Fitch Affirms Great-West Lifeco; Outlook Stable
The ratings affirmation is based upon the company's consistently strong and stable core insurance earnings; strong competitive position in the Canadian market; conservative investment profile; and overall actuarial liability profile which is not heavily exposed to the equity markets. Offsetting these positives are the company's relatively high use of financial leverage and the ongoing underperformance of Putnam Investments (Putnam), which has strained overall earnings levels and has caused fixed-charge coverage to remain at depressed levels for some time.
Fitch published newly updated insurance notching criteria on July 14, 2015 via an update to its master criteria report, 'Insurance Rating Methodology.' Today's rating actions reflect application of the updated notching criteria to GWO's ratings, and such application resulted in no rating changes. Under Fitch's notching criteria, Canada is classified as having a 'Group Solvency' style of regulation. However, since GWO's ultimate holding company is not regulated by the Office of the Superintendent of Financial Institutions (OSFI) in Canada, Fitch employed a 'Ring Fencing' style notching in establishing GWO's ratings. Additionally, more than 30% of GWO's consolidated earnings and capital comes from businesses outside of Canada.
KEY RATING DRIVERS
Fitch views GWO's solid core insurance earnings performance positively as it drives and supports the company's financial flexibility and consolidated risk-based capital position. Fitch believes this performance reflects the company's conservative risk appetite which has resulted in lower-risk product design, pricing discipline, strict asset-liability matching, and management of key earnings drivers such as expenses and persistency. Additionally, Fitch views the Canadian life insurance market as inherently less risky than the U.S. life market due to greater pricing rationality and less aggressive product guarantees. Operating earnings totalled CAD1.4 billion in the first half of 2015 (1H15), up 13% from the same period in 2014. Operating return on equity on a trailing four-quarter basis was 15.7%, above the company's long-term target of 15%.
Despite strong operating results from GWO's insurance operations, fixed charge coverage of 8.3x during 1H15 remains below expectations for the current rating category. This is due to the ongoing underperformance of Putnam. Fitch does not expect Putnam to contribute meaningfully to GWO's earnings in the near- to intermediate-term. Fitch believes GWO will continue to rely on holding company cash and earnings from the insurance subsidiaries to service interest expense on debt related to the acquisition of Putnam.
Fitch believes GWO's investment performance is a reflection of its conservative investment policies and underwriting standards as well as its asset/liability, liquidity and investment skills. By policy, the company does not invest in below-investment-grade (BIG) credits, and therefore reported exposure in this category consists of 'fallen angels,' including privately placed issues with strong covenant protection. BIGs totalled CAD1.4 billion at June 30, 2015, or 1.3% of bond investments. At CAD3.3 billion in total investment provisions, Fitch believes that GWO is well-provisioned for future credit loss and that future impairments in excess of actuarial reserve provisions are likely to remain within manageable levels and ratings expectations.
Fitch views GWO's actuarial liabilities as relatively insensitive to equity markets, due to the avoidance of riskier enhancements to individual segregated funds. The company's primary exposure to equity markets is through Putnam.
Irish Life's ratings reflect Fitch's view that Irish Life is 'very important' to GWO as defined in the agency's Insurance Rating Methodology. GWO's ownership of Irish Life results in a two-notch uplift to Irish Life's IFS rating to 'AA-' from its stand-alone assessment of 'A'.
Fitch believes that GWO's acquisition of Irish Life has been well managed and has provided the company with critical scale in the Irish market as well as operational synergies and expense savings. The acquisition has moved GWO to the top position in Ireland with a market share greater than 30%.
Irish Life's ratings reflect its strong standalone capitalization (regulatory solvency ratio of 186% at year-end 2014), comparatively low-risk business (the majority of Irish Life's insurance net liabilities are unit-linked, with investment risk borne by policyholders) and strong market position. The ratings continue to reflect the importance of the Irish economy (Ireland; long-term IDR 'A-'/Stable Outlook) to Irish Life's business on a standalone basis as 99% of its business is domestic. In view of the weak operating environment in Ireland, Fitch expects the company's earnings to remain under pressure for several years.
