DBRS Morningstar Confirms Ratings on iA Financial Corporation Inc. and Affiliates

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of iA Financial Corporation Inc. (iA or the Company) at A (low) and the rating on its Subordinated Debentures at BBB (high). For Industrial Alliance Insurance and Financial Services Inc., iA’s major insurance operating subsidiary, DBRS Morningstar confirmed the Issuer Rating and Financial Strength Rating at A (high), the Subordinated Debentures rating at “A,” and the Non-Cumulative Preferred Shares rating at Pfd-2 (high). All trends are Stable.

KEY RATING CONSIDERATIONS
The rating confirmations for iA reflects the Company’s excellent market position in Canada (iA is the fourth-largest life insurer by gross premiums written), particularly in individual insurance and in segregated funds, where it continues to generate good sales and profitability. The Company’s extensive franchise in Canada is supported by a comprehensive and growing distribution network, including both exclusive and independent agents, among other channels. iA’s ratings also benefit from its stable earnings metrics, which are at the high end of peers. The Company’s risk management is thorough and iA has demonstrated pricing and operational discipline over the years. As the Company grows both organically and through acquisitions, the maintenance of good risk management will be key in determining the ratings, particularly if the growth is outside iA’s historical scope of operations and areas of expertise.

The Company’s ratings are reflective of a conservative investment portfolio that is invested primarily in high-quality fixed income. The Company’s financial flexibility, as evidenced by a low leverage ratio relative to peers (22.3% at Q3 2019), and high EBIT fixed-charge coverage ratio of 11.2 times as at the nine months ended 2019, is excellent, and positions the Company well in terms of being able to realize its growth initiatives. In determining the ratings, DBRS Morningstar also considers the Company’s sizable exposure and sensitivities to adverse policyholder behaviour, interest rates, and equity markets resulting from its large individual life insurance and segregated funds portfolio, making the maintenance of an adequate regulatory capital buffer key to maintaining the ratings.

The Stable trends on iA’s credit ratings consider the Company’s comprehensive risk management, consistent financial metrics, and demonstrated ability to navigate challenging economic environments.

RATING DRIVERS
Positive ratings pressure may arise from the successful integration of recent large acquisitions, including the U.S. dealer services businesses. Continued enhancement in the management of the Company’s exposure to the market risks arising from its individual insurance and segregated funds portfolio, combined with capital levels that provide an ample buffer to deal with adverse scenarios, may also have positive rating implications. Conversely, negative ratings pressure could arise from a sustained erosion in market share in key lines of businesses, including Individual Insurance and Wealth Management, indicating a significant weakening of the franchise, and from a pattern of unprofitable acquisitions of risky businesses outside of the Company’s expertise, weakening the financial and risk profiles of the Company.

RATING RATIONALE
The Company’s operations are well diversified by business line, with sizable operations in individual insurance and in wealth management. iA has a strong market presence in the family market, with a leading market position in terms of number of life insurance policies sold, even as the face amounts of the policies are generally smaller. The Company is a strong competitor in the segregated funds space, consistently generating positive net sales. iA also participates in several niche segments, including personal property and auto insurance in Québec, and in the dealer services space in Canada and the U.S., among others. The Company has historically operated primarily in Canada, with only a small life insurance segment in the U.S., but has expanded more geographically in the past two years, with the acquisitions of two U.S.-based dealer services companies.

The Company continued to generate good sales and earnings in its major lines of businesses year-to-date 2019, including individual life and disability insurance and segregated funds. Profitability in weaker business lines has shown improvement, including in the Auto & Home business, where the Company lowered its combined ratio from prior years. Mutual fund net flows continue to be challenged in an operating environment that is facing multiple headwinds, including fee pressure and a movement toward lower-cost, passive funds. iA is continuing to strengthen its distribution networks, both by investments in digital and technology for brokers as well as by increasing scale through acquisitions. iA’s operational risk profile is currently heightened with its recent acquisition of IAS Parent Holdings Inc., a U.S. dealer services company, that it acquired for USD 720 million, making it the largest acquisition in iA’s history. While the acquisition aligns well with the Company’s strategic goals and is complimentary to iA’s existing dealer services businesses, some integration risk remains. DBRS Morningstar views the Company as having a well-articulated and far-sighted strategy.

The Company has taken multiple steps in recent years to reduce its market-related exposures, a positive for the ratings. The sensitivity of both the regulatory solvency ratio and net income to changes in interest rates has materially reduced in the past few years, as a result of company actions and the introduction of the Capital Adequacy Requirements Guideline (CARLI) – Insurance of Persons regulatory regime (implemented in January 2018). Similarly, iA’s exposure to adverse movements in equity markets has declined, with the Company taking steps to further reduce this exposure through hedging programs and changes to its investment portfolio. In late 2018, iA also received hedging credit from the Autorité des marchés financiers’ (the Québec regulator) for its segregated fund portfolio, which helps reduce the amount of required capital for this block of business. DBRS Morningstar is cognizant of the Company’s proactive approach in managing its market-related risks, given the Company’s portfolio of long-dated liabilities, even as there is a loss of some of the benefits of a rising rate environment or positive equity markets on earnings. iA has also made good progress in shifting its sales mix to reduce the proportion of products sold offering long-term or high guarantees, which along with pricing actions, has served to materially reduce its new business strain in the past few years.

With the introduction of CARLI, iA is in a good capital position because the new capital regime is inherently less volatile than the prior guideline. The Company’s capital profile is enhanced by its low leverage as well as strong organic capital generation. iA has a good solvency ratio of 134% as at Q3 2019 (117% as calculated by iA on a pro forma basis following the acquisition of IAS Parent Holdings Inc. in December 2019), providing an adequate buffer against any future adverse developments, even as it is at the lower end among peers.

The Grid Summary Grades for iA are as follows: Franchise Strength – Excellent/Good; Risk Profile – Excellent/Good; Earnings Ability – Excellent/Good; Liquidity – Excellent/Good; Capitalization and Asset Quality – Excellent/Good.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (September 2019), which can be found on our website under Methodologies & Criteria.

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 rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com.

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