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Fitch Affirms Great-West Lifeco; Outlook Stable
March 17, 2017 / 7:03 PM / 4 months ago

Fitch Affirms Great-West Lifeco; Outlook Stable

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(The following statement was released by the rating agency) NEW YORK, March 17 (Fitch) Fitch Ratings has affirmed the ratings of Great-West Lifeco (TSE: GWO) including the holding company's Issuer Default Rating (IDR) at 'A+' as well as the Insurer Financial Strength (IFS) ratings of all operating subsidiaries at 'AA'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release. The ratings affirmation is based upon the company's very strong capitalization, consistently strong and stable core insurance earnings; strong competitive position in the Canadian market; conservative investment profile; and overall actuarial liability profile that is not heavily exposed to the equity markets. Offsetting these positives is the continued 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. KEY RATING DRIVERS GWO's ratings consider its conservative risk appetite, which is reflected in its 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 less risky than the U.S. life market due to greater pricing rationality and less aggressive product guarantees. GWO's operating earnings were CAD2.6 billion in 2016, down 4% from 2015 due to lower fee income and restructuring costs at Putnam, the depreciation of the British pound, and less favorable morbidity experience. Results in Canada and Europe remain strong with ROEs of 20% and 17%, respectively, in 2016. GWO's fixed charge coverage of 7.9x in 2016 remains below expectations for the current rating category, which is due to the ongoing underperformance of Putnam. Putnam recorded losses of CAD72 million in 2016, including restructuring expenses of CAD20 million related to reducing its staff by approximately 8%. Putnam continues to experience net outflows, driven by the industry's shift toward passive funds. Fitch does not expect Putnam to contribute meaningfully to GWO's earnings in the near- to intermediate-term and expects it to 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 totaled CAD1.5 billion at year-end 2016, or 1.2% of bond investments. Fitch considers GWO well-provisioned for future credit loss, as evidenced by its over CAD2.9 billion of provisions for future credit losses, and expects future impairments in excess of actuarial reserve provisions to remain within manageable levels and ratings expectations. Fitch views GWO's liquidity as strong, with its over CAD7.9 billion of cash, cash equivalents and short-term bonds, including CAD1.1 billion of cash at the holding company. GWO also generates ample cash flows and liquidity through its well-diversified operations. Additionally, GWO's actuarial liabilities are 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. GWO's financial leverage increased to 20% at year-end 2016 as a result of the issuance of EUR500 million senior notes in December. Fitch notes that a portion of the proceeds was used to redeem EUR200 million in February 2017, and financial leverage was 19% on a pro forma basis. Financial leverage remains consistent with the rating level, but the company's debt/total capital ratio of 28%, which includes CAD2.5 billion of perpetual preferred securities, is slightly higher than comparably rated North American peers. GWO's risk-adjusted capitalization remains supportive of the rating; Great-West Life Assurance Company's MCCSR was 240%, while Great-West Life & Annuity Insurance Company's RBC ratio was 458% at year-end 2016. Effective Jan. 1, 2018, the Office of the Superintendent of Financial Institutions (OSFI) plans to replace MCCSR with a new capital adequacy framework, Life Insurance Capital Adequacy Test (LICAT). Fitch expects GWO to remain in a strong excess capital position under LICAT, given the company's conservative risk profile. RATING SENSITIVITIES 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 evidenced by MCCSR ratios falling below 200% and no change in view of capital under the LICAT framework. --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, London Life or Irish Life acquisitions. --Acquisitions outside GWO's historical risk preferences or expertise, or any other material changes in the company's risk appetite. --Reduction in Power Financial Corporation's ownership stake in GWO. 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'; --1.75% Euro bond debt due December 7, 2026 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, 2.176% non-cumulative first preferred shares at 'BBB+'; --Series O, Floating Rate 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'. Irish Life Assurance plc --IFS at 'AA'; --Long-term IDR at 'AA-'. Canada Life International Re Ltd. --IFS at 'AA'. Great-West Life & Annuity Insurance Capital, LP II --2.538% fixed rate plus 3-month LIBOR subordinated debentures due 2046 at 'BBB+'. Canada Life Capital Trust --Series B, 7.529% senior debentures 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+'. Contact: Primary Analyst Jamie R. Tucker, CPA Associate Director +1-212-612-7856 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Dafina M. Dunmore, CFA Director +1-312-368-3136 Committee Chairperson James B. Auden, CFA Managing Director +1-312-368-3146 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020758 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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