DBRS Morningstar Confirms Ratings on The Empire Life Insurance Company at “A,” Stable Trends

DBRS Limited (DBRS Morningstar) confirmed all ratings on The Empire Life Insurance Company (Empire or the Company), including its Financial Strength Rating at “A.” The trends on all ratings are Stable.

KEY RATING CONSIDERATIONS
The rating confirmations and Stable trends reflect Empire's long-standing presence in the Canadian life insurance market as a mid-size player offering individual insurance and wealth management products as well as group benefits. The Company uses a multichannel distribution strategy and has recently increased its distribution capabilities through acquisitions. Record earnings in 2021 were supported by strong sales activity and financial market performance. However, Empire is exposed to equity market volatility through its segregated fund guarantees and equity investments. DBRS Morningstar views the continued successful management of market risk as an essential support for Empire's current ratings. The LICAT ratio remains strong at 142% as at Q1 2022 with a substantial cushion above the supervisory target of 100%.

RATING DRIVERS
If the Company is able to successfully integrate recently acquired new distribution channels that help to profitably grow sales of products while maintaining appropriate risk-adjusted capitalization, the ratings would be upgraded. A reduction in market risk exposure while maintaining good profitability would also have positive ratings implications.

Conversely, the ratings would be downgraded if there were a sustained deterioration in profitability and capitalization due to losses on investments or product guarantees. A loss of access to distribution channels resulting in material erosion of market share would also have negative rating implications.

RATING RATIONALE
Empire maintains a stable market position as a mid-size life insurer with diverse product offerings and access to multiple distribution channels. It has recently focused on enhancing its access to distribution by acquiring and making significant investments in distribution partners as well as developing direct and speciality distribution channels. Successful integration of these new distribution platforms could strengthen Empire’s franchise through a more diversified income stream and the opportunity to better align product design and technology. The Company lacks the scale of its larger competitors and is therefore selective in the products it offers and in the strategic investments it makes in innovation and technology. In certain lines, such as group benefits, Empire may have to sacrifice growth in order to maintain profitability, or vice versa.

Empire has an extensive risk management framework with a prudent approach to product design although its product portfolio is more heavily weighted to higher-risk segregated funds. The Company’s fixed income portfolio is conservative, with a large exposure to Canadian provincial government bonds. Empire retains a large portion of the market risk arising from its segregated fund guarantees and also invests a portion of its portfolio in equities.

The Company achieved a good return on equity (ROE) of between 8.5% to 13.0% over the past five years, with the three-year weighted average ROE reaching 11.3% as at YE2021. Because of a release of segregated fund guarantee reserves, net income was exceptionally strong at $239 million in 2021 compared with $157 million in 2020. Despite the recent market volatility, Q1 2022 net income was relatively steady at $41 million.

Empire maintains very high levels of liquidity with substantial cash, short-term assets, and highly liquid government bonds on its balance sheet. Its product portfolio has a predictable claims profile and the Company has limited collateral requirements, mainly on its hedging program. The Company has sufficient liquidity to meet its upcoming subordinated debt maturity of $200 million in Q1 2023.

The Company's LICAT ratio is sensitive to equity market volatility, primarily because of increased liabilities and capital requirements related to its segregated fund guarantees. Nonetheless, Empire has consistently maintained sufficient capital above the supervisory capital target to protect the Company against substantial stress scenarios. It has also implemented hedging strategies and utilized reinsurance to mitigate its equity market exposures and product guarantee risks. The LICAT ratio remains strong at 142% as of Q1 2022. The Company has access to capital through public debt issuances and its flexible dividend policy allows it to retain internally generated capital at the discretion of its majority shareholder, E-L Financial Corp. Limited.

ESG CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929.

The Grid Summary Grades for Empire are as follows: Franchise Strength—Good/Moderate; Risk Profile—Good/Moderate; Earnings Ability—Good; Liquidity—Strong/Good; 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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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