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17 May 2006
MOODY'S ASSIGNS Baa2 RATING TO GREAT-WEST LIFE & ANNUITY INSURANCE CAPITAL, LP II SECURITIES
New York, May 17, 2006 -- Moody's has assigned a Baa2 rating with a stable outlook to Great-West
Life & Annuity Insurance Capital, LP II's (GWLP-II) Fixed/Adjustable
Rate Enhanced Capital Advantaged Subordinated Debentures (the Debentures)
offered in a 144A private placement. The Debentures of GWLP-II
are guaranteed on a junior subordinated basis by GWL&A Financial,
Inc. (GWLAFI; issuer rating at A3, stable outlook),
which is the U.S. holding company of Great-West Life
& Annuity Insurance Company (GWLA; insurance financial strength
at Aa3, stable outlook), the primary U.S. life
insurance subsidiary of the Canadian Great-West Life group of companies.
The total size of the transaction is $300 million.
The GWLP II subordinated debt rating is subject to Moody's review and
approval of all final transaction documentation.
Moody's has also determined that the securities qualify for Basket D treatment
(75% equity benefit/25% debt treatment) under Moody's Hybrid
Criteria. Going forward, Moody's will adjust Great-West
Lifeco's (Lifeco; not rated by Moody's) consolidated GAAP financial
leverage and coverage ratios for analytical purposes to reflect the equity
benefit associated with the securities.
Moody's said that the Basket D treatment is based upon the relative permanence
of the subordinated debentures in the capital structure due to their relatively
long-dated maturity of 40 years. It is also based upon the
covenant related to replacement of the Debentures prior to maturity.
In particular, should GWLP-II call the securities for cash,
permitted beginning ten years from issuance, or redeem the securities
in the event of a change in the transaction's U.S. and/or
Canadian tax treatment, or under a legal defeasance, GWLAFI
must seek to replace the securities with other instruments possessing
equal or greater equity characteristics.
The securities also feature a mandatory deferral upon the trigger of either
of an NAIC RBC ratio test, or a combined net income/shareholders'
equity test, providing GWLP-II cash flow flexibility at a
time of financial distress. Upon triggering either of the two tests,
GWLAFI must issue preferred stock in an amount sufficient to pay accrued
and unpaid interest on the Debentures. If GWLAFI is unable to do
so, Lifeco must contribute common equity to GWLAFI in a like amount,
so that it will be in a position to pay accrued and unpaid interest,
according to the terms of a capital contribution agreement.
Interest payments on the subordinated notes are also optionally deferrable
for up to 20 semi-annual periods, but after 10 consecutive
periods, GWLAFI must either issue preferred stock or obtain a capital
contribution from Lifeco in an amount sufficient to pay the deferred payments.
Moody's noted that the transaction structure is highly complex,
and involves a U.S. and a Canadian intermediate Special
Purpose Vehicle, through which interest and principal payments flow
to the ultimate GWLP II noteholders. However, the rating
of the GWLP-II Debentures is ultimately based on the full and unconditional
guarantee, on a junior subordinated basis, from GWLAFI to
GWLP-II and to the debenture-holders, of the full
and punctual payment of GWLP-II's payment obligations, the
rating agency said. In the event of a GWLP-II default on
the payment of interest or principal, the GWLAFI guarantee can be
activated either by the GWLP-II indenture trustee on behalf of
the debenture-holders, or by the debenture-holders
Commenting on the priority of claim of the GWLAFI junior subordinated
guarantee, Moody's noted that it ranks junior to all other GWLAFI
guarantees, including a junior subordinated guarantee accorded in
2004 by GWLAFI to the notes of another Great-West affiliate.
The GWLAFI junior subordinated guarantee, because of its deep subordination,
confers to the GWLP-II debentures the implied Baa2 preferred stock
rating of GWLAFI, whose long-term issuer rating is A3.
By virtue of this guarantee, the GWLP-II Debentures are junior
to all current and future debt securities of GWLAFI, and will rank
as preferred stock in liquidation, thereby providing a loss-absorption
cushion to securities of higher priority, the rating agency explained.
Commenting on the A3 long-term issuer rating of GWLAFI, Moody's
said that it is based on the established niche position of its primary
life insurance subsidiary, GWLA, in the U.S.
group pension and specialized life and health insurance markets,
its good capital adequacy, high quality investment portfolio,
and solid profit margins. GWLAFI's rating also reflects the leading
position of GWLA's sister company, Great-West Life Assurance
Company (GWL), in most key product markets in Canada, its
strong profitability, and its good asset quality.
Offsetting these strengths are the relatively high level of consolidated
financial and operating leverage and goodwill at Lifeco; the greater
earnings volatility of GWL's reinsurance business, and the companies'
group health insurance business in the U.S. and Canada (including
a recent decline in net case flows at GWLA); the intensely competitive
markets the companies operate in on both sides of the border; and
potential pressures on GWLA's capital formation from debt service coverage
and other needs at Lifeco and sister companies in Canada. Moody's
noted that although consolidated interest coverage may decline slightly
with the new Debentures, it expects Lifeco's consolidated financial
leverage and coverage ratios to remain within its rating expectations.
Great-West Life Assurance Company and its key Canadian and U.S.
subsidiaries, including Great-West Life & Annuity Insurance
Company and its key U.S. subsidiaries, are the primary
operating companies of Great-West Lifeco, Inc.,
headquartered in Winnipeg, Manitoba, Canada. Great-West
Life & Annuity Insurance Capital, LP-II is a Delaware
limited partnership, wholly owned by Great-West Lifeco Inc.
At March 31, 2006, Great-West Lifeco reported consolidated
general and segregated fund assets of approximately Can. $182
billion and consolidated shareholders' equity of almost Can. $10
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to repay punctually senior policyholder claims
and obligations. Long-term issuer ratings are Moody's opinions
of an entity's ability to repay senior financial obligations.
For more information, visit our website at www.moodys.com/insurance.
Life Insurance Group
Moody's Investors Service
VP - Senior Credit Officer
Life Insurance Group
Moody's Investors Service
No Related Data.
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