Fitch Affirms Great-West Lifeco; Rates Preferred Stock

CHICAGO--()--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'. A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.

At the same time, Fitch has also assigned a 'BBB+' rating to previously issued C$200 million series S, 5.25% non-cumulative first preferred shares. Proceeds from the issuance were used for general corporate purposes and to augment GWO's current liquidity position.

KEY RATING DRIVERS

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, which exclude the impact of Irish Life related restructuring and acquisition costs and certain litigation provisions, totaled CAD592 million in the first three months of 2014, up 14% from the same period in 2013. Adjusted operating return on equity on a trailing four quarter basis was 15.2%, just above the company's long-term target of 15%.

Despite strong operating results from GWO's insurance operations, fixed charge coverage of 7.7x thus far in 2014 remains below historic levels as well as expectations for the current rating category. This is due to the ongoing underperformance of Putnam. Fitch does not expect Putnam to meaningfully contribute to GWO's earnings in the near to intermediate term. Fitch believes GWO will have to continue to rely on holding company cash and earnings from the insurance subsidiaries to service Putnam's approximately CAD100 million of annual interest expense.

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 CAD1.7 billion at March 31, 2014, or 1.7% of bond investments. At CAD2.9 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 views GWO's actuarial liabilities as 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.

Fitch believes that GWO's acquisition of Irish Life Assurance plc (Irish Life) has been well managed and has provided the company with critical scale in the Irish market as well as operational synergies and expense savings. The acquisition has moved GWO to the top position in Ireland with a market share greater than 30%. Irish Life contributed CAD52 million to GWO's net earnings in the first quarter of 2014. Execution risk has been mitigated in part by GWO's existing knowledge of the Irish market and by GWO's track record of supplementing growth through acquisitions.

Irish Life's ratings reflect its strong standalone capitalization (regulatory solvency ratio of 193% at March 31, 2014), comparatively low-risk business (the majority of Irish Life's insurance net liabilities are unit-linked, with investment risk borne by policyholders) and strong market position. The ratings continue to reflect the importance of the Irish economy (Ireland; long-term IDR 'BBB+'/Stable Outlook) to Irish Life's business and remain subject to sovereign constraint on a standalone basis as 99% of its business is domestic. In view of the weak operating environment in Ireland, Fitch expects the company's earnings to remain under pressure for several years.

Fitch considers Irish Life to be 'important' to GWO. This is due to its relatively small size compared with the group as a whole, its different branding and newness to the group. GWO's ownership of Irish Life results in a one-notch uplift in Irish Life's IFS rating to 'A' from its stand-alone assessment of 'A-'.

RATING SENSITIVITIES

Fitch considers an upgrade of GWO's ratings in the near to intermediate term unlikely.

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.

Key rating triggers for Irish Life's ratings that could lead to an upgrade include:

--An upgrade in Ireland's sovereign rating;

--A change in Fitch's view of Irish Life's strategic importance to GWO.

Key rating triggers for Irish Life's ratings that could lead to a downgrade include:

--The macro-economic environment having a greater than expected adverse impact on policyholder surrender rates, new business or profitability. These threats could include the impact of the Irish government's austerity package, high unemployment, reduced consumer confidence and lower than expected GDP triggering higher policyholder surrender rates and lower sales volumes.

Fitch has assigned the following rating:

--Series S, 5.25% non-cumulative first preferred shares at 'BBB+'.

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';

--2.5% Euro bond debt due April 18, 2023 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 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 at 'BBB+';

--Series P, 5.4% non-cumulative first preferred shares at 'BBB+';

--Series Q, 5.0% non-cumulative first preferred shares at 'BBB+';

--Series R, 4.8% non-cumulative first preferred shares at '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'.

Irish Life Assurance plc

--IFS at 'A';

--Long-term IDR at 'A-';

--5.25% subordinated debt at 'BBB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology', dated Nov. 13, 2013.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840764

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Contacts

Fitch Ratings
Primary Analyst
Tana M. Higman (GWO), +1-312-368-3122
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Ralf Ehrhardt (Irish Life), +44 20 3530 1551
Associate Director
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
or
Secondary Analyst
R. Andrew Davidson, CFA (GWO), +1-312-368-3144
or
Senior Director
Clara Hughes (Irish Life), +44 20 3530 1249
Senior Director
or
Committee Chairperson
James B. Auden, +1-312-368-3146
Managing Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Tana M. Higman (GWO), +1-312-368-3122
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Ralf Ehrhardt (Irish Life), +44 20 3530 1551
Associate Director
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
or
Secondary Analyst
R. Andrew Davidson, CFA (GWO), +1-312-368-3144
or
Senior Director
Clara Hughes (Irish Life), +44 20 3530 1249
Senior Director
or
Committee Chairperson
James B. Auden, +1-312-368-3146
Managing Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com