Fitch Ratings has affirmed its ratings on Great-West Lifeco (GWO), including the companies issuer default rating at ‘A+’, on the announcement that GWO will be acquiring Irish Life Group Ltd. for €1.3 billion ($1.75).
The rating agency notes that GWO’s financials will remain solid, and it will gain strategically from the deal.
The rating agency says that its decision reflects its belief that GWO’s capitalization and leverage will not be materially affected by the acquisition; that the integration risk will be reasonably well managed; and, that Irish Life will provide strategic benefits for the firm.
Fitch says it expects GWO will use $1.25 billion of new common equity, euro-denominated senior debt and internal cash resources to finance the proposed acquisition, which is expected to close in the third quarter (subject to customary regulatory approvals). The increase in financial leverage of roughly 1.5 points is still within an acceptable level for its current rating category, it says.
The acquisition of Irish Life will provide Great-West with critical scale in the Irish market, as well as operational synergies and expense savings, Fitch says; noting that its existing Irish subsidiary has operated in the country since 1903, and is currently the seventh largest life insurer with a 5% market share. This deal will move GWO to the top position in Ireland with a market share greater than 30%, and is expected to contribute approximately 10% to GWO’s total earnings.
“Execution risk is mitigated in part by GWO’s existing knowledge of the Irish market and by GWO’s track record of supplementing growth through acquisitions,” Fitch notes. It also says that it views Irish Life’s business model as low risk, with over 80% of its insurance liabilities in unit-linked pensions and savings products, where the investment risk is borne by the policyholders. Irish Life is also well-capitalized, it notes.
The deal will increase GWO’s eurozone exposure within its general investment portfolio from $3.6 billion to $5.2 billion, Fitch notes; but, it believes that, over time, GWO will reduce Irish Life’s holdings of European sovereign bonds and invest the proceeds in high quality corporate securities.