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Fitch Affirms Great-West Lifeco; Outlook Stable
January 26, 2016 / 9:48 PM / 2 years ago

Fitch Affirms Great-West Lifeco; Outlook Stable

(The following statement was released by the rating agency) NEW YORK/LONDON, January 26 (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'. At the same time, Fitch has upgraded the ratings of Irish Life Assurance plc (Irish Life) one notch, including the IFS rating to 'AA' from 'AA-'. A full list of rating actions follows at the end of this release. The Rating Outlook is Stable. The 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 that 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 (FCC) to remain at depressed levels for some time. The upgrade of Irish Life's ratings reflects Fitch's view that Irish Life has become 'core' to GWO as defined in the agency's Insurance Rating Methodology. GWO acquired Irish Life in July 2013. Fitch believes that GWO's acquisition 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 moved GWO to the top position in Ireland with a market share greater than 30%. KEY RATING DRIVERS Fitch views as positive GWO's solid core insurance earnings performance, as it drives and supports the company's financial flexibility and consolidated risk-based capital position. Fitch believes this performance is reflective of 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 CAD2.1 billion in the first nine months of 2015, up 10% from the same period in 2014. Operating return on equity on a trailing four-quarter basis was 15.2%, slightly above the company's long-term target of 15%. Despite strong operating results from GWO's insurance operations, FCC of over 8x during the first nine months of 2015 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, including those in the funds withheld account, totalled CAD1.9 billion at Sept. 30, 2015, or 1.6% of bond investments. At CAD3.4 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. Since 2013, GWO's financial leverage has been trending down and was 18.1% at Sept. 30, 2015. However the company's debt-to-total capital of 26.5%, which includes CAD2.5 billion of perpetual preferred securities, continues to be slightly higher than comparably rated North American peers. The company's risk-adjusted capitalization remains supportive of the rating. Great-West Life Assurance Company's (GWL) MCCSR was 234% at Sept. 30, 2015. 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 with no plans or ability to rectify. This would include the U.S. risk-based capital ratio falling below 400% and 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, London Life or Irish 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. FULL LIST OF RATING ACTIONS Fitch has upgraded the following ratings with a Stable Outlook: Irish Life Assurance plc --IFS to 'AA' from 'AA-'; --Long-term IDR to 'AA-' from 'A+'; --5.25% subordinated debt to 'A' from 'A-'. 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% 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 Tana M. Higman (GWO) Director +1-312-368-3122 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Ralf Ehrhardt (Irish Life) Associate Director +44 203 503 1551 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Dafina M. Dunmore, CFA (GWO) Director +1-312-368-3136 David Prowse (Irish Life) Senior Director +44 207 682 7256 Committee Chairperson James B. Auden, CFA Managing Director +1-312-368-3146 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 16 Sep 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=998426 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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