Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of Great-West Lifeco Inc.'s (GWO) operating subsidiaries at 'AA' (Very Strong), as well as GWO's Issuer Default Rating at 'A+' and senior notes at 'A'.

The Rating Outlook was revised to Stable from Negative.

Key Rating Drivers

The revision of the Outlook to Stable from Negative reflects GWO's strong financial results while integrating the acquired Massachusetts Mutual Life Insurance Company's Retirement Services business and Prudential Financial, Inc.'s full-service retirement business. Fitch also believes GWO will continue to reduce its financial leverage in line with rating expectations. Favorably, the acquired businesses are synergistic to the company's Empower Retirement business and should be accretive to earnings over time, primarily though expense synergies, a portion of which have been realized.

Fitch believes the current economic headwinds will remain manageable for GWO due to its conservative investment portfolio and strong diversification across product lines. GWO's ratings also continue to reflect its very strong capitalization, strong competitive position in the Canadian market, stable core insurance earnings and conservative liability profile that is not heavily exposed to equity markets. The ratings also continue to reflect the underperformance of GWO's asset manager, Putnam Investments, which remains subscale.

Fitch views GWO's business profile as very strong, which reflects its low-risk product offerings and diversification across liabilities and geographies. In addition to its market leading positions in Canada, GWO is a leader in the U.S. retirement market and has a meaningful presence across Europe and in the reinsurance market. Fitch views GWO's diversification as promoting earnings stability. Fitch considers Power Financial Corporation's majority stake in GWO as a slight positive for the rating, given that it leads to a greater focus on stable long-term returns relative to peers.

GWO's capital position remained very strong at 1H22, with a Life Insurance Capital Adequacy Test ratio of 117% down from of 124% at 2021 YE, driven primarily by rising interest rates, but remains within its internal target range of 110%-120%. Financial leverage increased to 24.2% as of 1H22 from 23% at YE 2021, driven by the funding of Prudential acquisition. Financial leverage exceeds expectations for the rating level but is expected to trend downwards over the coming periods. Leverage declined slightly in 2021 following GWO's repayment of $500 million in short-term debt.

GWO's fixed-charge coverage remained stable at 9x in 1H22 which is in-line with 2021YE, but is below expectations for the rating level. Fixed-charge coverage is expected to remain stable in 2022, despite increased financing costs and integration of the acquired business. Financial flexibility is viewed as very strong, which considers the high fungibility of cash flows, as well as GWO's diversified cash flow sources and mix of debt instruments and tenors.

GWO's earnings are generally stable and benefit from its comprehensive and diversified product portfolio. The company had 15% ROE in 1H22 flat to 2021 and increased from 13% in 2020, and is in-line with its long-term target of a 15% ROE. This is a result of the company's Canadian market being mostly flat, offset by growth in the U.S. and the European U.K and Ireland segments. Additionally, GWO's Capital & Risk Solutions saw continued growth in the Capital & Risk Solutions segment, GWO saw strong business growth, driven by longevity agreements, and the coronavirus impact has been muted due to its diversified risk exposure. The Mass Mutual and Prudential Financial Inc acquisitions further increases Empower's scale and could result in the U.S. becoming a more meaningful earnings contributor for GWO.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A financial leverage ratio at or below 15%;

Fixed-charge coverage maintained above 10x;

Successful integration of the acquired retirement plan businesses in line with pricing expectations.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Failure to reduce financial leverage toward historical levels of near 20%;

Material adverse deviation from management's expectations on the performance or integration of the acquired retirement plan businesses;

A sustained drop in the company's risk-adjusted capital position;

Acquisitions outside GWO's historical risk preferences or expertise, or any other material changes in the company's risk appetite;

A decline in fixed-charge coverage to less than 7.0x;

Reduction in Power Financial Corporation's ownership stake in GWO.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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