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

Posted on 15 Mar 2010

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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).

A.M. Best also has assigned a debt rating of "bbb+" to IA's recently issued CAD 100 million 5.90% non-cumulative preferred shares Series F, which were issued under the shelf registration. Additionally, A.M. Best has affirmed the existing debt ratings of IA and Industrial Alliance Capital Trust. The proceeds from the assigned debt rating are to be used for general corporate purposes.

Concurrently, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of "a-" of IA's U.S. life insurance subsidiary, IA American Life Insurance Company (IA American) (Atlanta, GA). The outlook for all ratings is stable. (See below for a detailed listing of the debt ratings.)

The ratings of IA and IAP reflect their favorable risk-adjusted capitalization and continued profitability from various lines of business. Risk-adjusted capital, as measured by the regulatory Minimum Continuing Capital and Surplus Requirements (MCCSR), has benefited in recent years from the issuance of preferred shares and subordinated debt, as well as changes made to the Canadian regulatory capital formula. Overall net income returned to more historical levels in 2009 due to the recovery of equity markets and an improvement in overall economic conditions in Canada, as reflected in lower credit losses incurred. The ratings also recognize IA's continued growth through acquisitions and its ability to successfully integrate these operations into the organization, particularly in its asset management business, with IA Clarington becoming a notable player in this market.

Offsetting these positive factors is A.M. Best's concern with the group's increase in financial leverage in its capital structure, reduced coverage as well as exposure to the equity market in Canada, primarily through its segregated fund and mutual fund operations. A.M. Best notes that IA has continued to report favorable capital levels; however, this has been partially due to increased issuance of debt and preferred shares. Coverage ratios also are lower than historical levels. The group's profitability is exposed to equity market volatility, vis a vis, lower fee income from assets under management and administration, the potential for higher reserve charges and lower sales from its savings and investment products.

The ratings of IA American reflect the support the company will receive from IA, both through capital contributions as well as through a reinsurance agreement. The ratings also acknowledge the experience IA has in the U.S. market through the branch operations of IAP.

Partially offsetting these positive factors are the expected weak operating results due to the statutory strain from new business production, limited brand recognition and lack of scale. In addition, IA American will 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.