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

DBRS Ratings GmbH (DBRS Morningstar) confirmed all ratings of Great-West Lifeco Inc. (Great-West or the Company) and its related entities, including Great-West’s Issuer Rating at A (high) and The Canada Life Assurance Company’s (Canada Life) Financial Strength Rating at AA. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
The ratings confirmation and Stable trend reflect the Company’s position as a leader in the Canadian insurance market, as well as its strong franchise across the United States, Ireland, and the United Kingdom. Great-West’s ratings benefit from a conservative risk profile relative to peers, as well as from very strong liquidity. Great-West’s operations are well diversified in terms of products and geographies, including a consolidated position as the second-largest provider of retirement services in the United States. Great-West has demonstrated consistent profitability over time despite the recent challenges brought up by the pandemic.

Great-West’s ratings also consider its above-average financial leverage, as well as its relatively low Life Insurance Capital Adequacy Test (LICAT) ratio compared with that of relevant peers, which negatively affects the Company’s financial flexibility. Moreover, as a large, complex international insurance organization operating across multiple jurisdictions that has made several recent acquisitions, operational risks are higher but remain well managed. In DBRS Morningstar’s view, this operational risk is partly mitigated by the Company’s long record of successfully integrating large acquisitions in the past, as well as operating mostly exclusively in developed economies.

RATING DRIVERS
Over the longer term, a material improvement in financial leverage, while maintaining strong earnings and strengthening regulatory capital levels, would result in an upgrade.

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

RATING RATIONALE
The Company’s broad and diverse franchise is supported by leading market shares and strong distribution capabilities 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 brand. Great-West is also one of the largest reinsurers in the world through its Capital and Risk Solutions business. After exiting the life insurance business in the U.S., the Company has focused its growth efforts in building up its retirement business in the country, where it is now the second-largest provider in this market. The Company’s expansion in the U.S. retirement services business has provided additional revenue diversification in a relatively low-risk segment.

Despite ongoing macroeconomic and geopolitical uncertainty, Great-West continues to generate resilient and stable earnings, reflecting its solid market position and careful selection of chosen markets and products. Return on equity (three-year weighted average as calculated by DBRS Morningstar) is strong at 13.6% with return on equity remaining resilient during 9M 2022 at 12.5%. However, a dimmed economic outlook in most countries where it operates poses potential headwinds for the Company’s growth and profitability prospects.

Great-West has a comprehensive and well-developed risk management infrastructure that ensures that risks are independently assessed. Great-West’s ratings are also supported by the Company’s well-diversified investment portfolio, together with a strong underwriting and product pricing discipline, which has helped mitigate interest rate risk. Great-West’s conservative product design and close asset-liability matching have traditionally resulted in reduced net income fluctuations relative to peers. Although Great-West is exposed to natural catastrophes via its reinsurance business, this is partially mitigated by conservative aggregation limits, which DBRS Morningstar views to be well within the Company’s loss absorption capacity. The Company recently announced a provision of $128 million (after tax) for estimated reinsurance claims expected to result from Hurricane Ian. Though manageable given Great-West’s scale, it evidences that large catastrophe events can adversely affect the Company’s quarterly results. DBRS Morningstar also notes the significant increase in the proportion of BBB and lower-rated bonds in the Company’s investment portfolio to almost 30% from approximately 25% following the closing of Prudential’s retirement business acquisition in Q2 2022, resulting in moderately higher credit risk.

DBRS Morningstar views Great-West’s liquidity position as very strong, with the Company maintaining ample cashable assets, including approximately $300 million in cash at the holding company level. Great-West also has several committed credit lines with Canadian chartered banks. The Company has implemented a robust liquidity risk management program, including constant monitoring of liquidity risk coverage ratios. The Company also benefits from a claims distributions profile that is largely predictable despite occasionally large but manageable property catastrophe losses in its Capital and Risk Solutions segment.

Great-West maintains good regulatory capital levels with Canada Life’s LICAT ratio at 118% as of the end of Q3 2022. While Canada Life’s LICAT ratio has decreased from 135% at the end of 2019 and remains below those of relevant peers, DBRS Morningstar considers that this level of regulatory capital still provides the Company with a sufficient buffer against adverse movements, including equity and interest rate volatility. Following the Office of the Superintendent of Financial Institutions’ release of its 2023 LICAT Guideline, the Company expects a positive impact on its LICAT ratio after the implementation of IFRS 17 in Q1 2023. Meanwhile, Great-West’s financial leverage remains elevated at 34.3% as a result of issuing debt to fund acquisitions. Despite operating with a financial leverage relatively high for its current rating category, DBRS Morningstar still views Great-West’s financial flexibility as adequate given its proven access to debt and equity markets.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Environmental concerns regarding climate and weather risks are relevant to the ratings of Great-West but do not affect the assigned rating or trend. Any impact from exposure to climate and weather risks is expected to be indirect in nature, primarily through its investment portfolio and its Capital Risk Solutions segment, which has some exposure to property catastrophe retrocession. Great-West is a leading member of several global sustainability networks, including the Principles for Responsible Investment through several subsidiaries, as well as being a supporter of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, among others.

There were no 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/ (17 May 2022).

The Grid Summary Grades for Great-West Lifeco Inc. 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 Insurance Companies and Insurance Organizations, https://www.dbrsmorningstar.com/research/402220 (31 August 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/ (17 May 2022) in its consideration of ESG factors.

The sources of information used for this rating include Company Documents, Great-West 3rd Quarter 2022 Results (Quarterly Report to Shareholders, Earnings Release, Quarterly Information for Analysts and Investors, and Supplemental Information Package), Great-West 2021 Annual Report, and Great-West 2021 Public Accountability Statement. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

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 further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/405162.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

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
Last Rating Date: November 9, 2021

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