Desjardins-Laurentian Financial Corporation: Upgrades Pfd-3 (high)n

Kent Wideman, CFA, Jarmo Saari, CFA / 416-593-5577 ext.2235, ext.2257 / e-mail: kwideman@dbrs.com

n – Denotes that the security is non-cumulative.

DBRS is upgrading the rating for the Class A Preferred Shares of Desjardins-Laurentian Financial Corporation ("DLFC") to Pfd-3 (high) n from Pfd-3 (low) n, partly related to a higher level of stress for the relationship and support that exists with the parent, the Desjardins Group.

More specifically, reasons for the rating upgrade include the following: (1) Following the Desjardins Group ("DG") action to purchase the minority interest in DLFC in 2000 to own 100%, DG remains a supportive parent and continues to take actions to further integrate services between DLFC subsidiaries and the caisses network in Quebec. DBRS presently assigns a long-term corporate rating of AA (low) to DG (see report on Mouvement des caisses Desjardins). (2) While we believe that Imperial Life will continue to be challenged in finding a profitable and defendable niche, actions that released Imperial Life from all subsequent claims in the U.K. and plans to merge Imperial with DLLA (DLFC’s Quebec based life insurance company) have dealt with some of our concerns. Imperial has recently also returned to profitability. (3) While the acquisition of CIBC’s two general insurance subsidiaries added leverage, increased goodwill and will take some time to reach a satisfactory return, the acquisition adds critical mass. Also, integration challenges appear manageable and DLFC has a good track record in claims and cost controls in its Quebec operation. From a strategic sense, the addition also provides further expansion outside of Quebec for DG. (4) Credit quality at DLFC remains favourable, following ongoing and significant improvement since the mid-1990s. (5) While not without challenges, DLFC’s Quebec based insurance operations continue to hold significant market share positions. Further improvement in the credit rating is possible. However, in the absence of further stress on the parent, any rating increase would not be considered until there is proof that the newly acquired P&C operations can reach and maintain acceptable profit levels, that the DLLA / Imperial merger will allow Imperial Life to reach higher and sustainable levels of profit and that some evidence of debt reduction is seen.