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, relationships, and acquisitions. The Company has been successful at managing the risks and the profitability of its core individual insurance and wealth management businesses while at the same time growing auto services and distribution capabilities. The Company maintains a conservative, high-quality investment portfolio and has lowered its risk exposure to market volatility. The ratings also consider iA’s exposure to adverse policyholder behaviour arising from its large individual life insurance and its growing investments in private assets.

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 1% of its bond portfolio being rated below investment grade and a small allocation to nonfixed income assets.

The Company has had good financial results despite the economic slowdown and market volatility caused by materially higher interest rates to combat inflation. Net income of $817 million in 2022 almost matched the $830 million earned in 2021, when iA benefitted from a better operating backdrop. Positively, the higher interest rate environment is expected to be supportive of the Company’s business model going forward and allow the maintenance of the current profitability levels.

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 126% at YE2022 provides a sufficient buffer for its sensitivity to equity market and interest rate volatility. Management has indicated that the imminent transition to IFRS 17 reporting is expected to be positive for the Company’s regulatory capital position, which gives further comfort in the adequacy of the capital buffer. The Company’s capital profile is also enhanced by its relatively low leverage as well as strong organic capital generation.

ENVIRONMENTAL, SOCIAL, GOVERNANCE 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/. (May 17, 2022)

The Grid Summary Grades for iA Financial 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 applicable to the rating is the Global Methodology for Rating Insurance Companies and Insurance Organizations (August 31, 2022; https://www.dbrsmorningstar.com/research/402220/). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929/) in its consideration of ESG factors.

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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