DBRS Morningstar Confirms Ratings of Co-operators Financial Services Limited at BBB with 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 ratings confirmation reflects the Financial Strength Rating of A (low) 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. The ratings also consider the Company’s good capital position, conservative risk management, and effective strategic initiatives. 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.

As CFSL’s ratings are likely to move in tandem with those of CGIC, the Stable trend is the same as that of its main operating subsidiary.

RATING DRIVERS
The ratings would be upgraded if there is an upgrade in the ratings for CGIC. Conversely, the ratings would be downgraded if there is a downgrade in the ratings for 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 2019 direct written premiums. CSFL maintains a multichannel distribution strategy that includes direct distribution through call centres, brokers, advisors, agents, caisses populaires, and credit unions. The Company’s largest competitor for clients that has an affinity to the Canadian co-operative culture, is Desjardins Group (rated AA with a Stable trend by DBRS Morningstar). CFSL continues to dedicate significant resources to enhancing brand awareness through client engagement and advertising. The Company continues to deploy resources to expand its distribution channels and enhance its digital capacity.

Risk management is integrated into the business planning and strategic decision-making process of CFSL, which is a positive element for the ratings. CFSL’s insurance subsidiaries (CGIC and CLIC) adhere to the provisions of the Office of the Superintendent of Financial Institutions’ Guideline E19: Own Risk and Solvency Assessment (ORSA). The results of the ORSA process are used for setting internal solvency targets and are integrated into the annual planning process. The risk management function uses diverse tools, measures, and models, including sensitivity testing and stress testing, to quantify its risk exposures. As the Company is focused in Canada, it does not have international operations or the associated cross-border operating and regulatory risks.

CFSL’s earnings ability benefits from a diversified business model through its ownership of CGIC and CLIC, its investment management and brokerage subsidiaries, and the opportunities to extract synergies from these businesses because of its centralized corporate governance structure. For example, sharing information technology and risk management platforms between CGIC and CLIC allows for expense synergies and cost savings. Ownership of CUMIS General Insurance Company and CUMIS Life Insurance Co., which offer general and life insurance solutions to credit unions, provides an opportunity for enhanced sales penetration of the credit union sector with CFSL’s life insurance, retirement, wealth management, and property and casual (P&C) insurance products. The brokerage and other noncore insurance underwriting operations have strengthened the diversity of its earnings and have continued to contribute positively to the consolidated net income of the Company over the years.

DBRS Morningstar views CFSL’s liquidity position as good. The factors that contribute to this assessment include the reasonably predictable insurance and claims risk profile of its insurance subsidiaries and high level of marketable assets. The Company's insurance subsidiaries have appropriate reinsurance cover commensurate with their risk exposure limits. CFSL maintains a good liquidity position with the balance sheet comprising mainly marketable assets.

CFSL’s consolidated financial leverage ratio (including preferred shares of CGIC) increased to 12.9% as at the first nine months of 2020 (9M 2020) from 10.6% as at YE2019, mostly because of the issuance of $300 million in senior unsecured debt in May 2020. The fixed-charge coverage ratio for the year-to-date period ended September 30, 2020, was 18.3 times as a result of the positive net earnings reported as of 9M 2020. On an unconsolidated basis, expected normalized cash flow from dividends and interest payments from its subsidiaries usually covers the Company’s fixed charges, which largely consist of the interest on its senior unsecured debentures. 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
Environmental concerns related to climate and weather risks are key drivers behind the rating action. As a P&C insurer, CGIC is exposed to catastrophe loss from natural events such as wind, wildfires, hail, flooding, and other extreme weather events. These events can lead to earnings volatility and increased insurance costs. This ESG factor is primarily considered as part of product risk when assessing the Company’s risk profile, but can also affect Earnings Ability, Liquidity, and Capitalization.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (July 21, 2020: https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

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