DBRS Confirms Ratings of Great-West Life and Affiliates

DBRS has today confirmed the ratings of Great-West Lifeco Inc. (GWO or the Company) and its affiliated operating subsidiaries, including the Claims Paying Ratings at The Great-West Life Assurance Company, The Canada Life Assurance Company and London Life Insurance Company; all trends are Stable. The existing ratings for the Company and its operating subsidiaries reflect the continuing strong financial performance and the notable absence of earnings volatility associated with recent exogenous market factors. Stable earnings are a testament to the Company’s diversification by product and geography, as well as its conservatism with respect to embedded product risks, actuarial assumptions and asset quality.

Like its major peers, the Company is anchored by Canadian operations that benefit from an oligopolistic industry structure, which limits the worst of price competition. As the largest seller of participating life insurance products in Canada and a major player in group insurance, the Company enjoys strong market positions in risk-mitigated products, supporting its strong return on equity. Continued success in growing the largely fee-based U.S. retirement saving administration business segment and focused niches in Europe, primarily in the United Kingdom, represent additional stable sources of earnings contributions. While Putnam Investments, LLC (Putnam) has continued to be a relative drag on earnings due to its sub-optimal scale in the context of a difficult market environment, there is evidence that the situation is improving through reduced redemptions and ongoing enhancement of investment fund performance. Notwithstanding the slow progress in returning to consistent profitability, Putnam has a good platform for long-term growth in assets under management, given its brand, its entrenched distribution network of independent financial advisors and its recovering presence in the institutional market.

Having grown by acquisition in the past, the Company’s current strategy appears more focused on leveraging its diversified distribution channels to generate organic growth through untapped markets or taking market share from competitors. In this context, the Company has identified the need to be among the most cost-efficient providers, while also ensuring that it has made the necessary investments in technology required to maintain a high level of customer service and ease of use. While DBRS believes that the market for retail financial services is likely to continue to evolve with lower-cost direct investment options for retail investors, there is still a growing market for the advice-driven channel that the Company targets, which is supported by demographics and the legitimate concerns on the part of retail investors, who want to protect their beneficiaries and not outlive their assets.

The MCCSR ratio of the Company’s major regulated operating subsidiary has hovered just over 200% for the last two years. While this is lower than that of some major competitors, it reflects the Company’s lower-risk asset portfolio and insurance liabilities, and does not include $825 million of cash at the holding company that could easily be advanced to the regulated entities in the form of capital, if required. With longer experience as a shareholder-owned company, GWO has traditionally operated with higher financial leverage than most of its Canadian peers, a reflection of its debt-financed mergers and acquisitions activity and the historical attention paid to the efficient use of shareholder capital. At 32.2% at the end of June 2012, the Company’s total debt plus preferred has come into alignment with that of the peer group, as Great-West has reduced financial leverage and de-mutualized competitors have increased theirs. Fixed-charge coverage ratios at GWO nevertheless remain healthier than those of its peers, reflecting stronger profitability. The Company is actively retiring capital instruments issued at its operating companies in order to have a higher proportion of capital issuance at the holding company level, which will serve to reduce its double leverage ratio. In short, DBRS considers the Company’s financial leverage and capital position to be consistent with the current rating category, as long as it continues to operate conservatively.

As an integral component of Power Financial Corporation’s group of companies, GWO benefits from its parent’s financial support and its strong governance and risk management controls and procedures, which reinforce the conservative bottom-line focus of the Company.

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

The applicable methodology is Rating Companies in the Canadian Life Insurance Industry (March 2011), which can be found on our website under Methodologies.