A.M. Best Co. said it has affirmed the financial strength rating of A (Excellent) and issuer credit rating (ICR) of "a" of The Empire Life Insurance Company (Empire Life) (Kingston, Ontario, Canada).
In a release, the insurance ratings company said, concurrently, it has affirmed the debt rating of "bbb+" on the CAD 200 million 6.73 percent subordinated unsecured fixed/floating debentures due May 20, 2019 of Empire Life. The outlook for all ratings is stable.
The ratings affirmation reflects Empire Life's favorable risk- adjusted and absolute capital position. The high level of regulatory capital has enabled Empire Life to limit its reliance on reinsurance, which has resulted in more short-term volatility in year-over-year earnings results but should translate to higher levels of future profitability. A.M. Best believes that Empire Life's leverage ratios are within the range that supports its current ratings.
Offsetting rating factors include Empire Life's exposure to equity market risk in the general account and through its segregated fund products, including those with guaranteed minimum withdrawal benefits. A.M. Best notes that Empire Life currently does not hedge the living or death benefits on its segregated fund products, which exposes it to potentially greater volatility in its earnings as well as higher capital requirements. However, the overall net amount at risk is relatively low at present, but it could increase as the company expands its segregated fund sales in Canada or should the equity markets experience ongoing volatility. A.M. Best believes that this level of risk is manageable and is monitored carefully through Empire Life's enterprise risk management program. Like other life insurers in Canada, Empire Life's earnings also have been negatively impacted by the continued low interest rate environment.
Empire Life's parent, E-L Financial Corp. Limited (E-L Financial), also has high exposure to equity market performance. E- L Financial's investment philosophy historically has been focused on long-term capital appreciation, which includes significant exposure to equities. However, E-L Financial continues to support the long- term growth objectives of Empire Life.
A.M. Best notes that Empire Life will continue to face challenges in expanding its operations in its core business lines due to the competition from larger Canadian life insurance companies that have the scale to make the significant technology investments required to compete effectively in group insurance. Recently, Empire Life launched a new mutual fund subsidiary, Empire Life Investments, which should help expand its wealth management footprint and add diversity to its revenue stream through fee income.
The ratings of Empire Life remain well positioned for the near to medium term. Key factors that could result in negative rating actions include deterioration in the financial strength of its ultimate parent, E-L Financial Corp. Limited, a significant or sustained decline in its risk-adjusted capitalization or an operating performance that does not meet A.M. Best's expectations over a sustained period.
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