DBRS Confirms Ratings of Empire Life Insurance Company

DBRS has today confirmed its ratings of The Empire Life Insurance Company (Empire or the Company) including its Claims Paying Rating of IC-2, its Issuer Rating of “A” and its Subordinated Debt rating of A (low). All ratings have a Stable trend. The Company enjoys modest levels of profitability in each of its chosen business lines, including wealth management, individual insurance and group benefits, each of which has been jostled by recent extraordinary market and economic conditions. A five-year average ROE of under 10% reflects reasonable and steady returns on assets under management (AUM) of 66 basis points and conservative financial leverage. Expenses per AUM are higher than the peer group average which reflects the absence of scale, but are targeted for improvement by management through the implementation of a strategic transformation project which is expected to channel resources into more profitable and sustainable growth. While capitalization has traditionally been very conservative, the adverse impact of the deterioration in equity market performance forced the Company to raise capital in the form of $200 million of subordinated debt, which brings the Company’s debt-to-capitalization ratios closer to those of its industry peers at around 20%. The Company’s reported Minimum Continuing Capital and Surplus Requirement (MCCSR) at the end of March 2010 was 258%, ranking it among the best capitalized life insurance companies in Canada.

In the context of the life insurance company universe which DBRS rates, the ratings on Empire reflect its concentration in Canada, specifically in the province of Ontario, and the Company’s relatively small size with less than 5.5% market share in each of its chosen market segments. By comparison, the three largest domestic life insurance competitors control over 60% of the domestic market in addition to the extra diversification contributed by their large international operations. While larger scale is associated with more diversification of revenues and earnings as well as lower unit costs, the Company’s small size allows it to focus on relationship marketing and superior customer service aimed at particular markets and distribution channels.

The underlying exposure of Canadian life insurance companies to equity markets has become apparent following the recent deterioration in global equity markets. Having had a relatively large exposure to common equities in the past, the Company is currently managing its overall equity exposure (ownership of common stock and exposure to segregated fund guarantees) to be consistent with the overall equity exposure levels of industry peers. The Company's asset mix is otherwise more conservative than that of the life insurance industry, with lower exposure to mortgages and real estate and a higher proportion of its asset mix in high grade bonds, the corporate portion of which has been increased as attractive spread enhancement opportunities prevailed in 2009.

The Company’s controlling shareholder, E-L Financial Corporation Limited (E-L), is 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 owners have demonstrated a commitment to the Company’s continuance through capital injections and an accommodative dividend policy which has allowed the Company to build up its regulatory capital base.

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

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

This is a Corporate (Financial Institutions) rating.