Morningstar DBRS Confirms Credit Ratings on The Equitable Life Insurance Company of Canada at A (high), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Financial Strength Rating and Issuer Rating of The Equitable Life Insurance Company of Canada (Equitable or the Company) at A (high). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings and Stable trends reflect Equitable's established presence in the Canadian life insurance market where it offers individual and group products. The Company's focus on participating insurance allows the transfer of much of its risk exposures to policyholders. Equitable has demonstrated consistently strong profitability and capital levels even through financial market volatility. The credit ratings and trends also consider Equitable's distribution strategy, which is heavily reliant on the independent advisor channel where some of the leading distributors are owned by other insurers. So far, the Company has been successful by being the independent alternative of choice for these competitor-owned distributors. Equitable holds sufficient cash and a large portfolio of highly rated marketable securities. The Company's portfolio also includes a sizable portion of equity, real estate, private placements, and commercial mortgages, which can be riskier or less liquid, although much of the performance of these assets is passed through to policyholders.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade the credit ratings if Equitable were to significantly strengthen its market position or reduce its exposure to investment risks while maintaining strong profitability metrics and appropriate capital buffers. Conversely, Morningstar DBRS would downgrade the credit ratings if the Company were to experience a material deterioration in its profitability and capitalization.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Good/Moderate
Equitable operates mainly in the Canadian life insurance middle market where it is especially strong in the participating life insurance product line, which aligns well with its mutual company status. The Company's smaller size makes it more flexible in terms of responding to changing market conditions and adjusting its product offering, but it does not benefit from the same brand presence and scale as larger insurers, which can be challenging when making investments in technology or distribution. The Company continues to focus on growing profitably and organically while strengthening its product offering, distribution channels, and digital capabilities. In 2023, it embarked on a new five-year operational plan, which kicked off with a rebranding of the organization under the Equitable name, the unveiling of a new corporate logo, and other initiatives to improve its client-centric value proposition, which has been well-received by advisors and customers.

Risk Profile Building Block Assessment: Good
Equitable's product portfolio is heavily focused on participating individual life insurance, which allows the Company to share some of the product and investment risks with policyholders. The Company also has a small Universal Life portfolio with conservative rate guarantees, which limit the exposure to Equitable. While the Company has a higher-than-average allocation to equity and real estate investments, these investments mainly back participating and unit-linked policies where the performance is passed through to policyholders.

Earnings Ability Building Block Assessment: Strong/Good
Equitable has delivered strong growth in total premiums and deposits at 15.2% over the past three years, more than twice the growth rate of the Canadian life insurance industry. While it is still early to evaluate the impact of the rebranding, we expect the Company to continue to grow while remaining profitable, considering its recent track record. Equitable has consistently generated good return on equity (11.4% in 2023 with a three-year weighted average of 12.4%).

Liquidity Building Block Assessment: Strong/Good
Equitable maintains an adequate liquidity position despite exposure to lower liquidity assets such as private debt and real estate. It holds a large amount of cash, government bonds, and other marketable securities in its investment portfolio. Equitable's claims profile is stable and unlikely to cause liquidity issues. The Company has adequate reinsurance coverage and its liquidity risk management framework appropriately considers its substantial cashable long-term insurance liabilities.

Capitalization Building Block Assessment: Strong
Equitable's strong capitalization reflects its substantial excess capital position with a Total Life Insurance Capital Adequacy Test (LICAT) ratio of 174% at Q1 2024, which was positively affected by the transition to IFRS 17, strong 2023 profitability and a prudent policyholder dividend policy. The Company's LICAT ratio is significantly higher than the regulatory target and provides a material buffer to absorb losses. The focus on participating insurance also benefits the LICAT ratio as it has lower capital requirements than similar nonparticipating products. Equitable has no debt outstanding and it is exploring avenues to deploy its capital, including through initiatives to support clients and partners.

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) 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' 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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