DBRS Morningstar Confirms Ratings on The Independent Order of Foresters at “A,” Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Financial Strength Rating and Issuer Rating of The Independent Order of Foresters (Foresters Financial or the Company) at “A” and its Subordinated Debt rating at A (low). All trends are Stable.

KEY RATING CONSIDERATIONS
The ratings reflect the Company’s established presence in the U.S., Canadian, and UK life insurance and asset management markets where it offers a diversified product mix. Foresters Financial has a comprehensive risk management framework that encompasses its diverse businesses as well as sound capital management. The Company maintains high quality fixed income investments while having minimal investment in equities and no material segregated fund risk. DBRS Morningstar anticipates that returns on equity will continue to be tempered by the Company's high level of capital and volatile earnings, given the overall contribution of profitability from U.S. and UK operations and fluctuations in exchange rates. Foresters Financial’s liquidity is strong and it maintains a highly marketable invested assets portfolio mix. There are minimal demands to post collateral and liquid assets are more than adequate to cover any cashable liabilities. The Company maintains a substantial amount of cash and cash equivalents on its balance sheet. With a consolidated Life Insurance Capital Adequacy Test (LICAT ratio) of 192.5% as at YE2020, Foresters Financial has consistently maintained a capital cushion significantly above the required level of the regulatory capital minimums that supports its stressed capital targets.

RATING DRIVERS
The ratings are well placed in the current rating category. However, over the longer term, the ratings would be upgraded if the Company were to strengthen its market positions with sustained improvement in net earnings while maintaining appropriate capitalization buffers.

Conversely, the ratings would be downgraded if there were a sustained deterioration in profitability, capitalization, or market share.

RATING RATIONALE
Foresters Financial operates in the highly fragmented life insurance market in the U.S. and in a Canadian market that is dominated by a few large insurance companies. The Company also has an established UK asset management business, which enhances diversification. However, it has been successful in defending its share of the sales of new life protection products. The Company has a multichannel distribution strategy comprising multilevel marketers, independent marketing organizations, managing general agents, independent agents, and direct to consumer. An effective product distribution strategy remains key to competing effectively in the North American life insurance space. DBRS Morningstar views Foresters Financial as having a sound investment strategy for its general account assets, with moderate exposure to credit risk as reflected by its good quality fixed income portfolio. Invested assets consisted largely of a well-diversified fixed income portfolio (81.0%) and equities (9.8%) as at YE2020. The average credit quality in the portfolio is "A" and it is diversified across various corporate sectors. The main market risk is a decline in equities because of market volatility. However, the Company has minimal investment in equities and no material segregated fund risk. A substantial portion of the investment in equities in the general account assets represents equity-linked products sold in the UK; these are pass-through investments, so the policyholder bears the risk. The recent acquisition of Canada Protection Plan in Canada strengthens the Canadian distribution strategy and reduces distribution risk significantly.

Foresters Financial reported a consolidated net loss of $1 million before other comprehensive income for 2020, driven in part by the impact of Coronavirus Disease (COVID-19) on mortality losses in Canada and the U.S. The results were also partly affected by accrual provisions established for coronavirus and non-coronavirus claims for 2021 for the North American business. The Company's three-year weighted-average return on equity is lower than that of its peers. As a Fraternal Benefit Society, net income is retained to grow its surplus base and to support its Fraternal purpose. Foresters Financial has a low concentration of non-liquid assets, such as loans to certificate holders. The Company also maintains a USD 100 million committed five-year revolving facility, expiring in 2025, available for additional liquidity needs. The high proportion of marketable assets and the quality of the investment portfolio assures Foresters Financial the ability to withstand a stressed liquidity environment.

DBRS Morningstar assesses Foresters Financial’s capitalization as Strong/Good. The consolidated LICAT ratio was a very strong 192.5% as at YE2020 and remained very high at 187.9% through Q1 2021, providing a substantial cushion above the regulatory supervisory minimum of 100%, and well above internal targets. The regulated U.S. branch is appropriately capitalized on an individual basis with a risk-based regulatory company action level ratio of 320% as at Q1 2021.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Foresters Financial are as follows: Franchise Strength—Good/Moderate; Risk Profile—Strong/Good; Earnings Ability—Moderate/Weak; Liquidity—Strong; Capitalization—Strong/Good.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262 ).

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.

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

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

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