DBRS Assigns Ratings to Empire Life

DBRS is today assigning a Claims Paying Rating of IC-2 to policy obligations issued by The Empire Life Insurance Company (Empire or the Company). DBRS has also assigned an Issuer Rating of “A” and a Subordinated Debt rating of A (low) to Empire. All ratings have a Stable trend. In the context of the life insurance company universe which DBRS rates, the ratings on Empire reflect the relatively small size and domestic focus of the Company in the context of the concentrated Canadian life insurance industry, where the top three competitors control over 60% of the domestic market in addition to their international operations. Scale is generally associated with both more diversified and lower cost operations especially in the context of information technology, which drives any insurance company’s ability to innovate and respond to customers on a timely basis in a cost-effective manner. Offsetting some of the scale concerns is the Company’s specific focus on relationship marketing and superior customer service aimed at particular markets and distribution channels.

Earnings are modest, with a five-year average ROE of under 10% reflecting reasonable returns on assets and an absence of financial leverage to date. Margins are generally below those of the industry in reflection of higher new business strain assumed by the Company’s relatively large individual insurance business and the lower use of reinsurance. Expenses are higher than the peer group average which reflects the absence of scale, but are targeted for improvement by management. While capitalization has traditionally been very conservative, the recent deterioration in equity market performance has forced it to raise additional capital in the form of $125 million of subordinated debt issued to E-L Financial Corporation Limited (E-L), which brings the Company’s financial leverage ratios closer to those of its industry peers at around 16%.

The Company’s controlling shareholder, E-L, is in turn controlled by the Jackman family, members of which have overseen the business of the Company for over 50 years through three generations of ownership and oversight. With a long-term perspective on the Company’s potential to create value, E-L has traditionally been prepared to accept the trade-off between the short-term adverse impact of higher new business strain and the more favourable impact in the long-term arising from the secular improvement in mortality experience.

The underlying exposure of Canadian life insurance companies to equity markets has become apparent following the recent deterioration in global equity markets. The Company realized that it must reduce its direct holdings in common equities and completed steps to begin this reduction in 2006, recognizing that it is also indirectly exposed to equity markets through segregated fund guarantees and the fees earned on assets under management (AUM). The Company is currently managing its overall equity exposure (ownership of common stock and exposure to segregated fund guarantees) in order to remain consistent with the overall equity exposure level of industry peers. The Company's asset mix is otherwise more conservative than that of industry peers, with lower exposure to mortgages and real estate and a greater portion of its mix in domestic government bonds.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Life Insurance Companies, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.