Fitch Ratings Monday affirmed its ratings on Great-West Lifeco Inc., citing the company’s strong earnings performance, its market position, and conservative investment stance.
Fitch affirmed the insurance holding company’s Issuer Default Rating (IDR) at ‘A+’ and all outstanding senior debt and hybrid issues. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of all of GWO’s operating subsidiaries at ‘AA’. The rating outlook is stable.
The rating agency says its action is based upon the GWO’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.” On the negative side is the company’s relatively high use of financial leverage and the ongoing underperformance of Putnam Investments, “which has strained overall earnings levels and has caused fixed-charge coverage to remain at depressed levels for some time”, it notes.
Fitch says its views Great-West’s solid core insurance earnings performance positively “as it drives and supports the company’s financial flexibility and consolidated risk-based capital position.” It also says it 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, it notes that the company maintains conservative investment policies and underwriting standards. And, it says that Great-West’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.
An upgrade in its ratings is unlikely in the short term, but several events could lead to a downgrade, Fitch says, including: a sustained drop in the company’s risk-adjusted capital position with no ability to rectify it; an increase in financial leverage; a sizable goodwill impairment; ill-advised acquisitions; or, a reduction in Power Financial Corp.’s ownership stake in the firm.