Moody’s Investor Services has downgraded the insurance financial strength ratings of Great-West Life Assurance Co. of Canada, its wholly owned Canadian subsidiary, London Life Insurance Co., and its U.S. sister company, Great-West Life & Annuity Insurance Co. respectively, to Aa3 from Aa2.

The credit ratings of other Great-West subsidiaries were also downgraded.

The commercial paper ratings of GWL, GWLA, and London Life were confirmed at Prime-1, as was the Aa3 insurance financial strength rating of GWLA’s New York subsidiary, First Great-West Life & Annuity Insurance Co.

Separately, Moody’s confirmed the insurance financial strength ratings of Canada Life Assurance Co. and its wholly owned U.S subsidiary, Canada Life Assurance Co. of America at Aa3. Canada Life’s subordinated debt rating was also confirmed at A2.

Both sets of rating actions follow the completion by the Great-West group of its acquisition of the Canada Life Financial group for $7.1 billion for a combination of cash, common and preferred stock. The rating actions complete reviews initiated on February 17 for the Great-West companies, and on February 6 for the Canada Life companies.

Commenting on the Great-West rating actions, Moody’s recognizes that the Canada Life acquisition will make the Great-West Life group the leading life insurer in most key product markets in Canada — an important competitive advantage in this highly concentrated but key home market.

However, the rating’s agency notes that financing of the transaction also results in a substantial increase in the group’s consolidated goodwill, financial, and operating leverage, which Moody’s believes significantly diminishes its financial flexibility.

Although GWL management plans to start reducing debt as early as 2003, attaining pre-transation financial leverage levels of 20%-25% will take a number of years and will involve some factors and execution risks outside of the group’s control, Moody’s says.

According to Moody’s, GWL now faces the risks of integrating two major Canadian life insurance groups and their U.S. operations The group also faces the risks of managing Canada Life’s overseas subsidiaries. For these reasons, including a relatively long expected period of above-average consolidated financial leverage and reduced earnings coverage ratios, the outlook for both the Great-West ratings (with the exception of commercial paper ratings) and the Canada Life companies is negative.

Commenting on the strengths of the Great-West companies, Moody’s noted the group’s leading position in the group life & health and individual life insurance markets in Canada, and on its strong niche positions in the group life, health, and pension markets in the U.S.

Mitigating these strengths are the greater volatility and risk of the U.S. and Canadian health insurance markets and GWLA’s acquisition activity in the U.S., as well as a significant exposure to the higher risk (relative to traditional life insurance) reinsurance business through London Life’s London Reinsurance Group subsidiary.

Commenting on the Canada Life rating confirmations, the rating agency noted that Canada Life will benefit in terms of distribution, cost savings, and scale from being part of a larger Canadian life insurance group in the highly competitive domestic market in Canada. The transaction will also bring incremental revenue and earnings diversification to the Great-West group, from its operations in the UK, Ireland, and Europe.