NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an initial 'B' long-term Issuer Default Rating (IDR) to Sagicor Financial Corporation (SFC) and a rating of 'B (EXP)' to the planned issue of senior unsecured notes, issued by Sagicor Finance (2015) Ltd and guaranteed by SFC and Sagicor Life Inc. Fitch has also assigned a Recovery Rating of 'RR5(EXP)' to the planned note issue. The Rating Outlook is Positive.
Fitch expects SFC to issue between $200 million to $320 million of senior unsecured notes. Proceeds from the planned issuance will be used to refinance the company's existing debt due in 2016.
KEY RATING DRIVERS
Fitch's ratings for SFC reflects the challenging operating and economic environments of the main insurance subsidiaries domiciled in Barbados and Jamaica, and very high exposure to below investment grade sovereign debt, partially offset by strong operating company capitalization, and reasonable, but volatile, profitability. The ratings also consider the company's high financial leverage, macroeconomic challenges associated with low interest rates, high quality of the investment-grade portion of the investment portfolio, and asset liability duration mismatches in the operations of Barbados and Trinidad.
Of SFC's total revenues, 58% come from Jamaica and Barbados. In addition, the insurer holds high levels of Jamaica and Barbados' sovereign debt in its investment portfolio, which together equate to over 150% of SFC's consolidated shareholders' equity.
Capitalization ratios are strong but potentially more volatile than those of many insurers rated by Fitch. Management uses Canadian regulatory capital standards to help manage capital, and the consolidated MCCSR for SFC is strong and has remained above 250% since 2011. Fitch expects the MCCSR to remain close to this level over the medium term. However, the capital exposure to the sovereign debt of Jamaica and Barbados could result in sharp declines in capitalization ratios in adverse sovereign scenarios. Management is trying to reduce the exposure to these sovereign instruments, but Fitch believes this process will be relatively slow.
SFC's financial leverage ratio (FLR) is high at 46% as of year-end 2014 (adjusted to exclude non-controlling interests from capital). SFC's fixed-charge coverage ratio, as calculated by Fitch, remained at 4.1x at 2014, which is modest. The near-term maturity of all of SFC's outstanding debt is in 2016, which creates significant near-term refinancing risks. SFC is planning to issue new debt to refinance 100% of the two senior unsecured notes in the near term. Reduced refinancing risk via these issuances is an important consideration in Fitch's ratings of SFC.
SFC's profitability ratios are good but with higher volatility than peers. Consolidated net income has been affected by currency retranslation losses of foreign operations and losses from Sagicor Europe. SFC sold Sagicor Europe in 2013 and as of March 2015, the company recognized $47.6 million of net losses and other liabilities associated with the pre-2014 underwriting years and has capped its potential future loss liability on the business for up to an additional $20 million.
As a result of the lack of availability of long duration assets in Barbados and Trinidad and Tobago, the company has a duration mismatch, where liabilities are much longer than assets. Concern over this duration mismatch is somewhat mitigated by the company's use of a Canadian accounting framework that requires SFC to set aside reserves to address the rollover risk associated with the duration mismatch.
Customarily, holding company senior debt is notched down by one from the IDR at a Recovery Rating of 'RR5(EXP)'. However, in the case of SFC the IDR has been pulled down due to concerns over risks tied to the company's business concentration in Barbados and Jamaica, including transfer and convertibility (T&C) risks.
T&C exposure is somewhat mitigated by substantial assets held in U.S. external accounts that is a source of debt service in the event of adverse sovereign scenarios. While Fitch does not publish a sovereign rating or a country ceiling for Barbados, Fitch does maintain internal viewpoints that the agency considered in establishing its rating on SFC. Fitch's sovereign rating for Jamaica is 'B-' (local and foreign currency IDR) and the country ceiling is 'B'. The current use of external accounts, which are largely owned by non-Barbados subsidiaries, reduces much but not all T&C exposure to Barbados, but T&C risks to Jamaica remain due to the potential move back of funds into the Jamaican subsidiaries and imposition of foreign exchange controls in an adverse Jamaica scenario.
Thus, Jamaica's country ceiling of 'B' has been applied to SFC's ratings. Further, the Positive Outlook on SFC's IDR is based on the Positive Outlook Fitch has for Jamaica's sovereign ratings and country ceiling. As a result, any future upgrade of Jamaica's country ceiling, together with completion of the below noted reorganization would trigger an upgrade of SFC's IDR to 'B+'.
The Positive Outlook is also based on Fitch view that SFC's proposed reorganization plans as outlined in the Offering Memorandum of the expected new debt issuance as a credit positive in further reducing the exposure to T&C risk. The proposed reorganization includes the redomiciliation of SFC, a Barbados-based holding company, to an investment-grade jurisdiction. It also includes a reorganization of the corporate structure such that the non-Barbados Caribbean operating subsidiaries, including those in Jamaica, are no longer rolled up underneath the Barbados operating entity and instead held directly by SFC. The reorganization is expected to be completed within the next six months.
SFC is a Barbados-based financial holding company and leading provider of insurance products and financial services in the Caribbean region. It also provides insurance products in the U.S. as well as banking and investment management services in Jamaica. