DBRS Limited (DBRS Morningstar) 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.
KEY RATING CONSIDERATIONS
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.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Environmental concerns regarding climate and weather risks are relevant to the rating of CFSL because of its large P&C operations but did not affect the assigned 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.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
The Grid Summary Grades for Co-operators Financial Services Limited are as follows: Franchise Strength—Good; Risk Profile—Good/Moderate; Earnings Ability—Good; Liquidity—Good; Capitalization—Strong/Good.
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/402220/ (August 31, 2022). 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.
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.
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 ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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