DBRS Morningstar Confirms Ratings on The Equitable Life Insurance Company of Canada at A (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Financial Strength Rating and Issuer Rating of The Equitable Life Insurance Company of Canada (Equitable Life or the Company) at A (high). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The ratings and Stable trends reflect Equitable Life’s established presence in the Canadian life insurance market where it offers individual and group products. The Company’s focus on participating insurance allows the transfer of much of its risk exposures to policyholders. Equitable Life has demonstrated consistently strong profitability and capital levels even through financial market volatility. The ratings and trends also consider Equitable Life’s distribution strategy, which is heavily reliant on the independent advisor channel where some of the leading distributors are owned by other insurers. So far, the Company has been successful by being the independent alternative of choice for these competitor-owned distributors. Equitable holds a sufficient amount of cash and a large portfolio of highly rated marketable securities. The Company’s portfolio also includes a sizable portion of equity, real estate, private placements, and commercial mortgages, which can be riskier or less liquid, although much of the performance of these assets is passed through to policyholders.

CREDIT RATING DRIVERS
The ratings are well placed in the current rating category. However, over the longer term, the ratings would be upgraded if the Company were to significantly strengthen its market position while maintaining strong profitability metrics and appropriate capitalization buffers.

Conversely, the ratings would be downgraded if the Company experienced a material deterioration in its profitability, capitalization, and the strength of its distribution channels.

CREDIT RATING RATIONALE
Equitable Life operates mainly in the Canadian life insurance middle-market where it is especially strong in the participating life insurance line because of its mutual status, despite facing much larger competitors. The Company’s smaller size makes it more flexible in terms of responding to changing market conditions and adjusting its product offering, but it does not benefit from the same brand presence and scale as larger insurers, which can be challenging when making investments in technology or distribution. The Company continues to focus on growing profitably and organically while strengthening its product offering, competitiveness, and digital capabilities.

Equitable Life’s product portfolio is heavily focused on participating individual life insurance, which allows the Company to share some of the risks with policyholders. While the Company has higher-than-average equity and real estate investments, it mainly backs participating and unit-linked policies where the investment performance is passed through to policyholders, which limits the risk to Equitable Life.

Equitable Life has experienced consistent growth in premiums and deposits at 12.1% over the past five years, more than twice the growth rate of the Canadian life insurance industry. DBRS Morningstar expects the Company to continue to grow while remaining profitable, considering its conservative underwriting practices and track record of consistent profitable growth in earnings. Indeed, Equitable Life has consistently generated good return on equity (12% in 2022 with a three-year weighted average of 14.2%), which are above those of its life insurance peers.

DBRS Morningstar views Equitable Life’s liquidity position as strong/good. The Company has increased its investments in less liquid securities but continues to hold a large amount of cash, government bonds, and other marketable securities in its portfolio. Equitable Life maintains a stable claims profile with an adequate reinsurance coverage and has a liquidity risk management framework that considers its substantial cashable long-term insurance liabilities.

Equitable Life’s strong capitalization reflects its lack of financial leverage and strong regulatory solvency ratio of 169% at Q1 2023, which was positively affected by the transition to IFRS 17. Equitable Life’s solvency ratio is significantly higher than the regulatory target and provides a material buffer to absorb losses. The strong Life Insurance Capital Adequacy Test (LICAT) ratio is driven by good organic capital generation because of the Company’s strong profitability and prudent policyholder dividend policy. The focus on participating insurance also benefits the LICAT ratio as it has lower capital requirements than similar nonparticipating products.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784.

The Grid Summary Grades for Equitable Life are as follows: Franchise Strength—Good/Moderate; Risk Profile—Good; Earnings Ability—Strong/Good; Liquidity—Strong/Good; Capitalization—Strong.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 14, 2023; https://www.dbrsmorningstar.com/research/417109). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023; https://www.dbrsmorningstar.com/research/416784) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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