DBRS Morningstar Confirms Ratings on Great-West Lifeco Inc. and Affiliates, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Debentures rating of Great-West Lifeco Inc. (GWO or the Company) at A (high) and its Non-Cumulative First Preferred Shares rating at Pfd-2 (high). DBRS Morningstar also confirmed the Issuer Rating and Financial Strength Rating (FSR) of The Great-West Life Assurance Company at AA and its Preferred Shares rating at Pfd-1, the FSR of The Canada Life Assurance Company at AA and its Subordinated Debentures rating at AA (low), the FSR of London Life Insurance Company at AA and the Capital Trust Securities (CLiCS) rating of Canada Life Capital Trust at A (high). All trends are Stable.

KEY RATING CONSIDERATIONS
The rating confirmations reflect the Company’s strong position in life insurance in Canada, Ireland and the United Kingdom, as well as in the retirement market in the United States, coupled with its solid franchise in the reinsurance industry. The Company’s ratings benefit from a more conservative risk appetite in its product profile and investment portfolio than peers. The ratings also consider the immediate challenges of GWO’s plan to legally amalgamate its operating insurance companies in Canada.

RATING DRIVERS
Positive ratings pressure could arise from the Company achieving a stronger capitalization through reduced financial leverage while maintaining return on equity (ROE) in the 10% to 15% range, as well as successfully completing the amalgamation of its operating insurance companies in Canada.

Conversely, ratings are likely to be negatively pressured if the Company embarks on large debt-financed acquisitions, reducing GWO’s financial flexibility, or if an extended decline in equity or credit markets causes a significant weakening in the Company’s financial position, including a material deterioration in capital ratios.

RATING RATIONALE
In confirming the ratings, DBRS Morningstar considered GWO’s global franchise, which is supported by strong market shares in its chosen markets, as well as its excellent risk management infrastructure. The Company’s extensive insurance and wealth management operations in Canada, Europe and the United States as well as in global reinsurance offer a high degree of product and geographic diversification. GWO has a long history of generating strong ROE values, although somewhat declining in 2019. This sustained ROE level is a positive for the ratings.

Like other large international insurance companies, GWO is subject to the legal, regulatory, solvency and accounting challenges of operating in multiple jurisdictions. The Company is in the final stage of a significant transformation effort in its Canadian business, partly to adapt to increasing customer demands. GWO is in the process of legally amalgamating its three large insurance operating companies in Canada under the Canada Life brand, which might pose execution risk in the short to medium term. However, this brand simplification strategy is expected to be positive for GWO’s credit ratings in the long run given the potential for cost savings and improved client retention.

GWO’s rating confirmations also reflect the Company’s exceptional/excellent liquidity, with consolidated cash and cash equivalents of $8.2 billion as at the end of Q3 2019 and a very large pool of liquid government bonds available for sale/repurchase, as well as access to committed banking lines. GWO’s invested asset portfolio is very high quality and well diversified by geography and industry. Additionally, the Life Insurance Capital Adequacy Test (LICAT) ratio for The Great-West Life Assurance Company, GWO’s primary operating subsidiary, reached 139% as at September 30, 2019, which is well positioned compared with peers in Canada. However, GWO’s excellent capitalization is constrained by its relatively high financial leverage, which remains at the upper end of the range for a company in the assigned rating category.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (September 2019), which can be found on our website under Methodologies & Criteria.

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.dbrs.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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this issuer took place on November 16, 2018, when all ratings were confirmed.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Marcos T. Alvarez, Senior Vice President, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer

Initial Rating Date: July 19, 1985

For more information on this credit or on this industry, visit www.dbrs.com.

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