In addition, A.M. Best has downgraded the financial strength ratings to A (Excellent) from A+ (Superior) of GWL&A's major HMO subsidiary companies. These ratings also have been removed from under review.
These rating actions follow Lifeco's completed CAD7.3 billion acquisition of all outstanding common shares of Canada Life Financial Corporation for CAD44.50 for a combination of cash, common shares and preferred shares. The rating downgrades reflect a number of factors, including heightened leverage, significant goodwill associated with the transaction and integration challenges associated with an organization the size of Canada Life, which has no certainty that planned cost savings will be fully realized. Moreover, Canada Life has a presence in a number of markets outside of North America, where synergies are either minimal or non-existent. Although these markets offer Great-West greater geographic diversification, they also present formidable challenges to grow profitably growth in areas where Great-West has minimal experience. Furthermore, Canada Life has recently made acquisitions in Europe (U.K. group protection business from Royal and Sun Alliance and German operations from Prudential plc), thus adding more complexity to integration activities.
While the transaction is being financed principally through issuance of common stock and cash, the issuance of additional preferred shares and debentures and term financing has increased overall leverage, lowered coverage ratios and reduced Lifeco's financial flexibility beyond what A.M. Best considers appropriate for its highest financial strength rating level. However, Lifeco has a very strong liquidity posture along with solid coverage ratios to service its debt obligations. Moreover, Lifeco's financial performance has been historically superior, reflecting its low cost structure, significant scale advantages in core business lines and strong investment management capabilities. A.M. Best expects the acquisition to be accretive to earnings and fully expects Lifeco to continue to report strong operating results and generate superior returns.
The Canada Life acquisition will create the largest player in the Canadian market with dominant business positions in all major lines. The combined distribution system along with a multi-brand platform should serve as a major strength and competitive advantage.
In the United States, GWL&A is a significant player in the small- to medium-sized employee benefits market with considerable strength in the public and non-profit financial services sector. Its low cost administrative services platform and service capabilities enableexpansion in its client base of self-funded plans, providing a stable source of earnings for Lifeco. GWL&A has operations in all major areas where Canada Life's U.S. subsidiaries are active, presenting additional opportunities for cost savings and profitability improvements.
A.M. Best has downgraded the financial strength rating to A (Excellent) from A+ (Sup