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

DBRS Limited (DBRS Morningstar) confirmed all credit 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 CREDIT RATING CONSIDERATIONS
The credit ratings confirmation and Stable trend reflect the Company’s extensive insurance and wealth and asset management franchise across multiple geographies, with Great-West occupying leading or otherwise sizable market positions in the majority of the business segments that it operates in, including individual and group insurance in Canada and Ireland, retirement services in the U.S., group insurance in the United Kingdom as well as reinsurance globally, among others. The Company also maintains sizable wealth and asset management operations across multiple jurisdictions. Great-West’s extensive operations and distribution reach, disciplined pricing and underwriting approach, good expense management, and broad diversification in terms of both products and geographies have enabled it to have a large revenue base generating stable, recurring premium and fee income and consistent profitability over time. Future profitability may be affected by weaker expected economic growth, and to a lesser extent, possibly increased volatility in earnings as a result of the transition to the IFRS 17 accounting regime implemented in January 2023. Nonetheless, DBRS Morningstar believes that Great-West is well positioned to handle any potential headwinds.

Great-West’s credit ratings also benefit from a conservative risk profile, as well as from very strong liquidity resources relative to requirements. The credit ratings also consider the Company’s capital profile, which has deteriorated slightly in recent years, with Canada Life maintaining a lower Life Insurance Capital Adequacy Test (LICAT) ratio compared with that of relevant peers and above-average financial leverage that reduces financial flexibility. Moreover, as a large, complex international insurance organization operating across multiple jurisdictions that has made several recent acquisitions and divestitures, 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.

CREDIT RATING DRIVERS
Over the longer term, a material improvement in financial leverage, while maintaining strong earnings and strengthening regulatory capital levels, would result in a ratings 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, material, sustained declines in regulatory capital ratios would also result in a downgrade.

CREDIT 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 provides additional revenue diversification in a relatively low-risk segment. More recently, the Company exited the majority of its asset management operations in the U.S. with the sale of Putnam Investments to Franklin Templeton, enabling it to instead focus on its key strategic initiatives, including growing its more capital-light businesses such as group retirement and wealth management.

Despite ongoing macroeconomic and geopolitical volatility, Great-West continues to generate resilient and stable earnings, reflecting its solid market positions and careful selection of chosen markets and products. The Company’s individual and group insurance products continue to be its core source of stable revenues, while wealth and asset management, as well as growing reinsurance operations provide additional earnings and diversification. The Company’s three-year weighted average return on equity (as calculated by DBRS Morningstar) is strong at 13.8%, although it declined in H1 2023 to 10.1%. The decline was due in part to lower returns on nonfixed income assets in Q1 2023 as well as nonrecurring costs associated with acquisitions and divestitures, and surplus asset rebalancing activities in Q2 2023. Additionally, a weaker 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 credit ratings are also supported by strong underwriting and product pricing discipline. The Company’s invested assets portfolio is conservatively managed and of high quality, although DBRS Morningstar notes the increasing trend in the proportion of BBB and lower-rated bonds in the Company’s investment portfolio in recent years. Great-West’s conservative product design and close asset-liability matching have traditionally resulted in lower net income volatility relative to peers. Nonetheless, it is possible that income volatility may increase with the implementation of IFRS 17 in January 2023 and with unexpected movements in credit spreads. Great-West is also exposed to natural catastrophes via its reinsurance business, although this is partially mitigated by conservative aggregation limits, which DBRS Morningstar views to be within the Company’s loss absorption capacity.

DBRS Morningstar views Great-West’s liquidity position as very strong, with the Company maintaining ample cashable assets, including approximately $500 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 and comprises primarily high-frequency, low severity loss events.

Great-West maintains good regulatory capital levels with Canada Life’s LICAT ratio at 126% as of the end of Q2 2023, an increase from 120% at YE 2022. While Canada Life’s LICAT ratio is comfortably above regulatory minimums with the current value comparable to the prior two years, it remains below that 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. Meanwhile, Great-West’s financial leverage remains elevated at 35.3% as a result of issuing debt to fund acquisitions. Despite operating with a financial leverage ratio relatively high for its current credit 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
General Considerations

Environmental (E) Factors
Environmental concerns regarding climate and weather risks are relevant to the credit ratings of Great-West but do not affect the assigned credit 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 and Risk Solutions business, 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, and is a supporter of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures.

There were no Social or 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 (4 July, 2023) at https://www.dbrsmorningstar.com/research/416784.

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 (July 14, 2023; https://www.dbrsmorningstar.com/research/417109). 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/416784) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

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 credit ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Komal Rizvi, Vice President, Insurance
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: July 19, 1985

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

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