A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and issuer credit rating (ICR) of “a” of Kingston, Ont.-based Empire Life Insurance Co. The outlook for both ratings is stable.

The ratings agency says the ratings of Empire Life reflect its strong growth in segregated funds, favorable capital position and consistent aggregate operating earnings.

Empire Life has produced robust growth in its segregated funds through good fund performance, enhanced distribution, positive net flows and market appreciation.

Earnings and sales growth in its wealth management and employee benefits sectors were favorable in 2007, while capitalization measures continued to be at levels commensurate with the current ratings.

The capitalization levels have allowed Empire Life to continue to expand its platforms in core business lines. Sales in its individual insurance segment have also increased, which has led to strain related losses in this line in recent years.

Offsetting these strengths are the increasing exposure to equity market risk, challenges Empire Life faces in expanding its operations in its core business lines under continued high competition and ability to continue to improve earnings within its group and individual insurance segments. This is a concern, “especially within the group insurance segment, where A.M. Best believes Empire Life will be challenged to improve earnings and market share against competitors that have the scale to make the significant technology investments required to compete effectively in group insurance.”

Empire Life’s earnings and capital growth have become increasingly dependent on equity market performance, as growth in both capital and assets under management have been positively impacted by the five-year positive performance of the Canadian equity markets. A.M. Best notes the progress Empire Life has made in reducing its expense gap but believes scale will continue to be a competitive issue for certain product lines.