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 Equitable Life’s established presence in the Canadian life insurance market where it offers individual and group products. The Company’s focus on participating insurance transfers some of its risk exposures to policyholders. Equitable Life has demonstrated consistently strong profitability and capital levels even through recent financial market volatility. 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. Additionally, while the Company has a large and high quality asset portfolio, it is increasingly investing in private placements and commercial mortgages, which tend to be less liquid.

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 significantly strengthen its market position while maintaining strong profitability metrics and appropriate capitalization buffers.

Conversely, the ratings would be downgraded if there were 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
Equitable Life operates in the consolidated Canadian life insurance market and has retained considerable market share in the middle-market segment in its major lines of business despite facing much larger competitors. The Company’s smaller size makes it more flexible in terms of responding to changing market conditions and developing new products. The Company continues to focus on growing profitably and organically while strengthening its product offering, competitiveness, and digital capabilities.

Equitable Life’s product portfolio is heavily focused on participating individual life insurance, which allows the Company to share some of the risks with policyholders. While the Company has higher than average equity and real estate investments, they mainly back participating and unit-linked policies where the investment performance is passed through to policyholders, which limits the risk to Equitable Life.

Equitable Life has experienced consistent growth in premiums and deposits over the past five years, including in its core Individual Insurance business as well as in Savings and Retirement products. DBRS Morningstar expects the Company to continue to grow while remaining profitable, considering its conservative underwriting practices and track record of consistent profitable growth in earnings. Indeed, Equitable Life has consistently generated good return on equity values (16.4% in 2021 with a three-year weighted average of 15.5%), which are above those of its life insurance peers.

DBRS Morningstar views Equitable Life’s liquidity position as strong/good. The Company has increased its investments in less liquid securities but continues to hold a large amount of government bonds and other marketable securities in its portfolio. Equitable Life maintains a stable claims profile with an adequate reinsurance coverage and has a liquidity risk management framework that considers its substantial cashable long term insurance liabilities.

Equitable Life’s strong capitalization reflects its lack of financial leverage and strong regulatory solvency ratio of 153% at Q2 2022. Equitable Life’s solvency ratio is significantly higher than the regulatory target and provides a material buffer to absorb losses. The strong LICAT ratio is driven by good organic capital generation because of the Company’s strong profitability and prudent policyholder dividend policy. The focus on participating insurance also benefits the LICAT ratio as it has lower capital requirements than similar non-participating products.

ESG CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929.

The Grid Summary Grades for Equitable Life are as follows: Franchise Strength—Good/Moderate; Risk Profile—Good; Earnings Ability—Strong/Good; Liquidity—Strong/Good; 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

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 under regular surveillance.

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

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