DBRS Morningstar Confirms Ratings on The Equitable Life Insurance Company of Canada at A (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Financial Strength Rating and Issuer Rating of The Equitable Life Insurance Company of Canada (Equitable Life or the Company) at A (high). All trends are Stable.

KEY RATING CONSIDERATIONS
The ratings and trends reflect the Company’s established presence in the Canadian life insurance market where it offers a diversified product mix to individuals and small to medium-sized employer groups that consistently produces strong profitability metrics. Equitable Life’s strong balance sheet is supported by strong liquidity and capital positions.

The ratings and trends also consider Equitable Life’s distribution strategy, which is heavily reliant on the independent advisor channel. As such, the loss of a major distributor could cause a material decline in market share. While the investment portfolio is still composed of high-quality securities, there has been a gradual shift toward investing in more bonds and private placements rated BBB, which account for 26.4% of the bonds and private placements portfolio, which is relatively high compared with some of its peers.

RATING DRIVERS
The ratings are well placed in the current rating category. However, over the longer term, the ratings would be upgraded if the Company were to strengthen its market positions significantly while maintaining strong profitability metrics and appropriate capitalization buffers.

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

RATING RATIONALE
The Company operates in a market dominated by a few large insurance companies; however, it has retained considerable market share in the middle-market segment in its major lines of business. The Company’s smaller size makes it more flexible in terms of responding to changing market conditions and the development of new products. Equitable Life operates in Canada. The Company continues to focus on increasing market share organically, while strengthening its product offering, competitiveness, and digital capabilities. Equitable Life’s product portfolio mix offers conservative guarantees while maintaining low risk retention limits. The Company does not offer products that do not align with its risk appetite and risk tolerance limits. Equitable Life sets prudent prices for its level cost of insurance universal life, and critical illness, because of the long-term risks associated with these policies. The Company’s credit-risk policy permits a very limited exposure to non-investment-grade securities and minimizes the concentration of its assets in any company, geographic area, or industry by setting asset concentration limits. The Company’s investment portfolio is diversified by industry and region with conservative exposures to asset classes with volatile valuations.

The Company has experienced consistent growth in sales over the past five years, especially in its Individual Insurance business. DBRS Morningstar expects the Company to continue to grow in future years while remaining profitable, considering its conservative underwriting practices and track record of consistent profitable growth in earnings. Equitable Life has consistently generated good return on equity (ROE) values (15.8% in 2020 with a three-year weighted average of 14.2%) that are in the upper- to mid-tier segment compared with peer life insurers.

DBRS Morningstar views Equitable Life’s liquidity position as strong. The Company has a high proportion of government bonds in its bond portfolio. Equitable Life maintains a stable, predictable insurance and claims risk profile, adequate reinsurance commensurate with risk and a significant amount of marketable assets of good quality. The possibility of a catastrophic event occurring through Equitable Life’s Group Benefits business is considered remote.

Equitable Life’s strong capitalization reflects its lack of leverage and strong regulatory solvency ratio. Indeed, Equitable Life’s solvency ratios are significantly higher than regulatory minimums and provide a material buffer to absorb losses. As at year-end (YE) 2020, the Company’s life insurance capital adequacy test (LICAT) ratio was 165.7% (164.9% at H1 2021), which is well above the regulatory minimum and compares favourably with that of its peers and other companies operating in the Canadian life insurance industry in general. The strong LICAT ratio is driven by increased available capital, primarily as a result of the consistent organic growth in profitable earnings in the Company’s Individual Insurance line of business. The high level of participating whole life insurance sales, which has moderate capital requirements, also contributed significantly to the Company’s strong LICAT ratio.

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

Notes:
All figures are in Canadian 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).

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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