For more information, see the press releases “DBRS Confirms Ratings of Power Financial Corporation at A (high) and Pfd-2 (high), Stable Trends” published on November 30, 2018, and “DBRS Confirms Ratings on Great-West Lifeco Inc. & Affiliates” published on November 16, 2018.

KEY RATING CONSIDERATIONS
The rating confirmations reflect POW’s excellent franchise in life insurance and asset management, across several key markets in Canada, Europe and the United States. The Company benefits from a conservative risk profile with healthy levels of liquidity and steady dividend flows from its subsidiaries. POW’s Stable trends correspond to the Stable trends of its main subsidiary, PWF.

RATING DRIVERS
DBRS views upward rating movement as unlikely over the medium term; however, an upgrade of PWF or GWO could potentially benefit POW’s ratings. Negative rating pressure could result from a downgrade of PWF’s or GWO’s ratings. A significant deterioration in earnings and/or prolonged distress at any of its major operating subsidiaries; a sizable shift in the Company’s risk profile resulting from a major divestiture or acquisition; or evidence of governance and control difficulties could also put negative pressure on the ratings.

RATING RATIONALE
POW is a corporate holding company controlled by the Desmarais family since 1968, with PWF as its major asset (DBRS calculates that PWF comprises approximately 78% of POW’s net asset value). Through PWF, POW is indirectly invested in GWO, the largest life insurance operation in Canada; IGM, Canada’s largest non-bank-owned mutual fund company; and Pargesa Holding S.A., a Swiss holding company with indirect interests in various largely global companies through Groupe Bruxelles Lambert S.A. Aside from PWF, POW’s other interests include Sagard Investment Funds (equity investment funds focused in Europe, the United States and China); Power Energy (renewable energy); a minority ownership in China Asset Management Co., Ltd. (China AMC), a Chinese asset management company (POW and IGM own a combined 27.8% interest in China AMC); and other investments. The Company’s strategy of having significant interests in many of its investments allows it to contribute meaningfully to their management and influence strategic decisions.

The large proportion of earnings from GWO and IGM exposes the Company to the advice-centered distribution model of protection and wealth management products and services. POW is cognizant of the emerging issues and challenges in the financial services industry presented by the low-interest-rate environment, increasing regulatory requirements, disruptive technological forces and higher customer expectations. To counter these emerging risks, the Company is investing broadly in digital capabilities throughout its operating subsidiaries to enable them to modernize and adapt to the changing environment in the financial services industry. The Company is also strategically investing and sponsoring fintech initiatives to adapt to changes in consumer behaviour and leverage new technologies.

As the controlling shareholder of PWF and, by extension, GWO and IGM, POW influences the strategic vision for its financial services companies while setting the tone from the top in terms of conservative management style and risk tolerance. In turn, the Company’s subsidiaries benefit from this active oversight and the ability to leverage the benefits of being part of a large global organization. Such benefits include the sharing of expertise and the cross-selling of products across the various subsidiaries. Facilitating the execution of this strategy, the Company’s senior officers exercise a greater degree of influence through their active participation on the respective boards and board committees of POW’s various subsidiaries than is generally the case at more widely held companies.

DBRS views POW as benefiting from a strong capital position, high liquidity and prudent decision making. On a stand-alone basis, the Company’s financial profile is conservative. Financial leverage, as measured by debt plus preferred shares-to-capital, is low at 10.3% (as at September 30, 2018). The Company’s interest payments on its senior debt and dividend obligations on its perpetual preferred shares are well covered (16.9 times as at the nine months ended September 30, 2018 (9M 2018)). The Company’s liquidity is strong, with $832 million in cash and short-term investments as at September 30, 2018 (in comparison to $496 million as at September 30, 2017). At 10.2%, 9M 2018 return on equity is slightly below the average return for the last five years, as the Company faces some pressure on earnings resulting from slower organic growth because of the mature nature of the markets in which it operates.

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 principal methodologies are DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018), Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (January 2018) and Rating Companies in the Asset Management Industry (January 2018), which can be found on dbrs.com under Methodologies. In addition, the DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018) is used to assess the preferred shares.

Lead Analyst: Marcos T. Alvarez, Senior Vice President, 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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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