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

DBRS Limited (DBRS) confirmed the Issuer Rating and Financial Strength 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). All trends are Stable.

KEY RATING CONSIDERATIONS
IAG’s rating confirmation reflects the Company’s sizable franchise in Canada as well as its stable financial metrics. The Company has good franchise strength, which is evident in its leading market positions in several product segments, operations in several niche market segments and diversified distribution network. IAG’s conservative financial profile is reflected in its strong capitalization, low leverage (21.5% as at Q3 2018) and high EBIT fixed-charge coverage ratio of 9.6 times as at the nine months ended 2018. In determining the ratings, DBRS also takes into consideration the Company’s sizable exposure and sensitivities to adverse policyholder behaviour, interest rates and equity markets resulting from its large individual life insurance and segregated funds portfolio.

The Stable trends on IAG’s credit ratings consider the Company’s comprehensive risk management and demonstrated ability to navigate challenging economic environments.

RATING DRIVERS
IAG is well placed in its rating category, occupying leading market positions in several business lines, such as in segregated funds; however, upward rating pressure may arise from a material increase in market position in its other businesses, such as Employee Plans or Group Savings and Retirement. A material reduction in the Company’s exposure to the interest rate and equity market risks arising from its large individual insurance and segregated funds portfolio, combined with higher capital levels relative to peers, could also add upward rating pressure. Conversely, negative rating pressure could arise from (1) an inability to mitigate the adverse impact of low interest rates, equity market declines or adverse policyholder behaviour, negatively affecting earnings and eroding capital levels to be closer to regulatory minimums; (2) a sustained erosion in market share in key lines of business, including in Individual Life and Wealth, resulting in declining overall profitability and indicating a significant weakening of the franchise; and (3) a pattern of unprofitable acquisitions of risky businesses outside of the Company’s expertise, weakening the financial and risk profiles of the Company.

RATING RATIONALE
The Company continued to generate good sales and earnings in its major lines of businesses year-to-date 2018, including in individual life and disability insurance and segregated funds. Profitability in weaker business lines has improved from the prior year, as the Company undertook profitability initiatives in its Group Insurance and Auto & Home lines. Mutual fund net flows continue to be challenged in an operating environment that is facing multiple headwinds, including fee pressure and a movement toward lower-cost, passive funds. Further business growth may occur as the Company continues to strengthen its distribution networks, partly by increasing scale through acquisition. DBRS views the Company as having a well-articulated and far-sighted strategy.

IAG has significant risks arising from its large portfolio of long-dated liabilities, subjecting the Company to lapse risk and to adverse movements in interest rates and equity markets. These risks introduce some volatility to earnings, which may increase in the future with the implementation of International Financial Reporting Standard 17 in 2022. The introduction of additional hedging programs to manage interest rate risk will reduce sensitivity to adverse movements in the yield curve even as the Company loses the benefits of a rising rate environment. IAG has made good progress in shifting its sales mix to reduce the proportion of products sold offering long-term guarantees, which, along with pricing actions, has served to materially reduce its new business strain in the past few years.

IAG is in a strong capital position with the introduction of the Capital Adequacy Requirements for Life and Health Insurance (Autorité des marchés financiers’ solvency guideline similar to the Office of the Superintendent of Financial Institution’s Life Insurance Capital Adequacy Test) in 2018, a capital regime that is inherently less volatile than the prior guideline. The Company is also on track to obtain hedging credit for the hedging of its segregated funds portfolio by the end of 2018, which should reduce capital requirements. The Company has a good solvency ratio of 120% as at Q3 2018, providing an adequate buffer against future adverse developments.

The Grid Summary Grades for IAG are as follows: Franchise Strength – Good; Risk Profile – Good; Earnings Ability – Good; Liquidity – Excellent; Capitalization and Asset Quality – Good.

Notes:
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 www.dbrs.com.

The applicable methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (January 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on our website under Methodologies.

Lead Analyst: Komal Rizvi, Assistant Vice President, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG and Sovereign Ratings

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com.