Morningstar DBRS Upgrades The Empire Life Insurance Company's Financial Strength Rating and Issuer Rating to A (high), Stable Trends

DBRS Limited (Morningstar DBRS) upgraded all credit ratings of The Empire Life Insurance Company (Empire or the Company), including Empire's Financial Strength Rating and Issuer Rating to A (high) from "A." The trends on all credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating upgrades reflect Empire's good recent financial performance with increasingly stable profitability, prudent capital buffers, and reduced exposure to equity market risk. Despite its midsize position in the consolidated Canadian life insurance market, Empire has built a solid franchise with a diversified earnings power and good access to distribution in its key individual life and wealth management product lines. Empire reported record common shareholder's net income of $281 million in 2024, resulting in a return on common shareholder equity (ROE) of 15.4%, with positive credit rating implications. In recent years, Empire has significantly increased its equity hedge position while exiting most of its direct equity investments, reducing the Company's risk profile.

The Stable trends consider Empire's stable earnings and adequate capital buffer, with a Life Insurance Capital Adequacy Test (LICAT) ratio of 140% as of Q1 2025, allowing the Company to absorb the impact of potential market volatility.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade Empire's credit ratings if the Company were to substantially increase its market share and profitability while maintaining a prudent capital and risk profile. Conversely, Morningstar DBRS would downgrade the credit ratings if Empire reported sustained losses with a significant detrimental impact on capital buffers.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Good/Moderate
Empire maintains a stable market position as a midsize life insurer with diverse product offerings and access to multiple distribution channels. It has established relationships with distributors including through its investments into brokerage organizations and through its efforts to develop technology and service integration in direct, brokerage, and specialty distribution channels. As the Company lacks the scale of its larger competitors, it must remain selective in its product offering and its strategic and technology investments. Profitability in product lines where Empire is a small player, such as group benefits, remains challenging.

Earnings Building Block Assessment: Strong/Good
The Company improved its ROE in recent years up to 15.4% in 2024, reflecting rising profitability and efficient capital allocation. Common shareholders' net income of $281 million in 2024 compares favourably with $156 million in 2023, mainly because of favourable market impacts. Going forward, we expect Empire to continue to report relatively stable profits and an average ROE above 10%, with expense management and technology spend being key drivers.

Risk Building Block Assessment: Good
Empire has an extensive risk management framework with a prudent approach to product design, although its product portfolio is more heavily weighted to segregated funds, which have had a higher risk profile historically as a result of their market-linked guarantees. However, Empire has significantly increased its equity hedging as well as reduced the guarantee on most of its product portfolio over time, resulting in reduced net risk exposure. The Company's fixed-income portfolio is conservative, with a large exposure to highly rated Canadian provincial government bonds. As Empire focuses on products that pass through the investment performance to policyholders, its risk profile is shifting toward operational risks such as relationships with distributors, market conduct and regulation, technology, and reputation.

Funding and Liquidity Building Block Assessment: Strong/Good
Empire maintains very high levels of liquidity with substantial cash, short-term assets, and high-quality bonds on its balance sheet. Its product portfolio has a predictable claims profile, and the Company has limited collateral requirements, mainly on its hedging program.

Capitalization Building Block Assessment: Strong/Good
Empire's LICAT ratio is prudent at 140% as of Q1 2025, providing an adequate buffer to absorb capital volatility caused by the impact of market shocks and other risks. The Company has implemented a hedging program to mitigate its market risk exposures and uses reinsurance to manage product guarantee risks. Empire's leverage ratio was 29% as of Q1 2025, down from 30.5% at Q1 2024, mainly because of additional retained earnings. The Company has access to capital through public debt issuances and its flexible dividend policy allows it to retain internally generated capital at the discretion of its majority shareholder, E-L Financial Corporation Limited.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (September 10, 2024) https://dbrs.morningstar.com/research/439195. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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 https://dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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