Morningstar DBRS Changes Trends on The Empire Life Insurance Company to Positive from Stable, Confirms All Credit Ratings

DBRS Limited (Morningstar DBRS) changed the trends on The Empire Life Insurance Company (Empire or the Company) to Positive from Stable. Morningstar DBRS also confirmed all ratings, including Empire’s Financial Strength Rating at “A.”

KEY CREDIT RATING CONSIDERATIONS
The change in the trends to Positive from Stable and the credit rating confirmations 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. Empire has performed well in recent years, and while the transition to IFRS 17 has reduced base earnings, earnings volatility is expected to be lower as the Company has a large contractual service margin that will amortize profits over time. During 2023 and Q1 2024, Empire reduced its exposure to equity markets as it optimized its asset portfolio allocation for IFRS 17. Morningstar DBRS views the continued successful management of market risk as an essential support for Empire's current credit ratings and the trend changes. Empire’s LICAT ratio remained strong at 157% as at Q1 2024, with a substantial cushion above the supervisory target of 100%.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade Empire’s credit ratings if the Company were to maintain its strong capital buffer and reduced equity market risk profile as well as its current level of profitability. The trend on the credit ratings would revert to Stable if Empire reported weaker earnings and capital buffers. The credit ratings would be downgraded if the Company were to incur a significant investment loss or operational event that would materially reduce its solvency levels.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Good/Moderate
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 specialty 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 to maintain profitability, or vice versa.

Risk Profile Building Block Assessment: Good
Empire has an extensive risk management framework with a prudent approach to product design, although its product portfolio is more heavily weighted to relatively higher-risk segregated funds. The Company’s fixed-income portfolio is conservative, with a large exposure to highly rated Canadian provincial government bonds. Empire has reduced its market risk exposure by decreasing its investment position in public equities as it optimized its portfolio for IFRS 17. While Empire’s segregated fund guarantee portfolio remains a large source of market risk relative to its peers, it is a lesser concern, especially as more generous contracts run off over time.

Earnings Ability Building Block Assessment: Strong/Good
The Company has achieved a good return on equity (ROE) of between 8.5% and 13.0% over the past five years, with a three-year weighted-average ROE of 9.9% as at YE2023. Common shareholders’ net income declined to $156 million in 2023 (compared with $204 million in 2022 under IFRS 4), mainly due to the transition to IFRS 17. Expense management presents another challenge for Empire to deliver sustained profitability. In Q1 2024, Empire earned $52 million, in line with Q1 2023, with investment gains offsetting small experience losses.

Liquidity Building Block Assessment: Strong/Good
Empire maintains very high levels of liquidity with substantial cash, short-term assets, and high-quality 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.

Capitalization Building Block Assessment: Strong/Good
Empire’s LICAT ratio is strong at 157% as of Q1 2024, providing a generous buffer to absorb capital volatility caused by the impact of market shocks on its segregated fund guarantees. The Company has implemented a hedging program and utilizes reinsurance to mitigate its equity market exposures and product guarantee risks. Empire’s leverage ratio was 30.5% as of Q1 2024 and it has adequate fixed-charge coverage at 10.2 times. 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 Corporation Limited.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (April 15, 2024) https://dbrs.morningstar.com/research/431180. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.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 dbrs.morningstar.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.

Morningstar DBRS 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’s outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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