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

A.M. Best has upgraded the financial strength rating (FSR) to A+ (Superior) from A (Excellent), the issuer credit rating (ICR) to “aa-” from “a+” and the existing debt ratings of Industrial Alliance Insurance and Financial Services Inc. (IA) (Quebec) [TSX: IAG]. Concurrently, A.M. Best has upgraded the FSR to A (Excellent) from A- (Excellent) and the ICRs to “a” from “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). Additionally, A.M. Best has upgraded the ICR to “a+” from “a” and affirmed the FSR of A (Excellent) of Industrial Alliance Pacific General Insurance Corporation (IAPG) (Vancouver, Canada). All companies are domiciled in Waco, TX, unless otherwise specified. The outlook for all ratings is stable. (See below for a detailed listing of the debt ratings.)

The rating upgrades for IA reflect its strong capital growth, consistent profitability, reduced exposure to interest-sensitive businesses and the growing product diversity in its business. A.M. Best notes that IA has continued to report favorable capital levels and has continued to record more manageable financial leverage. Net income trends have been favorable, although results in recent years have been volatile due to the Canadian accounting/regulatory regime being highly sensitive to the sustained low interest rate environment and volatile equity markets. However, IA has successfully reduced its individual life new business strain ratio in its efforts to prudently manage earnings volatility. The ratings also recognize IA’s continued efforts to diversify its business profile and earnings stream in Canada (via its 2013 acquisition of Jovian Capital Corporation, thus providing an enhanced private wealth management platform) and through the IA American Life Group in the United States.

Partially offsetting these positive rating factors is IA’s exposure, albeit somewhat reduced, 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 IA 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 of higher reserve charges. However, IA’s dynamic hedging program for its new segregated fund products has performed well. A.M. Best views positively IA’s 2013 common equity offering and corresponding redemptions of its debt and preferred shares, which have improved the group’s financial leverage.

The ratings for the IA American Life Group recognize the support it has received from IA through capital contributions via surplus notes, several capital infusions and synergies from home office management of actuarial reserves and its investment portfolio. The ratings also acknowledge the footprint IA has created in the U.S. market through the acquisition of the American Amicable operation in 2010. A.M. Best also views positively IA’s strategic divestiture of its U.S. annuity business via reinsurance transactions, which provided capital relief and positions the company to better develop its life insurance business.

The IA American Life Group will continue to face challenges to gain market share in a highly competitive life 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 premium growth and the continued reallocation of the investment portfolio will improve future operating results.

The ratings and outlook reflect IAPG’s adequate capitalization, strong operating performance, prominent market profile and the implicit and explicit support it receives from its parent company, IA. Partially offsetting these positive rating factors are IAPG’s recent non-operationally based capital fluctuations, changing product mix, the competitive market conditions in Canada and upward pressure on operating expenses.

A.M. Best believes the potential for positive rating actions on IA is unlikely in 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 A.M. Best’s guidelines for the organization’s current rating level.

The following debt ratings have been upgraded:

Industrial Alliance Insurance and Financial Services Inc.—
-- to “a” from “a-” on CAD 250 million 4.75% subordinated debentures, due 2021
-- to “a” from “a-” on CAD 150 million 5.13% subordinated debentures, due 2019
-- to “a-” from “bbb+” on CAD 125 million 4.60% non-cumulative perpetual preferred shares, Series B
-- to “a-” from “bbb+” on CAD 100 million 6.00% non-cumulative Class A preferred shares, Series E
-- to “a-” from “bbb+” on CAD 100 million 5.90% non-cumulative perpetual preferred shares, Series F
-- to “a-” from “bbb+” on CAD 250 million 4.30% non-cumulative perpetual preferred shares, Series G

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

Industrial Alliance Insurance and Financial Services Inc.—
-- to “a+” from “a” on senior unsecured debt
-- to “a” from “a-” on subordinated debt
-- to “a-” from “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. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

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