DBRS Morningstar Changes Trends on Co-operators Financial Services Limited to Positive from Stable; Issuer Rating Confirmed at BBB

DBRS Limited (DBRS Morningstar) changed the trends on Co-operators Financial Services Limited (CFSL or the Company) to Positive from Stable. DBRS Morningstar confirmed the Issuer Rating and Senior Unsecured Debentures rating of the Company at BBB.

KEY RATING CONSIDERATIONS
The change in the trend to Positive from Stable reflects the change in trend to Positive from Stable for Co-operators General Insurance Company (CGIC), CFSL’s main operating subsidiary. The Company’s dependence on CGIC’s rating reflects the high proportion of earnings derived from this subsidiary. As the ratings are likely to move in tandem with CGIC, the Positive trend is the same as its main operating subsidiary.

The ratings confirmation reflects the two-notch differential between CGIC’s Financial Strength Rating of A (low) and that of CFSL, considering the structural subordination of the holding company’s creditors to the operating company’s policyholders and creditors in an insolvency situation, and recognizes the Company’s dependence on the upstreaming of earnings through dividends issued by its operating subsidiary companies.

RATING DRIVERS
The ratings would be upgraded if there were an upgrade in the ratings of CGIC.

Conversely, the ratings would be downgraded if there were a downgrade in the ratings of CGIC.

RATING RATIONALE
CFSL has a resilient franchise with solid brand recognition. It is one of Canada’s leading co-operative multiline insurance providers, offering various general and life insurance products through its insurance operating subsidiaries, CGIC and Co-operators Life Insurance Company (CLIC). CLIC is ranked eleventh among life insurance companies in Canada, based on direct premiums written, while CGIC is the fourth-largest general insurance company in Canada, based on 2020 direct written premiums. The Company maintains a multichannel distribution strategy that includes direct distribution through call centres, brokers, advisors, agents, caisses populaires, and credit unions. The Company continues to dedicate significant resources to strengthening brand awareness through digitalization, client engagement, and advertising. CFSL continues to deploy resources to expand its distribution channels and enhance its digital capacity.

The Company’s subsidiaries adhere to a defined risk appetite framework that sets detailed risk limits on acceptable levels of risk exposures for various risk categories. CFSL’s insurance operating subsidiaries maintain prudent attachment points for reinsurance coverage, which helps smooth profits. The Company has a catastrophe reinsurance program for its insurance subsidiaries to help mitigate exposure to large losses caused by catastrophic claims loss events on the various lines of business. CFSL's risk exposures are monitored against risk limits to ensure that the exposures are aligned with the subsidiaries’ business objectives and within acceptable risk appetite levels.

The Company's top-line revenue-generation capacity has been consistent. CFSL has experienced sustained growth in net earned premiums over the past five years. The net earnings for 2020 rebounded from the negative effects of the economic and equity market disruption caused by the Coronavirus Disease (COVID-19) pandemic. The Company reported a net profit of $286 million for 2020 (ROE of 9.3%). The Positive trend has continued in 2021 with CFSL reporting very strong net income in H1 2021 ($476 million, with ROE of 25.6%). This was mostly driven by the strong results reported by CGIC, the Company's property and casualty insurance subsidiary.

The Company maintains appropriate levels of liquid assets and cash on its balance sheet that can be deployed to provide contingent capital for its subsidiaries and pay capital servicing charges if needed. CFSL’s access to cash funding is also supported by the strong capital positions at its two insurance subsidiaries, which can flow capital up to the Company in the form of dividends. CFSL's access to cash resources is further enhanced by its ownership stakes in Addenda and its brokerage operations, which have no regulatory restrictions on the disbursements of dividends and have minimal need to retain capital.

The Company has been able to generate internal capital consistently. DBRS Morningstar considers the Company to be prudent in keeping financial leverage at conservative levels to provide flexibility to raise debt capital for possible contingencies. CFSL’s consolidated financial leverage ratio (including the preferred shares issued by CGIC) reduced to 11.5% as at H1 2021 from 12.7% as at YE2020 because of an increase in total capital. The fixed-charge coverage ratio for the year-to-date period ended June 30, 2021, was 55.4 times (x) (18.6x as at YE2020) as a result of the solid net earnings reported as of H1 2021. Both of the Company's major insurance subsidiaries have excess capital and liquidity, which help to ensure that CFSL’s debt-service requirements can be met on a timely basis.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577