DBRS Confirms Ratings of Industrial Alliance Insurance and Financial Services Inc.

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Financial Strength Rating of Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company) at A (high), its Subordinated Debentures rating at “A” and its Non-Cumulative Preferred Shares rating at Pfd-2 (high). All trends are Stable.

IAG is the fourth-largest life insurance organization in Canada based on 2015 direct premiums, with a market share of 10%. The Company has good franchise strength, which is evident in its good market positions in several product segments, as well as in its operations in several niche market segments, including a small home and auto insurance operation targeting the provincial Québec market and a growing Dealer Services (providing insurance and financing for car loans) business. The Company continues to increase its diversification by product and expand existing distribution channels, such as mutual fund dealers and securities brokerages. The December 2016 agreement to acquire HollisWealth, a financial advisory firm with $34 billion in assets, should further aid in the Company’s goals of diversifying away from capital-intensive products.

As a comparatively smaller player in an industry that is dominated by the three largest insurers capturing 64% of the 2015 total Canadian direct written premium market, IAG faces some risk of market erosion by competitors that are better able to leverage their scale to achieve profitable growth. IAG has been able to maintain its competitiveness in the individual insurance and annuities and segregated funds businesses, and has seen a recovery in Group Insurance this year, partially through better drug claims management and higher net sales.

The Company’s good risk profile reflects its changing product mix and thorough risk management. Management has been proactive in reducing interest rate exposure, one of the key risks faced by IAG through its large existing block of universal life products. IAG’s conservative risk management is reflected in its strong capitalization, as illustrated by (1) its financial leverage ratio of 28.7% at Q3 2016; (2) the improvement in its EBIT fixed-charge coverage ratio to 7.7 times (x) at 9M 2016, compared with 6.8x at 9M 2015 and 5.6x at 9M 2014; and (3) a strong minimum continuing capital and surplus requirements (MCCSR) ratio of 218% at Q3 2016.

DBRS’s assessment of IAG is positively affected by the Company’s good earnings ability. IAG’s return on equity has generally been in the 12.0% to 13.0% range for most of the last five years, in line with its internal target range of 11.0% to 12.5%. IAG has higher interest rate exposure than peers, due to its product mix being more heavily weighted towards products with long-term guarantees. Nonetheless, despite the current sustained low-interest environment, IAG has demonstrated resilience in earnings, combined with lower income volatility than most peers. IAG’s willingness to pursue niche opportunities in the property and casualty space, its focus on further strengthening its distribution networks, and proactive pricing decisions has allowed it to maintain strong earnings.

The Stable trends on IAG’s credit ratings take into account the Company’s good financial metrics, proactive risk management and strong capital levels.

RATING DRIVERS
Negative ratings pressure could arise from a sustained erosion in market share in key lines of business, indicating a weakening of the franchise, an inability to mitigate adverse impact of lower interest rates, equity market declines or adverse policyholder behavior, or from acquisitions of risky businesses. Positive pressure on IAG’s ratings could emerge from the successful growth and diversification of earnings in stable businesses, a material reduction in its exposure to interest rate and stock market value fluctuations combined with significantly stronger earnings, financial flexibility and capital levels, or a significant, sustainable increase in market share in main business lines.

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 methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.