DBRS Confirms Ratings of Industrial Alliance Insurance and Financial Services Inc. at A (high)

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company) at A (high), its Subordinated Debentures rating at “A” and its Non-Cumulative Preferred Shares rating at Pfd-2 (high). DBRS has assigned a Financial Strength Rating (FSR) of A (high) to IAG and has discontinued the IC-2 rating on the Company’s Claims Paying Ability. All trends are Stable. 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).

IAG is the fourth-largest life insurance organization in Canada based on 2014 direct premiums. The Company has good franchise strength, which is evident in its good market positions in several product segments, as well as its having operations in several niche market segments, including a small home and auto insurance operation targeting the provincial Québec market. The Company continues to increase its diversification by product and expanding existing distribution channels such as mutual fund dealers and securities brokerages. The Company’s good risk profile reflects its product mix and consistent risk management.

Even in the largely unfavourable market environment, IAG has demonstrated its good earnings ability. Its return on equity has generally been in the 12% to 13% range for most of the last five years, in line with its internal target range of 11.0% to 12.5%. IAG’s willingness to pursue niche opportunities in the property and casualty space, as well as its focus on further strengthening its distribution networks, has allowed it to maintain strong earnings even while experiencing declining market share in some business segments.

The Company has strong capitalization as illustrated by (1) its financial leverage ratio of 24.5% at Q3 2015, significantly reduced from a high of 35.2% at year-end 2012; (2) the improvement in the EBIT fixed-charge coverage ratio to 6.8x at Q3 2015, compared with 5.6x at Q3 2014; and (3) the minimum continuing capital and surplus requirement (MCCSR) of 225% at Q3 2015, an improvement of ten percentage points from Q3 2014.

The Stable trends on IAG’s credit ratings take into account the Company’s conservative risk management, good financial metrics and capital levels coupled with low volatility. Negative ratings pressure could arise if IAG experiences a sustained erosion of market share in key segments, a negative impact on its earnings because of lower interest rates, equity market declines or adverse policyholder behaviour, or acquisitions of risky businesses. Positive pressure on IAG’s ratings could emerge if underperforming businesses become profitable, if there is a reduction in exposure to interest rate and stock market value fluctuations, and if there is a significant increase in market share without cutting premium rates.

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 methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015) and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.

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