Morningstar DBRS Confirms Credit Ratings on The Independent Order of Foresters at "A"; Trends Remain Stable

DBRS Limited (Morningstar DBRS) confirmed its Issuer Rating and the Financial Strength Rating on 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 CREDIT RATING CONSIDERATIONS
The credit ratings and Stable trends reflect the Company's established presence in the U.S., Canadian, and UK life insurance and asset-management markets, its relatively diversified product mix, a high-quality investment portfolio, strong liquidity, and ample capital. Foresters Financial reported solid net earnings in 2022 and 2023 under IFRS 4 and IFRS 17, respectively, amid favourable market conditions. However, the credit ratings also consider the Company's challenges in improving sales growth and scale, as it remains a smaller player strategically focused on its Fraternal Society mission.

CREDIT RATING DRIVERS
The credit ratings would be upgraded if the Company materially strengthens its new business growth and market position while maintaining stable earnings, capital buffer, and financial leverage. Conversely, the credit ratings would be downgraded if there were a sustained deterioration in its market position, risk profile, or capitalization.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Good/Moderate
Foresters Financial operates in the highly fragmented life insurance market in the U.S. as well as in the Canadian market, which is dominated by a few large players. The Company also has a UK asset-management business, which provides diversification benefits. In North America, it mainly offers simplified life insurance products, differentiating its offering with its fraternal orientation and benefits. The Company has a multichannel distribution strategy comprising multilevel marketing, independent marketing organizations, managing general agents, independent agents, and direct-to-consumer in North America and a captive sales force in the UK. The Company further strengthened its distribution channel in 2024 through an affinity partnership with Allstate to become its fourth exclusive life insurance provider. Foresters Financial appointed a new President and CEO in January 2024, who previously served as President of Foresters Financial US and Canada, maintaining the Company's current strategic direction.

Risk Profile Building Block Assessment: Good
Foresters Financial's products have a higher exposure to excess mortality relative to its peers, leading to larger losses and strengthening of reserves during the coronavirus pandemic. However, the Company has taken appropriate steps to manage this risk including the use of reinsurance and a more disciplined underwriting approach. Foresters Financial has a sound investment strategy for its externally managed general account assets, with moderate exposure to credit risk as reflected in the quality of its fixed-income portfolio, which is well-diversified and has an average credit quality of "A." The Company has market risk exposure through its investments and through the asset under management-based fee income on its savings products.

Earnings Ability Building Block Assessment: Good/Moderate
Foresters Financial reported a record consolidated net income of $191 million in 2023, mainly as sustained high interest rates aided the Company's insurance business and net investment return. Following a strong recovery from the coronavirus pandemic in 2022, Foresters Financial continued to report a solid 9.3% return on equity (ROE) for 2023, which Morningstar DBRS views as positive especially as it calculated net of the $16 million in Fraternal Investments expenses. Foresters Financial also maintains a substantial capital buffer, which reduces ROE compared to its peers but allows for greater strategic and financial flexibility while the Company continues to provide membership benefits to its policyholders as part of its Fraternal purpose.

Liquidity Building Block Assessment: Strong
Foresters Financial has a low concentration of nonliquid assets, such as loans to certificate holders and mortgages. The Company also maintains a USD 100 million committed five-year revolving facility, renewed through 2027, 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.

Capitalization Building Block Assessment: Strong
Its consolidated LICAT ratio of 195% at Q1 2024 was very strong and provides a substantial cushion above the regulatory target of 100%. The regulated U.S. branch is strongly capitalized on an individual basis with a risk-based capital ratio of 480% as of Q1 2024. Foresters Financial maintains a prudent financial leverage ratio at 10.8% as of YE2023.

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 (23 January 2024) 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 (15 April 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 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577