DBRS Morningstar Confirms Ratings on Great-West Lifeco Inc. at A (high) and The Canada Life Assurance Company at AA With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed all ratings of Great-West Lifeco Inc. (Great-West or the Company) and its related entities, including Great-West’s Issuer Rating at A (high) and the Financial Strength Rating of The Canada Life Assurance Company (Canada Life) at AA. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
The confirmation of the ratings and trends reflects the Company’s leading market position as the largest insurance company in the Canadian market, as well as its strong franchise across the United States, Ireland, and the United Kingdom. Great-West’s ratings benefit from a conservative risk profile relative to peers, as well as from very strong liquidity and solid regulatory capital levels. Great-West’s operations are well diversified in terms of products and geographies, including successfully expanding its retirement services business in the United States, where it is already the second-largest player in the market. Great-West has demonstrated consistent profitability, including sustaining earnings through the Coronavirus Disease (COVID-19) global pandemic.

Great-West’s ratings also consider its financial leverage, which is higher than its peers’ and has increased as a result of recent acquisitions in the retirement services business. Moreover, as a large, complex international insurance organization operating across multiple jurisdictions that has made several recent acquisitions, operational risks are higher. In DBRS Morningstar’s view, this operational risk is mitigated by the Company’s long record of successfully integrating large acquisitions in the past.

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 strengthening 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
The Company’s broad and diverse franchise is supported by leading market shares and strong distribution capabilities in Canada, the United States, Ireland, and the United Kingdom. In Canada, the Company operates as the largest life insurance company under the Canada Life banner. Great-West is also one of the largest reinsurers in the world through its Capital and Risk Solutions business. 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, where it is now the second-largest provider in this market. Through its subsidiary, Empower Retirement (Empower), Great-West completed the acquisition of Personal Capital and the retirement business of MassMutual in 2020. Additionally, the Company announced in July 2021 the acquisition of Prudential’s full-service retirement business for an approximate transaction value of $4.5 billion, which is expected to close in Q1 2022. These acquisitions are expected to increase Empower’s contribution to Great-West’s earnings to approximately 30%, further enhancing revenue diversification.

Despite the initial challenges brought on by the pandemic, Great-West continues to generate resilient and stable earnings, reflecting its solid market position and careful selection of chosen markets and products. Return on equity during 2020 and the first nine months of 2021 has remained above 14% driven by strong results across all segments (Canada, United States, Europe, and Risk and Capital Solution). However, some headwinds remain as governments may need to reinstate social distancing measures amid new variants, which could delay or mute the economic recovery.

Great-West has a comprehensive and well-developed risk management infrastructure which ensures that risks are independently assessed. Great-West’s investment portfolio is well diversified by asset class, industry, and geography with negligible credit losses during the peak of the pandemic. Great-West’s ratings are also supported by the Company’s strong underwriting and product pricing discipline, which has helped mitigate interest rate risk. Great-West’s conservative product design and close asset-liability matching have traditionally resulted in reduced net income fluctuations relative to peers. Although Great-West is exposed to natural catastrophes via its reinsurance business, this is partly mitigated by conservative aggregation limits, which DBRS Morningstar views to be well within the Company’s loss absorption capacity.

DBRS Morningstar views Great-West’s liquidity position as very strong, with the Company maintaining ample cashable assets, including $600 million in cash at the holding company level, as well as a very large pool of high-quality government bonds. Great-West also has several committed credit lines with large banks that are currently unused. The Company has implemented an improved liquidity risk management program and benefits from a claims distributions profile that is largely predictable.

Great-West maintains solid and stable regulatory capital levels with Canada Life’s Life Insurance Capital Adequacy Test (LICAT) ratio at 123% as of the end of Q3 2021. While Canada Life’s LICAT ratio has decreased from 135% at the end of 2019 primarily because of acquisitions, this level of regulatory capital still provides the Company a sufficient buffer against adverse movements, including equity and interest rate volatility. Regulatory capital ratios at the Company’s international insurance subsidiaries also remained very strong at the end of 2020. Meanwhile, leverage has deteriorated as a result of issuing debt to fund acquisitions. Specifically, Great-West’s financial leverage was 33.3% as calculated by DBRS Morningstar as of the end of Q3 2021, which could negatively affect the Company’s financial flexibility. This is mitigated by Great-West’s traditional good access to debt and equity markets even after large acquisitions, most recently evidenced by a $1.5 billion Limited Recourse Capital Notes issuance in August 2021. DBRS Morningstar expects that Great-West will maintain its conservative financial management and reduce its financial leverage over the medium term.

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 Manulife Financial Corporation 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 Canadian dollars unless otherwise noted.

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

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 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 Issuers, 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 generally 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.

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