PrefBlog

I don’t usually highly rating agency confirmations, but this press release, DBRS Confirms Ratings on Industrial Alliance at “A”, Pfd-2 (high) was sufficiently meaty to warrant wider exposure.

DBRS has today confirmed its ratings on Industrial Alliance Insurance and Financial Services Inc. (IAG or the Company) and its related entities. All ratings have a Stable trend. The ratings reflect the Company’s consistently profitable operations and its sustainable and expanding market presence in the Canadian life insurance and wealth management industries, where it serves the financial planning and protection needs of individuals and groups. The Company’s market position is complemented by a conservative risk culture which has limited IAG’s earnings exposure to equity and credit market volatility through the recent credit/economic crisis.

Capitalization has become more aggressive, in line with that of the industry, with a total debt ratio of 32% at the end of 2009, increasing to 33.2% pro forma a $200 million preferred and common share issue in mid-February. Within the last two years, Canadian life insurance companies have been increasing their financial leverage to better maximize return on equity, while also optimizing regulatory capital in a low interest rate environment. The Company’s adjusted debt ratio, which gives some equity treatment to preferred shares, was 22.6% at year-end, falling to 22% following the February issues, which is within DBRS’s tolerance for the current credit rating. However, the Company’s use of hybrid capital instruments such as preferred shares has increased over the past two years, significantly reducing its fixed-charge coverage ratio, which has fallen from double digits in the pre-2008 period to 6.0 times in 2009, notwithstanding the return to normal profitability. The Company’s regulatory capital ratio, at 208% at the end of 2009, is currently above the top end of the Company’s targeted range of 175% to 200% and will rise further to 226%, pro forma the recent preferred and common share issues. The recent share issues have substantially improved IAG’s financial flexibility should it be required to augment its required capital or to fund another in a long line of acquisitions.

Given the existing conservative actuarial reserves and recent favourable experience in terms of interest rate and equity markets, there were no major net reserve adjustments required in 2009 as a result of changing actuarial assumptions or adverse experience. However, because the Company is more focused on the Canadian individual life insurance market than its peers, including its relatively strong market presence in the universal life market, it remains more exposed to the adverse impact of lower interest rates than its more diversified peers. Similarly, the Company retains a larger on-balance-sheet equity exposure to hedge the long-term liabilities under its life insurance products. A severe economic slowdown resulting in prolonged lower interest rates and equity markets would more seriously affect the Company than its peers, all other things being equal. To mitigate some of this risk, the Company remains very conservative in setting its policy reserves, including a recent reduction in the ultimate reinvestment rate assumption to 20 basis points below the Canadian Institute of Actuaries prescribed standard and relatively high reserves against equity market deterioration. In addition, the Company retains a higher proportion of mortality risk than its peers, rather than reinsuring it, since the long-term improvement in mortality ultimately accrues to the Company’s benefit, given its relatively large block of individual insurance.

The Company’s steady diversification of revenues and income across both product lines and geographical markets, combined with a conservative risk culture, has helped it to return to attractive levels of profitability before many of its larger competitors.

IAG has two Straight issues outstanding, IAG.PR.A and IAG.PR.E; and one FixedReset, IAG.PR.C. They are currently marketting a new issue of 5.90% Straights.

This entry was posted on Friday, February 19th, 2010 at 6:32 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.