Downgrade of Crown Life Insurance Co. Sparks Worry

Strategic Insights -

The collapse of Confederation Life Insurance Co. has caused a ripple effect, with rating agencies downgrading Crown Life Insurance Co. Moody's Investors Service Inc. downgraded Crown Life to Ba1, a rating just below investment grade. Dominion Bond Rating Service Ltd. cut the rating of Crown Life's preferred shares to pfd-4, considered a speculative investment. The downgrades will increase Crown Life's cost of borrowing and make it less attractive to institutions that cannot invest in debt instruments rated below investment grade. This may make it tougher for Crown Life to sell new policies.

Key Takeaways:

  • Moody's downgraded Crown Life to Ba1, a rating just below investment grade, due to its large commercial real estate exposure and financial weaknesses.
  • Dominion Bond Rating Service Ltd. cut the rating of Crown Life's preferred shares to pfd-4, a speculative investment, due to the insurer's financial situation.
  • Crown Life's cost of borrowing will increase due to the downgrades, making it less attractive to institutions that cannot invest in debt instruments rated below investment grade.
  • Crown Life's vice-president of finance, Alan Rowe, accused Moody's of "reacting prematurely" to the collapse of Confederation Life and using "flawed analysis."
  • Profit in the first half of the year was up 45% to $13.3 million, and Crown Life expects further improvement in the second half.
  • Crown Life has improved its mortgage asset quality, with arrears and foreclosed real estate at the lowest levels since 1987.
  • Bill Andrus, president of TRAC Insurance Services Ltd., believes Crown Life appears to have come to grips with its problems and is on the way to recovery.
  • Another industry consultant agreed, stating that Crown Life is "busting its buns to get its costs down and manage its affairs."
  • Dominion Bond Rating Service Lt. stated that Confederation Life's failure has increased concerns about consumers switching to more financially secure insurance companies, a "flight to quality."

Statistics:

  • Crown Life has $7.5 billion in assets, making it Canada's 10th-largest life insurer.
  • The insurer has a 5% ratio of capital to assets, which is low compared to other Canadian insurers.
  • Crown Life's common shares were bought by senior officers for $1 million worth from a U.S. investor last month.
  • In a recent transaction, Haro increased its stake in Crown Life to 64.5%, with Crownx Inc. dropping to 32.2%.
  • 150 life insurers in Canada are predicted to be shaken out of business by the year 2000, with half expected to be gone.

Sources:

  • Moody's Investors Service Inc.
  • Dominion Bond Rating Service Ltd.
  • TRAC Insurance Services Ltd.
  • The Globe and Mail
  • Gordon Cunningham, president of London Life Insurance Co.