DBRS Confirms Ratings on The Empire Life Insurance Company

DBRS Limited (DBRS) has today confirmed The Empire Life Insurance Company’s (Empire or the Company) Financial Strength Rating and Issuer Rating at “A” and its Subordinated Debt rating at A (low). The Preferred Shares rating has also been confirmed at Pfd-2. All trends are Stable.

The confirmations consider Empire’s good franchise strength, as indicated by the Company’s success as a capable insurer in maintaining its near 2% market share of industry direct premiums against some formidable life insurance competitors in Canada. While smaller than other players, the Company has managed to maintain its market position, including in the competitive group business market. Empire benefits from conservative management and a supportive primary shareholder. The Company is currently focusing on improving efficiencies throughout the organization, enhancing its digital capabilities and achieving organic growth by targeting streamlined insurance and wealth products toward the middle-income Canadian market.

Factored into the ratings confirmations is Empire’s good earnings ability, which has shown resiliency with return on equity improving since 2011 and now consistently in the 10% to 13% range. Financial leverage has historically trended lower, although it has increased markedly in Q1 2016 to 27.5% (20.6% at YE2015) due to the February 2016 issuance of $149.5 million in preferred shares. At 12.7 times earnings (Q1 2016), the Company’s fixed charge coverage ratio is more than adequate. Empire has a conservative investment portfolio and a negligible amount of intangibles on its balance sheet.

One of the Company’s primary risks arises from its sensitivity to interest rates and equity markets in both its general funds and segregated fund portfolio. The segregated fund risk lies with maintaining regulatory capital ratios for its tail risks rather than an immediate cash need. Segregated fund equity risks are now partially hedged, which helps stabilize the solvency ratio against equity market swings. Empire has taken actions to reduce risk within its product mix, including selling segregated funds with lower guarantee levels and higher fees and focusing on sales of less capital-intensive products.

The Stable trend considers Empire’s resilient fundamentals and its ability to adapt to the current environment.

RATING DRIVERS
Negative ratings pressure could emerge, if the Company’s fundamentals weaken because of a sustained erosion of earnings or an inability to maintain a sufficient Minimum Continuing Capital and Surplus Requirements ratio to endure a severe equity market decline. Positive ratings pressure could arise if Empire achieves a significant improvement in market share accompanied by reduced exposure to interest rate and equity market changes and a sustained improvement in profitability.

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

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.dbrs.com.

The applicable methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.