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

DBRS Limited (Morningstar DBRS) 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 credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect the Company's strength and stability in earnings supported by its top-tier market position in the majority of the business segments that it operates in, including as the top player in the Canadian group life and health insurance and as the second largest provider of retirement services in the U.S. Great-West is also one of the largest reinsurers globally. Leveraging its core financial strengths and inorganic growth, the Company has expanded its wealth and asset management platform across the same regions where it already operates. As it shifts towards more capital-light products, its return on equity (ROE) is expected to improve but earnings may become more sensitive to financial markets-driven volatility. Nonetheless, Great-West's extensive operations and distribution reach, disciplined pricing and underwriting approach, good expense management, and diversification by product and geography have enabled it to generate strong and stable earnings and consistent profitability over time. Credit ratings and trends also reflect the factors that negatively impact capitalization: the elevated leverage and lower capital ratio relative to peers. These are assessed in the context of the Company's strong capital generation capabilities, and overall financial flexibility which Morningstar DBRS views positively.

CREDIT RATING DRIVERS
Sustained material improvement in financial leverage and capital, while maintaining strong earnings, would result in a credit ratings upgrade. Conversely, the credit ratings would be downgraded if the Company were to experience a material deterioration in its financial leverage, combined with weaker profitability and coverage ratios.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Very Strong/Strong
The Company's broad and diverse franchise is supported by its long history of operations, 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. several years ago, and pulling back in the UK market, the Company has focused its growth efforts on firmly establishing its position as the second largest provider of retirement solutions in the U.S. The strong presence in this market provides geographic and revenue diversification in a capital-light sector. It also positions it well to execute on its key strategic initiative of growing the U.S. personal wealth business, which it launched in 2023. More recently, in January 2024, the Company closed on the sale of Putnam Investments to Franklin Templeton, representing a divestment in its asset management operations in the U.S., while increasing its scale in the Canadian wealth management business with the acquisitions of Investment Planning Counsel and Value partners, which were acquired in 2023.

Earnings Building Block Assessment: Strong
Despite ongoing macroeconomic and geopolitical volatility, Great-West continues to generate strong and stable earnings across all its reporting segments, reflecting its solid market positions and careful selection of risk. The growth in revenues and earnings in the retirement solutions platform in the U.S. has been particularly strong, on pace to achieve the 16% to 17% target ROE, subject to market conditions. Canadian and European operations continue to perform well and are an important source of earnings. The capital and risk solutions segment, which includes reinsurance operations, provides additional earnings and diversification. The Company's three-year weighted-average ROE (as calculated by Morningstar DBRS) is strong at 13%.

Risk Building Block Assessment: Strong
Great-West has a comprehensive and well-developed, enterprise-wide risk management infrastructure. The Company's conservative product design and close asset-liability matching minimize product risk. Exposure to natural catastrophes via its reinsurance business is partially mitigated by conservative aggregation limits, which Morningstar DBRS views to be within the Company's loss-absorption capacity. Much of the exposure to market risk is held in relation to participating policies thereby mitigating the Company's own investment risk. Overall, the invested assets portfolio is conservatively managed, although Morningstar DBRS notes the relatively higher proportion of BBB bonds and a substantial amount of private assets that tend to be less liquid. Operational risk has reduced in 2024 compared to a year ago level, following the sale of Putnam and completion of the Prudential business integration into the U.S retirement business. While the acquisitions of wealth management firms in Canada have not yet been completed, Morningstar DBRS views these to be of low-risk given their size, characteristics, and Great-West's history of successful integration of more complex and larger firms.

Liquidity Building Block Assessment: Very Strong
Mitigating the significant proportion of illiquid assets in its investment portfolio are ample holdings of highly rated marketable assets with $8.6 billion of cash and cash equivalent securities as of Q2 2024, including approximately $1 billion of cash at the holding-company level. Additionally, Great-West maintains significant committed credit lines with banks in Canada and in the U.S and has the ability to access additional funding through the Federal Home Loan Bank system in case of a liquidity stress event. The Company also benefits from a largely predictable high-frequency, low-severity claims distribution profile.

Capitalization Building Block Assessment: Strong/Good
Great-West maintains good regulatory capital levels with Canada Life's Life Insurance Capital Adequacy Test (LICAT) ratio at 130% as of the end of Q2 2024, representing an increase from 128% at YE2023. While Canada Life's LICAT ratio is comfortably higher than regulatory minimums and illustrating an increasing trend, it remains less than that of relevant peers. Morningstar DBRS 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 has improved. Despite operating with a financial leverage ratio that is still relatively high for its current credit rating category, Morningstar DBRS views Great-West's financial flexibility as adequate given its capital generation capabilities and the debt maturity profile.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
General Considerations
Environmental (E) Factors
The following Environmental factor(s) had a relevant effect on the credit analysis. Environmental concerns regarding climate and weather risks are relevant to the credit ratings of Great-West but do not affect the assigned credit ratings or trend. The Company has some direct exposure to climate and weather risks through its property and casualty catastrophe reinsurance retrocession business and indirectly through its investment portfolio. Great-West incorporates climate-related risks into its broader risk management framework with appropriate oversight.

There were no Social/Governance factor(s) 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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (September 10, 2024), https://dbrs.morningstar.com/research/439195. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024; https://dbrs.morningstar.com/research/437781) 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 https://dbrs.morningstar.com.

The credit ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

These credit ratings are 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 credit ratings:

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 monitored.

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Nadja Dreff, Senior Vice President, Sector Lead, Global Insurance & Pension Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global Financial Institution Ratings
Initial Rating Date: July 19, 1985

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

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