Desjardins-Laurentian Financial Corporation: Confirms at Pfd-3 (low) n

Kent Wideman, CFA / Jarmo Saari, CFA

(416) 593-5577 x235/x257

e-mail: kwideman@dbrs.com

n – Denotes that the security is non-cumulative. e-mail: kwideman@dbrs.com

Following a review of the planned purchase of two property and casualty subsidiaries of Canadian Imperial Bank of Commerce (for $330 million), DBRS is confirming the "Pfd-3 (low) n" rating for the Class A Preferred Shares of Desjardins-Laurentian Financial Corporation ("DLFC") with a Stable trend. The rating is thus removed from "Under Review" status, where it was placed with Developing implications on June 22, 2000.

Our review and the rating confirmation considered the following factors: (1) At the present time, DLFC’s only business outside of Quebec is Imperial Life, which is struggling and has a somewhat uncertain future. The CIBC lines, with over $300 million of annual premiums, represent approximately 60% of the P&C premium base that DLFC presently has in Quebec. While the acquired entities are expected to remain largely independent from DLFC’s Quebec-based operations, the acquisition would provide a larger base over which to spread the ever increasing high cost of technology, and rank DLFC in the top ten Canadian P&C companies on a combined basis (based on premiums). (2) Integration challenges, including human resources, client retention, and leasing issues, are all believed to be manageable. In addition to its solid base of agency business (which includes cross selling efforts with the caisse populaires), DLFC is the leading direct general insurer in Quebec with a 37% marketshare, and the CIBC operation is also a direct insurer (non-brokerage) using a similar call centre business model. DLFC uses leading edge information technology in such areas as pricing and segmentation, billing, sales, and claims settlement, and such expertise/capabilities can be applied to certain aspects of CIBC’s operations to achieve efficiencies. (3) DLFC has achieved a better than industry average combined ratio, reflecting good cost control and a technology focus, and this expertise can be applied in reducing costs in the CIBC General business. The latter is a relatively new business that has made steady progress to date, with a consistent improvement in the combined ratio in recent years. DLFC will use standard reinsurance to provide loss protection for any adverse loss experience connected to insurance policies written by CIBC in the past. (4) Allowing for cash sources that DLFC expects to use (including $90 million of cash and excess cash from operating subsidiaries), the Company presently expects that new debt funding will be in the $150 million range. This would increase DLFC’s net debt ratio to approximately 15%, reduce cash flow and interest coverage ratios and add significant liabilities above the rated preferred shares. The transaction will also add approximately $110 million in new goodwill. Overall, however, the balance sheet impact is considered manageable. As discussed in past DBRS reports on DLFC, a purchase of this type has been expected since the 1997 sale of Laurentian Bank left DLFC with excess cash to reinvest, and was allowed for in the rating. While this acquisition is expected to take a considerable amount of time to reach acceptable returns, it has the potential to be very strategically significant by not only extending DLFC’s size in the P&C area, but also adding a significant piece of business outside of Quebec. The Desjardins Group remains a supportive parent and with this acquisition, we do not expect DLFC to take on any other significant purchases in the near future.

Subject to regulatory approval, the deal is expected to close in October, 2000.

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