DBRS Morningstar Confirms Great-West Lifeco Inc.’s Issuer Rating at A (high), Stable Trend, Following Prudential Financial, Inc.’s Retirement Business Acquisition Announcement

DBRS Limited (DBRS Morningstar) confirmed Great-West Lifeco Inc.’s (Great-West or the Company) Issuer Rating and Debentures rating at A (high) as well as its Non-Cumulative First Preferred Shares rating at Pfd-2 (high). DBRS Morningstar also confirmed the ratings of Great-West’s subsidiaries at their current levels. The trend for all ratings is Stable. The ratings confirmation follows the announcement that Empower Retirement (Empower), Great-West’s retirement services subsidiary in the United States, has reached an agreement to acquire the full-service retirement business of Prudential Financial, Inc. (Prudential). The transaction is expected to close in Q1 2022, subject to customary closing conditions and regulatory approvals.

KEY RATING CONSIDERATIONS
The confirmation of the ratings and Stable trend reflect DBRS Morningstar’s view that the acquisition of Prudential’s retirement business is aligned with Great-West’s strategic plan to expand its wealth management and retirement service business in the United States, by providing strong economies of scale and a key growth platform for Empower. The acquisition of Prudential’s retirement business will further enhance Empower’s strong market position as the second-largest record keeper in the U.S. retirement industry. On a proforma basis, Empower will now have more than USD 1.4 trillion in assets under administration and 16.6 million participants across 71,000 workplace plans. DBRS Morningstar notes that Empower’s lower unit cost advantage relative to most of the industry is a competitive advantage.

The ratings also consider the increased leverage, as well as the increased operational risk associated with a large transaction, Great-West’s second large deal in the past year. However, DBRS Morningstar notes that Great-West’s long track record of successfully integrating large prior acquisitions, including previous acquisitions in the U.S. retirement business, helps mitigate the concern.

RATING DRIVERS
An upgrade is unlikely in the intermediate term given the increase in financial leverage and integration risk following two large acquisitions. However, over the long term, a material improvement in financial leverage together with the successful integration of recent acquisitions, while maintaining strong earnings and regulatory capital levels, would result in an upgrade.

Conversely, the ratings would be downgraded if the Company experiences further sustained deterioration of its financial leverage, combined with weaker profitability and coverage ratios. Moreover, an adverse event causing regulatory capital to decline substantially or significant operational missteps with recent acquisitions, would result in a downgrade.

RATING RATIONALE
Great-West has a broad and diverse franchise supported by leading market shares in Canada, the United States, Ireland, and the United Kingdom. After exiting the life insurance business in the U.S., the Company has focused its growth efforts in building up its retirement business in the country. Great-West completed the acquisitions of Personal Capital and the retirement business of MassMutual in 2020. In particular, the integration process of MassMutual’s retirement business is progressing according to the initial plan disclosed last year. With the acquisition of Prudential’s retirement business, Empower is expected to increase its contribution to Great-West’s earnings to approximately 30%, which provides additional diversification to the Company’s sources of revenue.

The USD 3.55 billion transaction is expected to be funded through a combination of approximately USD 1.15 billion in long-term financing, USD 1.0 billion in short-term debt, and existing resources. As a result, Great-West’s consolidated financial leverage (measured as consolidated debt and preferred shares over total capitalization) is anticipated to increase to 35.6% by the end of 2021 compared with 33.1% at the end of Q1 2021, significantly higher than the peer average and negatively affecting the Company’s financial flexibility amid the Coronavirus Disease (COVID-19) pandemic.

While DBRS Morningstar expects Great-West’s coverage ratio to remain strong, financial leverage will take several years to return to pre-acquisition levels below 30%. Great-West’s regulatory capital ratio is also expected to be in the 120% to 125% range for the next two years, which is somewhat below its peer average, returning to levels more aligned with the Company’s target by the end of 2023. Taking into consideration the expected levels of leverage, coverage ratio, and regulatory capital levels during the next two years, DBRS Morningstar assesses Great-West’s capitalization as Strong/Good. Supportive of current ratings, Great-West continues to benefit from very strong consolidated liquidity, as well as from its excellent franchise strength that generates consistent results across its chosen jurisdictions.

Of some concern, Great-West is still in the process of fully integrating MassMutual’s U.S. retirement business services, which it closed in December 2020. Adding on Prudential’s U.S. retirement business increases the operational and execution risk associated with both transactions. Nonetheless, DBRS Morningstar views Great-West as having the necessary expertise to successfully integrate both transactions.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Great-West Lifeco Inc. are as follows: Franchise Strength – Very Strong/Strong; Risk Profile –Strong; Earnings Ability – Strong; Liquidity – Very Strong; Capitalization – Strong/Good.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.

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

Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the “Global Methodology for Rating Insurance Companies and Insurance Organizations” (July 16, 2021) was used to evaluate the Issuer, and “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (February 3, 2021) was used to assess ESG factors.

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 monitored.

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Marcos Alvarez, Senior Vice President, Head of Insurance
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: July 19, 1985

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577