TEXT - Fitch affirms Great-West Lifeco
Jan 9 - Fitch Ratings has affirmed the ratings of Great-West Lifeco (TSE:GWO) including the holding company's Issuer Default Rating (IDR) at 'A+' and all outstanding senior debt and hybrid issues, as well as the Insurer Financial Strength (IFS) ratings of all operating subsidiaries at 'AA'. The Rating Outlook is Stable. The ratings rationale 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 to remain at depressed levels for some time. Fitch views positively 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 in the first nine months of 2012 were CAD1.5 billion, up 4.6% from the same period in 2011. Operating return on equity on a trailing four quarter basis was 16.1%, above the company's long-term target of 15%. 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 CAD1.4 billion at Sept. 30, 2012, or 1.5% of bond investments. At CAD2.6 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 believes 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. At Sept. 30, 2012 GWO's financial leverage was 21% and GAAP earnings-based interest and preferred dividend coverage was approximately 6.5 times (x). 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%; --Sizable goodwill impairment on Canada Life or London 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. Fitch considers an upgrade of GWO's ratings in the near to intermediate term unlikely. 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'; --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 J, 6% 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 'BBB+'; --Series P, 5.4% non-cumulative first preferred shares rated 'BBB+'; --Series Q, 5.0% non-cumulative first preferred shares rated 'BBB+'; --Series R, 4.8% non-cumulative first preferred shares rated 'BBB+'. GWL&A Financial Corp. --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 Lifeco Finance (Delaware) LP --5.691% subordinated debentures due 2067 at 'BBB+'; --7.127% subordinated debentures due 2068 at 'BBB+'. Great-West Life & Annuity Insurance Capital, LP --6.625% deferrable debentures due Nov. 15, 2034 at 'BBB+'. 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'.