DBRS Confirms Ratings on Empire Life

DBRS Limited has today confirmed its ratings of The Empire Life Insurance Company (Empire or the Company), including its Claims Paying Rating at IC-2, its Issuer Rating at “A” and its Subordinated Debt rating at A (low). All ratings have a Stable trend. The assigned ratings reflect the Company’s moderate sized franchise and solid fundamentals with improving levels of profitability.

The Company sells life, wealth and group benefit solutions and has a good following of advisors with its focus on the customer and advisor experience. Having a full suite of basic product 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 its customers’ purchasing experience and gain processing efficiencies.

As with many of its peers, Empire is managing its product sales, pricing and features with the intent 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 best-estimate 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 life products, which share the interest rate risk with the policyholder.

The Company has little exposure to mortgages and real estate. Credit default history has been very good.

At quarter end Q1 2015, Empire had a Minimum Continuing Capital and Surplus Requirements capital position at 190%, which is considered adequate for the rating. However, a higher ratio would provide a larger cushion to deal with potential market-related swings in its solvency capital ratio.

Empire’s largest risks are its exposures to equity market risk largely arising from the segregated fund portfolio and interest rate risk from its individual life portfolio. With the low interest rate environment and expectations of higher rates, the Company is reluctant to acquire fixed-income assets of sufficiently long duration but insufficient yield for the long-tail life products. This situation makes the Company’s reported earnings more volatile when interest rates are not stable. Empire monitors this interest rate mismatch to limit its exposure. The segregated fund risk lies with maintaining regulatory capital ratios for the volatility created by its tail risks rather than an immediate cash need. The Company has implemented hedging strategies to offset some of its equity exposure to income and required capital for severe equity market declines.

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 debt capital should it be required. Financial leverage (debt plus preferreds over total capital) is low at 22% at year-end 2014, and in Q1 2015, the financial leverage was 21.4%.

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.