Morningstar DBRS Confirms The Independent Order of Foresters' Issuer Rating and Financial Strength Rating at "A," Stable Trends

DBRS Limited (Morningstar DBRS) confirmed The Independent Order of Foresters' (Foresters Financial or the Company) Issuer Rating and Financial Strength Rating at "A" and its Subordinated Debt credit 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 as well as its relatively diversified product mix, high-quality investment portfolio, strong liquidity, and ample capital buffer. Foresters Financial achieved some sales growth in the U.S. market with well-received new initiatives in terms of distribution channels, product offerings, and underwriting technologies, although they are still in early stages. However, the credit ratings also consider the Company's volatile earnings, including a net loss in 2024 as a result of large basis changes, as well as the higher mortality and lapse risks associated with the Company's simplified-issue insurance policies in force. The Company continues to face some challenges in the Canadian market as it remains a smaller player strategically focused on simplified-issue products and its Fraternal Benefit Society mission.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade the credit ratings if the Company were to materially strengthen its market position through new business growth resulting in improved and more stable profitability while maintaining a similar capital buffer. Conversely, Morningstar DBRS would downgrade the credit ratings if there were a sustained weakness in profitability reflecting either a lack of sales growth or weaker underwriting. Morningstar DBRS would also downgrade the credit ratings if the capital buffer were to contract materially.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Good/Moderate
Foresters Financial operates in the highly competitive and 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 relatively small asset management business in the UK providing unit-linked investment products mainly through a local captive sales force. Overall, these businesses provide good revenue and geographic diversification. In North America, Foresters Financial primarily 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 the direct-to-consumer channel. Following a few years of weaker sales in the U.S. market, the Company achieved some new business growth in 2024 and Q1 2025, driven by well-received initiatives including a distribution partnership with a large US based insurer and new insurance products, along with support from its newly overhauled data-enabled underwriting algorithm. However, some of these initiatives are still in their early stages and subject to the challenge of demonstrating a sustained track record.

Earnings Building Block Assessment: Moderate
Foresters Financial reported a total net loss of $57 million in 2024, compared with net income of $191 million in 2023, mainly driven by a one-time basis change loss of $283 million related to updated mortality and lapse assumptions. The Company has relatively higher earnings volatility as it carries some onerous contracts under the IFRS 17 standard that have no contractual service margin to absorb short-term basis change volatility. The three-year weighted-average return on equity (ROE), as per Morningstar DBRS' calculation, is lower than its peers at 3.6% as of YE2024. This reflects the additional fraternal expenses and the Company's substantial capital buffer, which allows for greater strategic and financial flexibility but reduces ROE.

Risk Building Block Assessment: Good
Foresters Financial's products have a higher exposure to excess mortality and lapse risks relative to its peers, leading to larger losses and strengthening of reserves when facing adverse experience. The Company has taken appropriate steps to manage this risk for newer businesses through an upgraded underwriting algorithm, enhanced underwriting data supply, and a more disciplined underwriting approach. However, these remain key risk considerations that the Company needs to prudently manage for its large in-force policies. 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 assets under management-based fee income on its savings products.

Funding and 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. 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
The Company's consolidated Life Insurance Capital Adequacy Test ratio of 185% at Q1 2025 was very strong and provides a substantial cushion above the regulatory target of 100%. Foresters Financial maintained a prudent financial leverage ratio at 10.4% as of YE2024. The regulated U.S. branch is strongly capitalized on an individual basis with a risk-based capital ratio of 556% as of Q1 2025. The Company has successfully executed a few key capital projects in recent years, which increased capital flexibility within the organization.

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 Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196.

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 (May 16, 2025), https://dbrs.morningstar.com/research/454196 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 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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

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

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