DBRS Morningstar Confirms iA Financial Corporation Inc. at “A” and Industrial Alliance Insurance and Financial Services Inc. at AA (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed all ratings on iA Financial Corporation Inc. (iA or the Company) and its related entities, including iA’s Issuer Rating at “A” and Industrial Alliance Insurance and Financial Services Inc.’s Financial Strength Rating at AA (low). The trends on all ratings are Stable.

KEY RATING CONSIDERATIONS

The ratings and trends reflect iA’s extensive franchise in the Canadian life insurance market, its diversified risk profile, and its strong financial performance. In Canada, iA has built a comprehensive distribution network through investment in technology and acquisitions. The Company has been successful at managing the risks and the profitability of its core individual insurance and wealth management businesses in a low interest rate environment while at the same time growing niche insurance and brokerage segments. The Company’s financial flexibility has increased recently as a result of strong capital generation and a lower exposure to capital-intensive businesses. The Company maintains a conservative, high-quality investment portfolio. The ratings also consider iA’s still sizable exposure (although reduced from historical levels) to adverse policyholder behaviour 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.

RATING DRIVERS

DBRS Morningstar views iA’s ratings as well placed within its current rating category. Over the longer term, a ratings upgrade would occur from a sustained increase in market share in key product lines in combination with a more prudent risk profile or a larger capital buffer. Conversely, a substantial decline in capital levels or sustained weaker profitability would result in a ratings downgrade.

RATING RATIONALE

The Company has demonstrated the strength of its franchise in recent years with strong earnings growth in key business lines. In particular, the Company is a leader in the Canadian individual insurance and segregated funds markets thanks to its extensive distribution network.

The Company has been actively diversifying its product portfolio toward less capital-intensive products, reducing the level of guarantees offered and increasing its proportion of fee-based business. This has had positive ratings implications as it has reduced the Company’s risk profile through lower exposure to long-term guaranteed products and to market volatility. The Company’s investment portfolio is conservative with only 20% of its bond portfolio being rated BBB or lower and a small allocation to alternative non-fixed income assets.

The Company has had good financial results throughout the Coronavirus Disease (COVID-19) pandemic, including record 2021 earnings of $830 million driven by strong sales growth across major product lines. Despite exposure to long-term individual insurance and segregated funds, iA has reported steady earnings in the current low interest rate environment thanks to conservative reserving practices. The Company’s return on equity has been steadily improving and reached 13.2% in 2021.

With its conservative investment portfolio, iA maintains a large quantity of liquid assets available to fund any liquidity shortfall. While its long-term insurance portfolio is exposed to policyholder behaviour, the Company maintains a robust liquidity monitoring program as well as good access to external financing.

The Company’s exposure to product and market risks is mitigated by good product diversification and an adequate capital buffer. Indeed, the Company’s solvency capital ratio of 134% at YE2021 provides a sufficient buffer for its sensitivity to equity market and interest rate volatility. Management has indicated that the transition to the IFRS 17 accounting standard in 2023 is expected to be either neutral or positive for the Company’s capital position. Management has also stated that it maintains additional protection against adverse equity market movements in the way it determines its reserves, further reducing the volatility of the ratio. The Company’s capital profile is also enhanced by its relatively low leverage as well as strong organic capital generation.

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 iA Financial Corporation Inc. are as follows: Franchise Strength – Strong/Good; Risk Profile – Strong/Good; Earnings Ability – Strong/Good; 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).

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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