A.M. Best Affirms Ratings of Industrial Alliance Insurance and Financial Services, Inc. and Its Subsidiaries

A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a+” of Industrial Alliance Insurance and Financial Services Inc. (IA) (Quebec) [TSX: IAG] and its subsidiary, Industrial Alliance Pacific Insurance and Financial Services Inc. (IAP) (Vancouver, British Columbia). Additionally, A.M. Best has affirmed the existing debt ratings of IA and Industrial Alliance Capital Trust. (See below for a detailed listing of the debt ratings.)

Concurrently, A.M. Best has affirmed the FSR of A- (Excellent) and ICRs of “a-” of IA’s U.S. life insurance subsidiaries, IA American Life Insurance Company, (Atlanta, GA) American-Amicable Life Insurance Company of Texas, Pioneer Security Life Insurance Company, Pioneer American Insurance Company and Occidental Life Insurance Company of North Carolina (these companies are collectively known as the IA American Life Group). The outlook for all ratings is stable. All companies are domiciled in Waco, TX, unless otherwise specified.

The ratings of IA and IAP reflect their stable absolute and risk-adjusted capitalization, overall profitability and growing geographic diversity in the organization’s business. A.M. Best notes that IA has continued to report favorable capital levels, although its capital structure, which includes long-term debt and preferred shares, has recorded elevated financial leverage in recent years. Net income trends have been favorable, although recent results have been impacted by the sustained low interest rate environment and volatile equity markets. The ratings also recognize IA’s continued efforts to diversify its business profile and earnings stream through the IA American Life Group and other acquisitions.

Offsetting these positive rating factors is A.M. Best’s ongoing concern with IA’s continued exposure to equity market and interest rate volatility. The equity market exposure is largely through the organization’s mutual fund and segregated fund lines of business in Canada. This exposure makes the group susceptible to fluctuations in equity market performance, lower fee income from assets under management and administration, lower sales from its savings and investment products and the possibility for higher reserve charges. However, IA successfully implemented a dynamic hedging program for its new segregated fund products, which has performed well. A.M. Best also remains concerned about the group’s increased financial leverage in its capital structure and reduced coverage ratios, which remain lower than historical levels. Nevertheless, both measures are within the guidelines for the organization’s current rating level.

The ratings of the IA American Life Group recognize the support it has received from IA through capital contributions via a surplus note, several capital infusions and synergies from home office management of actuarial reserves and its investment portfolio. The ratings also acknowledge the experience IA has gained in the U.S. market through the acquisition of the American Amicable operations during 2010.

Partially offsetting these positive rating factors are IA American Life Group’s continued weak operating results due to the statutory strain from new business production, very high level of mortgage loans relative to capital, leverage in its capital structure and challenges over the long term to grow business in its core individual annuity and life markets due to limited scale. The IA American Life Group will continue to face challenges to gain market share in a highly competitive life and annuity insurance market in the United States, where it faces larger, more established players. While significant overall earnings have not yet materialized , A.M. Best expects that going forward, premium growth during 2011 and the reallocation of the investment portfolio will improve its operating results.

A.M. Best believes IA to be well positioned at its current rating level for the near to medium term. Key factors that could result in negative rating actions include a significant and sustained decline in IA’s risk-adjusted capitalization; investment losses or operating performance that does not meet A.M. Best’s expectations over a sustained period; or financial leverage and/or interest coverage that falls short of the guidelines for the current rating level.

The following debt rating has been assigned:

Industrial Alliance Insurance and Financial Services Inc.—

-- “a-” on CAD 250 million 4.75% subordinated debentures, due 2016

The following debt ratings have been affirmed:

Industrial Alliance Insurance and Financial Services Inc.—

-- “a-” on CAD 150 million 5.13% subordinated debentures, due 2019

-- “a-” on CAD 100 million 8.25% subordinated debentures, due 2019

-- “bbb+” on CAD 125 million 4.60% non-cumulative perpetual preferred shares, Series B

-- “bbb+” on CAD 100 million 6.20% non-cumulative perpetual preferred shares, Series C

-- “bbb+” on CAD 100 million 6.00% non-cumulative Class A preferred shares, Series E

-- “bbb+” on CAD 100 million 5.90% non-cumulative perpetual preferred shares, Series F

Industrial Alliance Capital Trust---

-- “bbb+” on CAD 150 million 5.714% trust securities Series A, due 2053

The following indicative ratings on securities available under the shelf registration have been affirmed:

Industrial Alliance Insurance and Financial Services Inc.—

-- “a” on senior unsecured debt

-- “a-” on subordinated debt

-- “bbb+” on preferred shares

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Rating Members of Insurance Groups”; “Understanding BCAR for Life/Health Insurers”; “Equity Credit for Hybrid Securities”; and “A.M. Best’s Ratings & the Treatment of Debt.” Best’s Credit Rating Methodology can be found at http://www.ambest.com/ratings/methodology.