DBRS Confirms Ratings for Empire Life

DBRS Limited has today confirmed its ratings of The Empire Life Insurance Company (Empire or the Company), including its Claims Paying Rating of IC-2, its Issuer Rating of “A” and its Subordinated Debt rating of A (low). All ratings have a Stable trend. The assigned ratings reflect the Company’s smaller scale and focused product range. The Company has improving levels of profitability and fixed-charge coverage.

At year-end 2013, Empire had a very strong Minimum Continuing Capital and Surplus Requirements (MCCSR) capital position at 267%. In the first quarter, after a shareholder dividend was paid, the MCCSR dropped to a still strong 250%. The MCCSR ratio will drop in the second quarter by 19 points due to a planned debt maturity in May 2014 that was pre-financed in 2013. The Company has little exposure to mortgages and real estate. Credit default history has been excellent. For its long-tailed liability exposures, the Company has chosen to partially fund the far-in-the-future payments with equities using a disciplined value investing framework. The asset-liability management is monitored closely, and the Company is waiting for interest rates to rise before locking in a long-term rate for a portion of the portfolio while monitoring the amount of exposure this creates to stay within tolerance limits. Empire is closely held by shareholders who are patient and demonstrate a willingness to allow the Company to suspend dividends so it can build capital during times of stress and inject capital should it be required. Financial leverage (debt plus preferreds over total capital) is high at 34% at year-end 2013 due to the sub-debt prefinancing. This ratio will improve with the debt maturity in May 2014 and should approach the more long-term leverage ratio of 25% mid-year.

As with many of its peers, Empire is targeting to grow products with low capital requirements to rationalize capital usage. The Company does have universal life and term-to-age-100 products in its liability portfolio, which exposes it to long-tail risks that can generate income volatility. The Company’s reserves contain a significant portion of provisions for adverse deviations, which provide a buffer and a store of future profit should assumptions prove accurate over time. The Company has demonstrated the discipline not to compete on price and has seen reduced insurance sales after raising prices on individual life products. Empire now offers adjustable premium products, which share the interest rate risk with the policyholder.

The Company sells life, wealth and group benefit solutions and has a good following with advisors with its focus on the customer and advisor experience. Having a full suite of basic products allows the Company to adjust sales to react to industry issues and client needs. The Company is targeting the middle-income market with novel advertising campaigns and innovative e-commerce projects to improve the purchasing experience and gain processing efficiencies.

Empire’s largest risk exposure is with equity risk largely arising from the segregated fund portfolio. With the Company’s currently strong capital position and with the current segregated fund guarantees largely below current market valuations, Empire can easily handle most equity market declines without the requirement to post reserves or required capital for its segregated fund guarantees.

Notes:
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 and Health 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.