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New York-based Standard & Poor’s Ratings Services (S&P) has downgraded Sagicor Life to ‘BB-’ from ‘BB+’ which is two notches deeper into “non-investment grade.” “On December 19, 2014, we lowered the sovereign rating on Barbados to ‘B’ from ‘BB-.’ As a result, we are lowering the ratings on Barbados-based Sagicor to ‘BB-’ from ‘BB+.’ At the same time, we lowered our rating on Sagicor Finance Ltd’s US$150 million, 10-year senior unsecured notes to ‘B' from ‘BB-’.
“Although Sagicor passes our default stress scenario for Barbados, we cap the ratings at two notches above the country of domicile due to our view that Sagicor has high country risk sensitivity,” S&P said. “The ratings continue to be supported by the company’s ‘moderately strong’ capitalization, improving operating performance, and ‘adequate’ competitive position,” S&P said. “The negative outlook reflects that of Barbados, because, in our view, ratings on life insurers are capped at two notches above the sovereign rating of the country of domicile considering our view of the critical role of regulations and funding for the insurer and provided that it passes our sovereign default stress test.”
The rating action took place on December 30. “The outlook is negative,” said two Mexico-based S&P analysts, Jose M Perez-Gorozpe and Alfredo E Calvo. “In our view, Sagicor faces ‘moderate risk’ in terms of industry and country risk as the company mainly operates through its subsidiaries: Sagicor Life (representing 41.5 per cent of the group’s gross written premiums as of September 30, 2014) serving Barbados, Belize, the Eastern Caribbean, the Dutch Antilles, Panama, and T&T; Sagicor Life Jamaica (representing 28.8 per cent, as of the same date) operates in Jamaica and the Cayman Islands; and Sagicor USA Inc, which operates in the US and represents 29.7 per cent of gross written premiums. The latter somewhat mitigates the exposure to high-risk Caribbean countries,” S&P said.
S&P said its insurance industry country risk assessment (IICRA) on Sagicor is based on its weighted assessment for these countries. It reflects the wide range of exposure, from the US’ “low risk” to Jamaica’s “extremely high risk,” the analysts said. “With the exception of T&T, most countries in the Caribbean represent an average estimated IICRA of ‘high risk,’ mainly due to low income levels, which limit insurance product penetration. We also view these countries’ institutional frameworks as weak,” they added.
S&P said Sagicor’s “adequate” competitive position is supported by its strong presence in the Caribbean and a well-known brand across that region. The company also has sound market positions with leading shares in most of the markets it participates in, S&P said. “Sagicor’s operating performance is improving after the divestment of Sagicor at Lloyds division, and we believe this trend will continue, despite the problems of some of the countries where the company has an important share of its business (Jamaica 28.8 per cent and Barbados 13.2 per cent of gross written premiums as of September 30, 2014). However, the company’s historic operating performance remains below that of its international peers, which somewhat limits its competitive position. In addition, most of the markets where Sagicor has presence are small, which also limits the company’s competitive position when compared with other international peers,” S&P said. “We expect the company will maintain a sound market position in the Caribbean and that it will continue to expand its presence in T&T and the US. We also consider that the company will maintain its focus on its life business segment. Considering these factors, we expect the company’s operating performance will continue to improve over the next two years.”
Founded in 1840, Sagicor operates in 21 countries but most of its business comes from Barbados, Jamaica, T&T, and the US. As of September 30, 2014, the company’s business mix was 75.6 per cent life, 16.9 per cent health, and 7.5 per cent property and casualty insurance.
S&P said it expects Sagicor’s 2014 results “to be constrained by sluggish premium growth driven by weak economic growth in Jamaica and Barbados. Additionally, in 2014, the company faced charges from discontinued operations after the divestment from Sagicor at Lloyds in 2013. We expect the company's return on equity (ROE) and return of revenues (ROR) to be around 5.7 per cent and 9.8 per cent as of year-end 2014, respectively.”
The company’s operating performance should gradually improve over the next two years “mainly driven by adequate growth in the company’s life and health business lines in the US and T&T,” S&P said. “In our base case, we expect net earned premiums to grow at an average 9 per cent over the next two years. Our forecast also considers a slight improvement in the gross domestic product (GDP) growth of both Jamaica and Barbados, which should also help support our expected net earned premium growth. “We also expect the company will maintain adequate expense control, which, coupled with a slight improvement in investment returns, should lead to a ROE and ROR averaging 8.7 per cent and 12.3 per cent, respectively over the next two years.”
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