A.M. Best Affirms Ratings of Industrial Alliance Insurance and Financial Services Inc.; Revises Outlook to Stable.

OLDWICK, N.J. -- 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 affirmed all debt ratings of IA. The outlook for these ratings has been revised to stable from positive.

Concurrently, A.M. Best has assigned an FSR of A- (Excellent) and an ICR of "a-" to IA's other subsidiary, IA American Life Insurance Company (IA American) (Atlanta, GA). The outlook assigned to both ratings is stable. (See below for a detailed listing of the debt ratings.)

The ratings of IA and IAP reflect their profitability from a somewhat diversified earnings stream and favorable risk-adjusted capitalization. Their risk-adjusted capital, as measured by the regulatory MCCSR, has benefited from the issuance of preferred shares and subordinated debt, as well as changes made to the Canadian regulatory capital formula. The ratings also reflect IA's continued growth through acquisitions and its ability to successfully integrate these operations into the organization.

The revised outlook recognizes A.M. Best's concern with the group's exposure to the equity market in Canada, primarily through its segregated fund and mutual fund operations. A.M. Best expects that continued negative and volatile equity markets will have a dampening impact on the group's profitability due to lower fee income from assets under management and administration, potential for higher reserve charges as well as lower sales from its savings and investment products due to lower consumer confidence in the markets.

In recent years, IA has grown its asset management business, with IA Clarington becoming a notable player in this market. IA's fourth quarter loss of CAD 110 million reflects the drop in the Canadian equity market, lower interest rates, credit impairments and strengthening of policyholder reserves for future policy benefits.

The ratings assigned to 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 statutory strain from new business, lack of scale and limited brand recognition. IA American will face challenges to gain market share in a highly competitive life and annuity insurance market in the United States, where it will face larger, more established players.

The following debt ratings have been affirmed:

Industrial Alliance Insurance and Financial Services Inc.--

-- "bbb+" on CAD 125 million 4.60% non-cumulative perpetual preferred shares Series B

-- "bbb+" on CAD 100 million 6.20% non-cumulative perpetual preferred shares Series C

-- "a-" on CAD 150 million 5.13% subordinated debentures, due 2019

Industrial Alliance Capital Trust---

-- "bbb+" on CAD 150 million 5.714% trust securities Series A, due 2053

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

Industrial Alliance Insurance and Financial Services Inc.--

-- "a" on senior unsecured debt

-- "a-" on subordinated debt

-- "bbb+" on preferred shares

For Best's Debt Ratings, all other Best's Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors, which may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.