DBRS Morningstar Upgrades Ratings on Equitable Life to A (high), Changes Trends to Stable

DBRS Limited (DBRS Morningstar) upgraded both the Financial Strength Rating and the Issuer Rating of The Equitable Life Insurance Company of Canada (Equitable Life or the Company) to A (high) from “A” and changed the trends to Stable from Positive.

KEY RATING CONSIDERATIONS
The ratings upgrade reflects Equitable Life’s strong recovery in Q2 2020 from the wide scale economic disruption and equity market volatility caused by the Coronavirus Disease (COVID-19) pandemic, which pressured the insurance industry, as well as its Q1 2020 net earnings. The upgrade also reflects the resilience of the Company in maintaining its historically strong business performance despite the disruptions caused by the pandemic. Equitable Life has good earnings generation, prudent risk management, and strong capitalization relative to the risks undertaken. The Company has maintained a strong market presence in the majority of its chosen niche market segments. Equitable Life continues to make significant investments in technological enhancements to create efficiencies and manage its costs. The Company reported a strong LICAT ratio of 162% as at Q2 2020. This is in the top tier for companies in the Canadian life insurance industry and provides a strong capital buffer that mitigates the risks that may arise from adverse movements in interest rates and equity markets.

RATING DRIVERS
Over the longer term, if the Company continues to profitably grow market share while enhancing its risk profile and maintaining its top tier capital levels, the ratings would be upgraded.

Conversely, the ratings would be downgraded if there is a sustained deterioration in profitability, or if Equitable Life were to lose a major distributor, resulting in a material decline in market share.

RATING RATIONALE
The Company’s earnings ability remains good across all three major product lines, though net income attributed to policyholders may decline slightly for full year 2020 as a result of the economic disruption and equity market volatility caused by the pandemic. Historically, Equitable Life has maintained consistent and stable earnings-generation capacity, which has shown resiliency with good return on equity results (13% for F2019), and strong capitalization. The Company has been historically profitable, which has helped maintain strong capitalization levels. Annualized individual life insurance premiums increased in 2019 from the prior year as the Company maintained good sales of its individual life insurance and wealth management products, with profitability rising from 2018. However, top-line revenue growth could moderate slightly in 2020 because of suppressed business activities and rising unemployment. In the current economic environment, rising unemployment will shrink the size of some groups, leading to reduced premium volumes in the group benefits line.

Equitable Life maintains a clearly defined business strategy, conservative corporate governance, and a significant participating life insurance block that supports capital levels. Equitable Life’s long-term strategy involves achieving organic growth by selling both new and traditional life insurance products as well as wealth management products targeting the middle- and high-income Canadian markets. The Company has demonstrated expertise in developing and enhancing its digital capabilities to serve distribution channels and clients. Equitable Life is focused on expanding its range of products and services, improving process efficiencies throughout the organization, and reducing operating expenses. The Company has set an annual earnings target consistent with a 12% return on equity.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Equitable Life are as follows: Franchise Strength—Good/Moderate; Risk Profile—Good; Earnings Ability—Strong/Good; Liquidity—Strong; Capitalization—Strong.

Notes:
The principal methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (July 21, 2020). https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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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