CCS.PR.C Upgraded to Pfd-2 by DBRS

DBRS has announced that it:

upgraded the ratings of Co-operators Financial Services Limited (CFSL or the Company), including its Issuer Rating, to BBB (high) from BBB. The ratings of Co-operators General Insurance Company (CGIC) were also upgraded, including its Financial Strength Rating, to “A” from A (low). Lastly, a Financial Strength Rating was assigned to Co-operators Life Insurance Company at “A.” The trends are all Stable.

The ratings upgrades reflect the Company’s strong and consistent growth and improved underwriting profitability. While the Company’s strong 2021 performance was supported by extraordinarily favourable Canadian auto insurance results that benefitted from the pandemic, DBRS Morningstar views CFSL as well positioned to maintain adequate underwriting profitability going forward, which will allow it to fund its strategic initiatives.

The ratings and Stable trend reflect the Company’s prudent liquidity, leverage, and capital positions. Moreover, the franchise benefits from a diversified product offering, although its core property and casualty (P&C) business is by far the largest contributor to earnings. CFSL has been able to expand into new product lines, relying on its distribution strengths. The ratings also consider that the life insurance and wealth management businesses would benefit from additional scale to improve profitability.

Given the recent upgrades, further positive ratings movement is unlikely in the near term. Over the longer term, a significant improvement in profitability that includes a greater contribution from CFSL’s life insurance and asset management businesses would result in a ratings upgrade.

Conversely, a sustained deterioration in underwriting and overall profitability combined with lower capital levels would result in a ratings downgrade.

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 solid brand recognition and access to multiple distribution channels, including proprietary agency 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 14th in the life insurance market according to MSA Research 2021 direct written premium data. The Company continues to dedicate significant resources to strengthening its customer relationships through digitalization, client engagement, and advertising.

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 catastrophic claims events.

CFSL has consistently grown revenues over the past five years, and earnings have benefitted. For 2021, the Company reported record earnings of $477 million and a return on average shareholders’ equity of 13.1%, reflecting strong financial markets and favourable P&C claims experience. In 2022, financial market volatility and rising interest rates have affected profitability with net income decreasing to $86 million for H1 2022 from $476 million in H1 2021. Going forward, the Company is expected to maintain adequate underwriting profitability and is also likely to be affected by any further financial market volatility.

CFSL has a healthy liquidity position with a large buffer of highly liquid assets in excess of its liquidity requirements. It has a $98 million undrawn credit facility 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 maintains adequate capital buffers in its insurance subsidiaries with the minimal capital test ratio of its P&C subsidiary at 219% and the life insurance capital adequacy test ratio of its life subsidiary at 152% at Q2 2022; both are well above regulatory targets of 150% and 100%, respectively. These capital ratios have declined since YE2021 because of rising interest rates and equity market declines in the first half of the year. CFSL’s consolidated financial leverage ratio (including preferred shares of CGIC) was 12.3% as at Q2 2022, which is conservative. The Company’s earnings are sufficient to easily cover interest payments on its debt.

The affected issue is CCS.PR.C.

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