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

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

KEY RATING CONSIDERATIONS
The Stable trends consider the Company’s conservative risk management, strong capital position and good strategic initiatives. 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 main 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 dependence on the upstreaming of earnings through dividends issued by its operating subsidiary companies. The Company’s dependence on CGIC’s Financial Strength Rating reflects the high proportion of earnings derived from this subsidiary.

RATING DRIVERS
Positive ratings pressure could emerge if there is an improvement in the Financial Strength Rating for CGIC, with a significant strengthening of the market share and profitability of the operating subsidiaries.

Negative ratings pressure could arise from a downgrade of CGIC or the occurrence of adverse loss events causing a sustained material decline in the regulatory capital of CGIC, resulting in an indefinite suspension of dividends.

RATING RATIONALE
CFSL’s core areas of operation are the personal and commercial property and casualty (P&C) insurance lines of business through CGIC and the life insurance line of business through Co-operators Life Insurance Company (CLIC). The Company has also made significant investments in insurance brokerage operations. CFSL has a majority stake in Addenda Capital Inc., a large multi-asset investment firm with over $31.6 billion in assets under management as at June 30, 2019.

CGIC enjoys a strong franchise in the co-operative space and ranks fourth with a 6.1% market share among P&C insurance providers in Canada based on year-end (YE) 2018 direct written premiums. Generating underwriting profitability was challenging for CGIC from 2016 to YE2018 due in part to the increasing frequency in the occurrence of large weather-related loss events. The Company has intensified its efforts to strengthen its pricing capacity, reduce costs, improve operational efficiency and enhance customer service through its omnichannel distribution model and investments in digital technology, claims management, billing and production infrastructure. These efforts appear to be yielding positive results, as the Q3 2019 combined ratio improved to 100.9% compared with 106.4% in Q3 2018. There is a modest expectation that the performance will continue to improve, resulting in a more stable earnings profile going forward.

CLIC is ranked tenth among federally regulated life insurance companies with a 1.4% market share (2018) in the Canadian life insurance market based on direct written premiums. Its main lines of business include individual life insurance, group benefits, wealth management and creditor insurance. CLIC has experienced challenges in maintaining/increasing its market position. It mainly sells through credit unions and CGIC’s advisor distribution network; it has yet to reach the critical scale necessary to achieve significant growth without the support of the Co-operators Group Limited (the Group).

Both insurance subsidiaries of CFSL benefit from a well-diversified distribution model, shared services and the ability to leverage cross-selling opportunities across the Group.

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

The principal methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (September 2019), which can be found on our website under Methodologies & Criteria.

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 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.

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

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