DBRS Morningstar Confirms Power Financial Corporation at A (high) and Pfd-2 (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Power Financial Corporation’s (PWF or the Company) Issuer Rating and Senior Debentures rating at A (high). DBRS Morningstar also confirmed PWF’s Cumulative First Preferred Shares (Series A) and Non-Cumulative First Preferred Shares ratings at Pfd-2 (high). All trends are Stable.

KEY RATING CONSIDERATIONS
The rating confirmations reflect PWF’s excellent franchise in life insurance and asset management across several key markets in Canada, Europe, and the United States, as well as its concentration in financial services and dependence on dividends for cash flows. The Company benefits from a conservative risk profile with healthy levels of liquidity, low leverage, and steady dividend flows from its operating companies, as well as overall resilient earnings during the Coronavirus Disease (COVID-19) global pandemic. PWF’s Stable trends correspond to the Stable trend of its main operating company, Great-West Lifeco Inc. (GWO; rated A (high) with a Stable trend by DBRS Morningstar).

RATING DRIVERS
PWF’s ratings reflect those of its main operating company, GWO. An upgrade of GWO’s ratings would likely result in an upgrade of PWF’s ratings.

Conversely, a downgrade of GWO’s ratings would result in a downgrade of PWF’s ratings. A sizable shift in the Company’s risk profile resulting from a major divestiture or acquisition, a material increase in unconsolidated financial leverage, or evidence of deterioration in governance controls across the Company would also result in a ratings downgrade.

RATING RATIONALE
DBRS Morningstar applied the “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” to assess the Issuer Rating of GWO, the Company’s largest contributor to earnings and overall strength. This Issuer Rating, in combination with the “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships,” has allowed DBRS Morningstar to conclude that the sum of the parts is sufficiently strong enough for PWF’s Issuer Rating to be at the same level as GWO’s. Indeed, the diversification and overall strength of the Company’s combined operating companies, in addition to the assessment of the financial strength of the PWF legal entity, all support this conclusion.

PWF is a corporate holding company controlling two major Canadian financial services providers: GWO, the largest Canadian life insurance operation and IGM Financial Inc. (IGM; rated A (high) with a Stable trend by DBRS Morningstar), Canada’s largest non-bank-owned wealth and asset management company. PWF also has significant holdings in a portfolio of global companies based in Europe through its investments in Groupe Bruxelles Lambers S.A. (GBL). PWF, in turn, is wholly owned by POW, following the completion of a reorganization in Q1 2020 where POW acquired all of the outstanding common shares of PWF held by minority holders in exchange of subordinated voting shares of POW and nominal cash. Through GWO and IGM, PWF focuses on manufacturing and distributing insurance, protection, wealth management, and investment products including mutual funds. The Company’s equity interest in GBL provides some additional geographic and industry diversification. While the Company is also strategically investing and sponsoring fintech initiatives to leverage new technologies, its focus on the financial services sector exposes it to some concentration risk, where it is subject to external market forces, including equity market volatility and low interest rates, potentially affecting earnings.

The ratings are supported by the Company’s strong free cash flow generation capacity which, in turn, supports its creditworthiness and debt service capacity. PWF’s debt service coverage ratio (including dividend obligations on its preferred shares) remains strong at 13.7 times as at the nine months ended September 30, 2020. Similarly, leverage remains conservative, with the Company having a debt and preferred shares-to-capitalization ratio of 13.6% as at Q3 2020. On a nonconsolidated basis, PWF had about $1 billion in cash and short-term investments as at September 30, 2020, reflecting the Company’s conservative financial management approach. The Company’s large liquid pool of assets positions it well to handle potential shocks and enables it to take advantage of potential acquisition opportunities.

ESG CONSIDERATIONS
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 methodologies are 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, DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020) https://www.dbrsmorningstar.com/research/369165/dbrs-morningstar-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-issuers, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 02, 2020) https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships.

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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