DBRS Confirms Ratings on Great-West Lifeco Inc. & Affiliates

DBRS Limited (DBRS) confirmed Great-West Lifeco Inc.’s (GWO or the Company) Issuer Rating and Debentures at A (high) and its Non-Cumulative First Preferred Shares at Pfd-2 (high). DBRS also confirmed the ratings on GWO’s major operating subsidiaries, including the Financial Strength Rating and Issuer Rating of The Great-West Life Assurance Company at AA as well as its Preferred Shares rating at Pfd-1; the Financial Strength Rating and the Subordinated Debentures rating of The Canada Life Assurance Company at AA and AA (low), respectively; and the Financial Strength Rating of London Life Insurance Company at AA. DBRS also confirmed Canada Life Capital Trust’s Capital Trust Securities (CLiCS) rating of A (high). At the same time, DBRS discontinued the rating on Great-West Lifeco Finance (Delaware) LP II’s Fixed/Floating Subordinated Debentures as the securities were redeemed on June 26, 2018. All trends are Stable.

KEY RATING CONSIDERATIONS
The rating confirmations reflect GWO’s excellent franchise across several key markets, including its competitive advantage as the largest insurance company in Canada with a dominant market position for both individual insurance and group benefits and savings, as well as an international diversification strategy through operations in Europe and the United States. The Company benefits from a conservative risk profile with healthy levels of liquidity and stable earnings. The Stable trends consider GWO’s resilient fundamentals and its ability to adapt to challenging operating environments as well as its conservative financial and risk management.

RATING DRIVERS
DBRS views upward rating movement as unlikely over the medium term; however, positive rating pressure could arise from continuing advances in the franchise, along with further strengthening in earnings metrics as well as stronger capitalization via reduced financial leverage. Negative rating pressure could result from large debt-financed acquisitions that reduce the Company’s financial flexibility. An extended decline in equity or credit markets that causes a significant weakening in GWO’s financial position, including a hard Brexit leading to a material deterioration in the invested assets and insurance sales in the United Kingdom, could also put negative pressure on the ratings.

RATING RATIONALE
In confirming the ratings, DBRS considered GWO’s excellent global franchise and strong market shares. The Company’s extensive insurance and wealth management operations in Canada, the United States and Europe as well as in global reinsurance offer a high degree of product and geographic diversification. Return on equity (ROE) for the nine months ended September 30, 2018 (9M 2018) was strong at 14.7%, a significant improvement over the same period in 2017. GWO has been able to sustain ROE levels in the mid-teens for several years, a positive for its ratings.

As with other large international insurance companies, GWO is subject to the legal, regulatory, solvency and accounting challenges of dealing in multiple jurisdictions. The Company is undergoing a significant transformation effort in its Canadian business to adapt to emerging threats and increasing customer demands. The movement to a more customer-centric operating model, compared with a product-centred one, involves a number of significant organizational and strategic choices, including its reporting structure, marketing and branding strategy, technology projects and digital spend as well as the reorganization of its distribution network. The magnitude of the transformation carries several risks, including declining client retention, service issues, expense and scope overruns as well as decreased customer and/or employee satisfaction.

The Company benefits from ample liquidity with consolidated cash and cash equivalents of $7.5 billion at the end of Q3 2018 as well as a large pool of liquid government bonds available for sale/repurchase and access to committed banking lines. Its invested asset portfolio remains high quality and well diversified by geography and industry; however, GWO is exposed to the uncertainty of current Brexit negotiations and the performance of the U.K. economy after Brexit is completed. The Company’s financial leverage remained stable at 26.9% at Q3 2018 while its fixed-charge coverage ratio improved to 8.1 times (x) for 9M 2018 compared with 6.5x for 9M 2017 based on higher profitability during 2018. The Life Insurance Capital Adequacy test (LICAT) ratio for The Great-West Life Assurance Company, GWO’s primary Canadian operating subsidiary, reached 134% at September 30, 2018, which is in line with the LICAT ratios of other main Canadian operating life companies.

The Grid Summary Grades for GWO are as follows: Franchise Strength – Excellent; Risk Profile – Excellent; Earnings Ability – Excellent; Liquidity – Excellent; Capitalization and Asset Quality – Good.

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 (January 2018), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Marcos T. Alvarez, Senior Vice President, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG and Sovereign Ratings

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

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