DBRS Confirms Empire Life Issuer Rating at “A” and Assigns Financial Strength Rating of “A”

DBRS Limited (DBRS) has today assigned a Financial Strength Rating of “A” to Empire Life Insurance Company (Empire or the Company) and confirmed the Company’s Issuer Rating at “A” and its Subordinated Debt rating at A (low). All trends are Stable. At the same time, the Company’s Claims Paying Ability Rating of IC-2 has been discontinued. All rating actions are detailed in the table below. The rating actions taken today follow the publication of DBRS’s new methodology, “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” (December 2015).

The confirmation considers Empire’s good franchise strength, as indicated by the Company’s success as a capable insurer in maintaining its market share of near 2% of industry direct premiums against some formidable life insurance competitors in Canada. While smaller than other players, the Company’s focus on service has enabled it to maintain its market position. Empire’s group business, which caters to small- to medium-sized employers, is facing more competition, as larger players are now increasingly focused on this sector to achieve market growth. Segregated fund equity risks are now partially hedged, which helps stabilize the solvency ratio against equity market swings. The Company is incurring new business strain because of its product mix. Also factored into the confirmation is Empire’s good earnings capability, which has shown resiliency with return on equity improving since 2011 and now consistently in the 10% to 13% range. Financial leverage has trended lower and is now near 21% at Q3 2015.

Empire’s largest risks are its exposures to equity market risk, largely arising from its segregated fund portfolio, and to interest rate risk from its individual life portfolio. The potential impact of these risks is more about maintaining regulatory capital ratios for the volatility created by its tail risks rather than an immediate cash need. Improving its generally good risk profile, the Company has implemented hedging strategies to offset some of its equity exposures to income and required capital for severe equity market declines. Empire’s capitalization and asset quality are considered excellent. The Company has a high ratio of quality assets to liabilities of approximately 85%, and the level of capital to riskier assets is 92% at year-end 2014.

The Stable trend considers Empire’s resilient fundamentals and its ability to adapt to the current environment. Negative ratings pressure could emerge if the Company’s fundamentals weaken because of a sustained erosion of earnings or an inability to maintain a sufficient minimum continuing capital and surplus requirement (MCCSR) to endure a severe equity market decline. Positive ratings pressure could arise if Empire achieves a significant improvement in market share, accompanied by reduced exposure to interest rate and equity market changes and a sustained improvement in profitability.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

DBRS will publish a report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.