DBRS Morningstar Confirms Great-West Lifeco Inc. at A (high) and The Canada Life Assurance Company at AA, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Great-West Lifeco Inc.’s (Great-West or the Company) Issuer Rating and Debentures rating at A (high) as well as its Non-Cumulative First Preferred Shares rating at Pfd-2 (high). DBRS Morningstar also confirmed The Canada Life Assurance Company’s (Canada Life) Financial Strength Rating and Issuer Rating at AA, Subordinated Debentures rating at AA (low), and Preferred Shares rating at Pfd-1. At the same time, DBRS Morningstar confirmed Canada Life Capital Trust’s Capital Trust Securities (CLiCS) rating at A (high). All trends are Stable.

KEY RATING CONSIDERATIONS
The rating confirmations reflect Great-West’s very strong franchise as the largest insurance company in Canada, which also has strong market shares in its core businesses in the United States, Ireland, and the United Kingdom. Great-West’s ratings benefit from a conservative risk profile relative to peers, as well as very strong liquidity and regulatory capital. Great-West’s operations are well diversified in terms of products and geographies, with the Company expanding aggressively in the wealth and asset management business in the United States given the recent acquisitions of Personal Capital and the retirement business of MassMutual, which will allow its subsidiary, Empower Retirement, to consolidate its position as the second-largest provider in the growing U.S. retirement industry. Great-West has demonstrated consistent profitability in recent years, with earnings benefitting from good expense control and claims management. Moreover, Great-West’s performance has remained resilient in 2020 amid the adverse macroeconomic impact brought on by the Coronavirus Disease (COVID-19) global pandemic. In DBRS Morningstar’s view, the Company’s risk management infrastructure is comprehensive and in line with the complexities of its size and international operations. The ratings also consider Great-West’s increasing financial leverage following new debt issued to fund recent acquisitions that has also caused its fixed-charge coverage to modestly deteriorate.

RATING DRIVERS
An upgrade is unlikely in the intermediate term given the uncertain macroeconomic environment. However, over the long term, a material improvement in financial leverage and coverage ratios together with the successful integration of recent acquisitions, while maintaining strong earnings and regulatory capital levels, would result in an upgrade.

Conversely, the ratings would be downgraded if the Company experiences further deterioration of its financial leverage combined with weaker profitability and coverage ratios. Moreover, an adverse event causing regulatory capital to decline substantially would result in a downgrade.

RATING RATIONALE
The Company has a broad and diverse franchise supported by leading market shares in Canada, the United States, Ireland, and the United Kingdom. In Canada, the Company operates as the largest life insurance company under the Canada Life banner following the amalgamation of its three operating insurance companies on January 1, 2020. DBRS Morningstar views the amalgamation positively as it simplified the organizational structure, created efficiencies, and improved customer perception. The Company has strong distribution capabilities in its chosen markets, as well as a broad product mix including individual and group life insurance, health and disability insurance, annuities, asset and wealth management, and retirement services. Great-West has made large investments in technology in recent years to support its growth strategy and maintain its leadership position in its chosen markets. Prior investments in digital tools have allowed the Company to minimize operational disruptions during the coronavirus pandemic-induced lockdowns. The Company has accelerated its focus on asset and wealth management with recent acquisitions in the United States that will consolidate its position as the second-largest provider of retirement solutions, diversifying Great-West’s earnings in noninsurance businesses. At Q3 2020, total assets under administration reached almost $1.7 trillion, providing enough scale to compete effectively with other large investment management players.

Great-West has a comprehensive and well-developed risk management infrastructure which ensures that risks are independently assessed. Great-West’s investment portfolio is well diversified by asset class, industry, and geography with negligible credit losses during the first nine months of 2020 despite the challenging macroeconomic environment. Great-West’s ratings are also supported by the Company’s strong underwriting and product pricing discipline, which has helped to mitigate interest rate risk. Great-West’s conservative product design and close asset-liability matching have traditionally resulted in reduced income fluctuations relative to peers. Although Great-West is exposed to natural catastrophes via its reinsurance business, this is partly mitigated by conservative aggregation limits, which DBRS Morningstar views to be well within the Company’s loss absorption capacity.

Great-West continues to generate resilient and stable earnings, especially considering the pandemic. Return on equity during the last nine months ended September 2020 improved to 13.2% from 11.9% a year ago because of stronger results in its Europe and Capital and Risk Solutions segments. With the increased focus on expanding the retirement busines in the U.S., DBRS Morningstar expects this segment to become a larger contributor to Great-West’s net earnings in the medium term, providing a more balanced revenue stream across all four segments (Canada, United States, Europe, and Risk and Capital Solutions).

DBRS Morningstar views Great-West’s liquidity as very strong with the Company maintaining ample cashable assets, including a very large pool of high-quality government bonds and several committed credit lines with large banks. The Company also benefits from a limited proportion of nonliquid assets in its investment portfolio while having a very predictable claims profile in its life insurance liabilities, where mortality and morbidity risk have remained mostly stable during the pandemic. Additionally, Great-West maintains a large cash cushion at the holding company level and has no material debt maturities over the next two years.

Great-West maintains strong and stable regulatory capital levels with Canada Life’s Life Insurance Capital Adequacy Test ratio sitting at 131% as of the end of Q3 2020. This level of regulatory capital provides the Company with a very important buffer against adverse movements including equity and interest rate volatility. Regulatory capital ratios at international insurance subsidiaries also remained very strong at the end of 2019. However, financial leverage deteriorated to 33.1% as calculated by DBRS Morningstar as of the end of Q3 2020 following recent acquisitions in the United States. This level of financial leverage is substantially higher than those of peers and could negatively affect the Company’s financial flexibility. However, Great-West has traditionally enjoyed good access to debt and equity markets even after large acquisitions. DBRS Morningstar expects that Great-West will maintain its conservative financial management and reduce its financial leverage over the medium term.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Great-West are as follows: Franchise Strength - Very Strong/Strong; Risk Profile - Strong; Earnings Ability - Strong; Liquidity - Very Strong; Capitalization: Strong/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 (July 21, 2020: https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.dbrsmorningstar.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.

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this issuer took place on November 13, 2019, when DBRS Morningstar confirmed all ratings.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Marcos Alvarez, Senior Vice President, Head of Insurance
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: July 19, 1985

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

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