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 and Stable trends reflect the Company’s established presence in the U.S., Canadian, and U.K. life insurance and asset-management markets where it offers a relatively diversified product mix, a high-quality investment portfolio with a small exposure to equities, strong liquidity, and ample capital. The ratings also consider weaker profitability. In recent years, Forester Financial's profitability has been challenged by mortality losses related to the Coronavirus Disease (COVID-19) pandemic, which have contributed to net losses the past two fiscal years. While DBRS Morningstar expects the Company to maintain a lower return on equity than most of its peers as a result of its high level of capital and its focus on providing community and membership benefits, continued losses would pressure the ratings.

RATING DRIVERS
The ratings would be upgraded if the Company were to strengthen its market position and improve profitability while maintaining a prudent capital buffer and financial leverage. Conversely, the ratings would be downgraded if the Company were to fail to return to profitability or if there were a sustained deterioration in market position, capitalization, or financial leverage.

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 U.K. asset-management business, which enhances diversification. It relies on its fraternal status to differentiate its product offering and has built relationships with distribution organizations, including through multilevel marketing channels. It focuses on simplified life insurance products in North America and on savings and retirement products in the U.K. The Company has a multichannel distribution strategy comprising multilevel marketers, independent marketing organizations, managing general agents, independent agents, and direct to consumer.

Foresters Financial was exposed to the excess mortality caused by the coronavirus pandemic because of the demographic characteristics of its simplified issue life insurance policyholders. In the last two years, the Company has taken appropriate steps including setting up additional reserves to account for the deterioration in the mortality experience. DBRS Morningstar views Foresters Financial as having a sound investment strategy for its general account assets, with moderate exposure to credit risk as reflected in the quality of its fixed-income portfolio. Invested assets consist largely of a fixed-income portfolio that is well-diversified across various corporate sectors The average credit quality in the portfolio is "A." The Company’s main market risk exposure is the impact of a financial market downturn on its fee income and savings products in the U.K.

Foresters Financial reported a consolidated net loss of $71 million before other comprehensive income in 2021, driven in part by the impact of coronavirus pandemic on mortality losses in Canada and the U.S., by a strengthening of mortality assumptions and by a write-down related to the acquisition of Canada Protection Plan in 2020. Recent losses have resulted in an average negative return on equity (ROE) over the last three years. As a Fraternal Benefit Society, the Company has less pressure to produce a high ROE and has accumulated a substantial capital buffer, which allows it to adjust its product strategy while continuing to fulfil its Fraternal purpose.

Foresters Financial has a low concentration of nonliquid 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, if needed. The high proportion of marketable assets and the quality of the investment portfolio also contribute to Foresters Financial’s ability to withstand a stressed liquidity environment.

Its consolidated LICAT ratio of 176.3% as at year-end (YE) 2021 was very strong and remained high at 160.1% by the end of Q2 2022, providing a substantial cushion above the regulatory target of 100%. The regulated U.S. branch is appropriately capitalized on an individual basis with a risk-based capital ratio of 317% as at YE2021.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Foresters Financial are as follows: Franchise Strength—Good/Moderate; Risk Profile—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 (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.

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 under regular surveillance.

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

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