DBRS Confirms Ratings on Great-West Lifeco Inc. and Affiliates

DBRS Limited (DBRS) confirmed Great-West Lifeco Inc.’s (GWO or the Company) Issuer Rating and Debentures at A (high) and its Non-Cumulative First Preferred Shares at Pfd-2 (high). DBRS also confirmed the Financial Strength Ratings of GWO’s major operating subsidiaries The Great-West Life Assurance Company, The Canada Life Assurance Company and London Life Insurance Company at AA. The Great-West Life Assurance Company’s Issuer Rating was confirmed at AA and its Preferred Shares were confirmed at Pfd-1. The Canada Life Assurance Company’s Subordinated Debentures were confirmed at AA (low). All trends are Stable.

In confirming the ratings of the Company and its subsidiaries, DBRS took into consideration GWO’s excellent franchise strength. GWO is the largest insurance company in Canada, with a dominant market position for both individual insurance and group benefits and savings. The Company has extensive operations in Europe, including its market position as the largest life insurer in Ireland. In the United States, GWO, through its brand Empower Retirement, operates the second-largest (by participants) pension plan record-keeping service. The Company has continued to strengthen its global franchise in recent years, a recent example being the creation of the Irish Life Health brand in 2016, and has historically demonstrated an ability to add value from acquisitions.

GWO has strong financial metrics, including a good financial leverage (debt, hybrids and preferreds to capital) ratio of 26.7% at Q3 2017 and The Great-West Life Assurance Company has a strong Minimum Continuing Capital and Surplus Requirements ratio of 233%. Return on equity for 9M 2017 was 12.0%, slightly below its usual mid-teen levels, primarily as a result of catastrophe losses in its property and casualty reinsurance segment arising from the impacts of hurricanes Harvey, Irma and Maria. Underlying earnings remained strong, with the Company demonstrating good growth in premium and fee income even as investment income declined from the prior year, primarily because of movements in bond yields. GWO’s conservative risk management style, including its decision to operate mainly in developed countries with stable economies, its measured approach to launching new products, disciplined expense management and conservative reserving methods have enabled it to have lower volatility in earnings than peers.

The Company is undergoing a significant transformation effort in its Canadian business in an effort to adapt to the stricter regulatory environment, emerging threats and increasing customer demands. The movement to a more customer centric operating model, as compared to a product-centered one, involves a number of significant strategic changes, including to its reporting structure, marketing and branding strategy, technology and digital spend and the reorganization of its distribution network. The magnitude of the transformation carries several risks, including the risk of declining client retention, service issues, expense and scope overrun and a decrease in customer or employee satisfaction.

The Stable trends consider the Company’s resilient fundamentals and its demonstrated ability to adapt to the current challenging operating environment, including continuing uncertainties surrounding the impact of Brexit and the market demand for payout annuities in Europe, the January 2018 implementation of the Life Insurance Capital Adequacy Test capital regime in Canada and the sustained global low interest rate environment.

RATING DRIVERS
Negative ratings pressure could arise from an extended decline in equity or credit markets that leads to a significant deterioration in the Company’s financial position, from large debt-financed acquisitions that reduce the Company’s financial flexibility, or from a reduction in earnings, affecting the Company’s return on equity and coverage ratios. The Company is well placed at the current ratings level; however, positive ratings pressure could arise from continuing advances in the franchise along with improvement in the earnings profile particularly for underperforming businesses as well as stronger capitalization and a reduction in financial leverage.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2016), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on our website under Methodologies.

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

Lead Analyst: Stewart McIlwraith, Senior Vice President, Head of Insurance - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings

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.