DBRS Confirms Great-West Lifeco Inc. Ratings on Irish Life Group Acquisition

DBRS has today confirmed the ratings on Great-West Lifeco Inc. (GWO or the Company) and its affiliates following the announcement of the acquisition from the Government of Ireland of Irish Life Group (Irish Life) by the U.K. operation of GWO’s Canada Life Assurance Company (Canada Life) subsidiary for EUR 1.3 billion. All trends remain Stable.

To fund the acquisition cost equivalent of approximately $1.8 billion, GWO intends to issue $1.25 billion in common equity. Power Financial Corporation (PWF or the Parent) will participate in this equity issue for up to $550 million, with IGM Financial Inc. participating for $50 million to maintain its current 4% ownership stake in its sister company. In addition, the Company intends to raise a certain amount of euro-denominated debt that will act as a balance sheet and earnings hedge for the Company, which reports in Canadian currency. The residual funding will come from internal sources, such as excess capital in its U.K. operations. GWO will also assume EUR 200 million in subordinated debt previously issued by Irish Life. According to the proposed financing plan, the reported financial leverage and fixed-charge coverage ratios at GWO are not expected to change materially.

The Irish Life Group acquisition by GWO has been speculated on for over a year as the Irish financial services industry has had to raise additional capital to meet minimum requirements laid out by the Irish government and various regulatory bodies in Europe. In the process, the Irish government acquired the Irish Life subsidiary Irish Life and Permanent, Plc at a cost of EUR 1.3 billion, by way of injecting additional capital into its Permanent TSB banking operation. As the economic clouds have lifted from Ireland in recent months, the ability of the government to redeploy its acquired financial services properties has increased.

In addition to a strong retail insurance operation, which is similar to that of Canada Life (representing an estimated 35% of earnings), Irish Life also has a group benefits and pension business representing 25% of earnings; an investment management operation with close to EUR 22 billion of third-party assets under management (AUM) in addition to EUR 16 billion managed for Irish Life itself, which accounts for 15% of earnings; and a series of ancillary operations related to distribution, health-care insurance and general insurance, which account for an additional 25% of earnings. The combined Irish operations are expected to account for an estimated 10% of GWO pro forma earnings.

With a relatively low acquisition cost estimated at just 72% of Irish Life reported embedded value of EUR 1.8 billion and obvious expense synergies generated from merging Canada Life’s operation, accounting for 5% of the market, with that of Irish Life, representing 25% of the Irish life insurance market, the value proposition for GWO is compelling. Expected expense synergies between the acquired operations of Irish Life and the existing Irish operations of Canada Life will more than offset the increased financing expenses so that the acquisition is expected to be accretive to GWO before restructuring and acquisition-related costs. In addition, GWO could potentially benefit from revenue enhancements as it introduces different management approaches related to investment strategies and the use of reinsurance, which could enhance margins in the future.

The potential for adverse development post-acquisition is relatively small as there are limited guaranteed policy liabilities. Close to 80% of assets are unit-linked for the strict account of the policyholder. Combined with the Irish Life investment management operation, a substantial proportion of the Irish Life revenues take the form of investment management and administrative fees. The remaining assets are largely sovereign government bonds and, therefore, not likely to be a source of adverse credit experience.

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 by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

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