PrefBlog

Standard & Poor’s has announced:

• Industrial Alliance Insurance and Financial Services Inc. has announced that it will issue C$100 million in noncumulative preferred shares.
• We are revising our outlook on the company to negative and affirming all ratings.
• We could lower the rating in the next 18-24 months if leverage is not reduced to less than 35%, and debt service coverage does not improve to
  more than 5x.

NEW YORK (Standard & Poor’s) June 19, 2012–Standard & Poor’s Ratings Services said today that it affirmed its ‘A-‘ debt rating on Industrial Alliance Insurance and Financial Services Inc.’s. (Industrial Alliance) non-cumulative five-year rate reset Class A preferred share Series G after its C$100 million add on. The series does not have a fixed maturity date. At the same time, we have revised our outlook on the counterparty credit and financial strength ratings to negative from stable.

Although the issuance of these preferred shares strengthens the company’s capital base, it has also marginally weakened certain leverage and fixed-charge coverage metrics to levels marginally below those appropriate for the rating. The company’s announcement to issue C$100 million non-cumulative preferred shares follows the issuance of C$150 million of the same series of securities that closed on June 1, 2012.

Although we did not change our outlook on Industrial Alliance after the recent preferred share issuance, the company’s decision to issue an additional C$100 million of the same securities has resulted in a marginal weakening of certain pro forma financial metrics. Specifically, we expect similarly rated companies to maintain leverage (including debt, hybrids, and preferred shares) of less than 35% and debt service coverage of at least 5x. Although Industrial Alliance maintains a strong financial profile, the recent preferred share issues have marginally weakened these metrics on a pro forma basis, resulting
in the negative outlook.

The capital raise reflects the company’s exposure to the current low interest rate environment. The bulk of this exposure is from the company’s relatively large exposure to long-duration individual life insurance products and the fair-value treatment that these liabilities receive under Canadian International Financial Reporting Standards and the Canadian regulatory capital rules. Although the company has a number of alternative means available to manage its Canadian regulatory capital adequacy position, it is choosing to supplement this with an additional preferred share issue to increase and optimize its options. Alternative options would include managing down new business strain, de-risking and repricing products to reduce capital strain, reinsuring on-balance-sheet mortality risk, or following the minimum guidelines for the ultimate reinvestment rate rather than accelerating the implementation of this by one year.

The outlook is negative. We could downgrade the company during the next 18-24 months if it does not reduce leverage to less than 35%, and improve its debt-service coverage to more than 5x. Alternatively, if the company were able to achieve these financial metrics, we would return the outlook to stable.

The reopening of IAG.PR.G has been discussed on PrefBlog. This news follows the DBRS announcement that the preferred shares and sub-debt of IAG are on Review-Negative.

IAG has the following preferred shares outstanding: IAG.PR.A, IAG.PR.E and IAG.PR.F (DeemedRetractible) and IAG.PR.C & IAG.PR.G (FixedReset). All are tracked by HIMIPref™ and all are assigned to the indicated indices.

This entry was posted on Thursday, June 21st, 2012 at 10:11 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.