fitch affirms great-west lifeco's ratings following irish life acquisition announcement
Feb 19 - 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. Today's action follows the announcement that GWO will be acquiring Irish Life Group Limited (Irish Life) for EUR1.3 billion. The transaction is expected to close in the third quarter of 2013 subject to customary regulatory approvals. KEY RATING DRIVERS Fitch's affirmation reflects its belief that GWO's capitalization and leverage will not be materially affected by the acquisition; the integration risk derived from the acquisition will be reasonably well managed; and that Irish Life provides strategic benefits for GWO. Fitch anticipates that GWO will use CAD1.25 billion of new common equity, euro-denominated senior debt and internal cash resources to finance the proposed acquisition. Fitch believes that GWO's pro forma financial leverage increase of roughly 1.5 points is still within an acceptable level for GWO's current rating category. Fitch expects that the Irish Life acquisition will add to GWO's goodwill, which totaled CAD5.4 billion at year-end 2011. Fitch believes that GWO's acquisition of Irish Life will provide the company with critical scale in the Irish market as well as operational synergies and expense savings. GWO's subsidiary, Canada Life (Ireland) Limited, has operated in Ireland since 1903 where it currently is the seventh largest life insurer with a 5% market share. The acquisition will move GWO to the top position in Ireland with a market share greater than 30%. The proposed transaction 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 views Irish Life's business model as low risk. Over 80% of Irish Life's insurance liabilities are unit-linked pensions and savings products, where investment risk is borne by the policyholders. Irish Life is well-capitalized with a local regulatory solvency ratio of 184% at June 30, 2012, in excess of the Central Bank of Ireland's capital requirement of 150%. Fitch expects that GWO will maintain Irish Life's capitalization at or above current levels. Following the Irish Life acquisition, GWO's Eurozone exposure within its general account investment portfolio increases from CAD3.6 billion to CAD5.2 billion. Fitch believes that over time GWO will reduce Irish Life's holdings of European sovereign bonds and invest the proceeds in high quality corporate securities. Fitch believes GWO has mitigated a portion of the currency risk associated with this transaction. Interest expense on the new Euro-denominated bond will net against the Euro-denominated income stream from Irish life resulting in lower earnings exposure to foreign exchange translation. Additionally GWO will use forward contracts to hedge a portion of foreign exchange risk. RATING SENSITIVITIES 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. --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% 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'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Insurance Rating Methodology', dated Jan. 11, 2013. Applicable Criteria and Related Research: Insurance Rating Methodology - Amended
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