DBRS Morningstar Confirms the Credit Ratings of Co-operators Financial Services Limited at BBB (high) and Affiliated Operating Companies at “A,” Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the credit ratings of Co-operators Financial Services Limited (CFSL or the Company), including its Issuer Rating, at BBB (high). The credit ratings of CFSL’s main operating subsidiaries were also confirmed, including their Financial Strength Rating, at “A.” The trends are all Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings and Stable trends reflect CFSL’s established property and casualty (P&C) insurance franchise and its strong profitability in recent years, which has allowed the Company to improve its financial position and invest in its operational and distribution capabilities. Going into 2023, CFSL is experiencing weaker P&C underwriting results along with the rest of the industry because of rising home and auto insurance claims. This is partially offset by better life insurance performance amid higher interest rates, highlighting some of the potential benefits of CFSL’s strategy to grow into a broader financial services company and diversify its business. CFSL’s investment portfolio is mainly composed of high-quality fixed-income assets but also includes a moderate exposure to common and preferred equities. The Company has prudent liquidity, leverage, and capital positions, which allow it to fund its strategic initiatives and take an opportunistic approach to innovation.

CREDIT RATING DRIVERS
An improvement in CFSL’s franchise through greater revenue and risk diversification, resulting in less volatile profitability, would result in a credit ratings upgrade. Conversely, a sustained deterioration in profitability combined with lower capital levels would result in a credit ratings downgrade.

CREDIT RATING RATIONALE
CFSL is one of Canada’s leading P&C insurers with a growing presence in life insurance, wealth, and asset management services. It has a resilient business model with strong brand recognition and access to multiple distribution channels, including dedicated advisor and brokerage networks as well as a unique partnership with Canadian credit unions. CFSL is ranked fourth in the Canadian P&C insurance market and 13th in the life insurance market based on direct written premium data from MSA Research. The Company continues to dedicate significant resources to strengthening its customer relationships through digitalization and client engagement centred on its cooperative identity.

CFSL is exposed to a diversified portfolio of insurance risks, with individual P&C insurance being its largest exposure. Its investment portfolio is mainly composed of high-quality fixed-income assets but also includes sizable allocations to equities, preferred shares, and mortgages. CFSL has a comprehensive risk management and stress testing framework that it uses to set adequate risk limits consistent with its risk appetite. CFSL’s insurance operating subsidiaries maintain prudent reinsurance coverage, which mitigates large losses caused by catastrophes.

CFSL has consistently grown revenues over the past five years, thereby also improving its earnings ability. For 2022, the Company reported earnings of $312 million, down from $477 million in 2021, when it benefitted from supportive financial market conditions. Return on equity remains acceptable at 7.9% in 2022, although it is expected to decline going forward as weaker underwriting results in the first half of 2023 caused by rising P&C claims, is putting pressure on profitability.

CFSL has a healthy liquidity position with a large buffer of highly liquid assets in excess of its requirements. Additionally, CFSL has access to a $91 million credit facility, the majority of which is undrawn, and has surplus capital held at the holding company level, which is invested in liquid assets and is sufficient to cover the principal of its senior debentures.

CFSL maintained adequate capital buffers in its insurance subsidiaries as of Q2 2023, with the Minimum Capital Test ratio of its P&C subsidiary at 234%, and the life insurance capital adequacy test ratio of its life subsidiary at 151%; both are well above regulatory targets of 150% and 100%, respectively. CFSL’s financial leverage ratio was 12% as of Q2 2023, which DBRS Morningstar considers conservative. The Company’s earnings remain sufficient to comfortably cover interest payments on its debt.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

E Environmental (E) Factors
Environmental concerns regarding climate and weather risks are relevant to the credit rating of CFSL because of its large P&C operations but did not affect the assigned credit rating or trend. As part of its P&C product offering, CFSL is exposed to weather-related losses from natural catastrophic events such as wind, wildfire, hail, flooding, and other extreme weather events. These events can lead to earnings volatility and increased reinsurance cost. DBRS Morningstar considered this ESG factor as part of product risk when assessing the Company’s risk profile. CFSL has adopted the processes of the Task Force on Climate-Related Financial Disclosures, and Principles for Responsible Investment (PRI). All of the Company’s invested assets are guided by its Sustainable Investment Policy. This approach considers ESG matters in investment activities with the objective of enhancing long-term investment performance and is consistent with the framework provided by the PRI.

There were no Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784/ (July 4, 2023).

The Grid Summary Grades for Co-operators Financial Services Limited are as follows: Franchise Strength—Good; Risk Profile—Good/Moderate; Earnings Ability—Good/Moderate; Liquidity—Good; Capitalization—Strong/Good.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations https://www.dbrsmorningstar.com/research/417109 (July 14, 2023). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784 (July 4, 2023) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

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

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