Key rating triggers for GWO's ratings that could lead to an upgrade include:
--Significant improvement in Putnam's earnings to a level on par with GWO's other operating subsidiaries;
--Decline in financial leverage to below 15% and a decline in total leverage to below 25%.
Key rating triggers for GWO's ratings that could lead to a downgrade include:
--A sustained drop in the company's risk-adjusted capital position with no plans or ability to rectify. This would include the U.S. risk-based capital ratio falling below 400% and Minimum Continuing Capital and Surplus Requirements (MCCSR) ratios falling below 200%.
--Increase in financial leverage to over 25% or an increase in total leverage to over 35%.
--Decline in fixed-charge coverage to less than 6x.
--Sizable goodwill impairment on Canada Life or London Life acquisitions.
--Acquisitions outside GWO's historical risk preferences or expertise, or any other material changes in risk appetite for the company.
--Reduction in Power Financial Corporation's ownership stake in GWO.
Key rating triggers for Irish Life's ratings that could lead to an upgrade include:
--A change in Fitch's view of Irish Life's strategic importance to GWO.
Key rating triggers for Irish Life's ratings that could lead to a downgrade include:
--The macro-economic environment having a greater than expected adverse impact on policyholder surrender rates, new business or profitability. These threats could include the impact of the Irish government's austerity package, high unemployment, reduced consumer confidence and lower than expected GDP triggering higher policyholder surrender rates and lower sales volumes.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Great-West Lifeco, Inc.
--Long-term IDR at 'A+';
--6.14% senior debentures due March 21, 2018 at 'A';
--4.65% senior debentures due Aug. 13, 2020 at 'A';
--6.74% senior debentures due Nov. 24, 2031 at 'A';
--6.67% senior debentures due March 21, 2033 at 'A';
--5.998% senior debentures due Nov. 16, 2039 at 'A';
--2.5% Euro bond debt due April 18, 2023 at 'A';
--Series F, 5.9% non-cumulative first preferred shares at 'BBB+';
--Series G, 5.2% non-cumulative first preferred shares at 'BBB+';
--Series H, 4.85% non-cumulative first preferred shares at 'BBB+'';
--Series I, 4.5% non-cumulative first preferred shares at 'BBB+'
--Series L, 5.65% non-cumulative first preferred shares at 'BBB+';
--Series M, 5.80% non-cumulative first preferred shares at 'BBB+';
--Series N, 3.65% non-cumulative first preferred shares at 'BBB+';
--Series P, 5.4% non-cumulative first preferred shares at 'BBB+';
--Series Q, 5.15% non-cumulative first preferred shares at 'BBB+';
--Series R, 4.8% non-cumulative first preferred shares at 'BBB+';
--Series S, 5.25% non-cumulative first preferred shares at 'BBB+'.
GWL&A Financial Inc.
--Long-term IDR at 'A+'.
Canada Life Financial Corporation
--Long-term IDR at 'A+'.
Great-West Life Assurance Company
--IFS at 'AA';
--Long-term IDR at 'AA-'.
Canada Life Assurance Company
--IFS at 'AA';
--Long-term IDR at 'AA-';
--6.4% subordinated debentures due Dec. 11, 2028 at 'A+'.
Great-West Life and Annuity Insurance Company
--IFS at 'AA';
--Short-term IDR at 'F1+';
--Commercial paper at 'F1+'.
London Life Insurance Company;
Great-West Life and Annuity Insurance Company of New York
--IFS at 'AA'.
Great-West Life & Annuity Insurance Capital, LP II
--7.153% subordinated debentures due 2046 at 'BBB+'.
Canada Life Capital Trust
--Series B, 7.529% preferred stock due June 30, 2052 at 'A'.
Great-West Life & Annuity Insurance Capital, LP
--6.625% deferrable debentures due Nov. 15, 2034 at 'BBB+'.
Great-West Lifeco Finance (Delaware) LP
--5.691% subordinated debentures due 2067 at 'BBB+';
--7.127% subordinated debentures due 2068 at 'BBB+'.
Irish Life Assurance plc
--IFS at 'AA-';
--Long-term IDR at 'A+';
--5.25% subordinated debt at 'A-'.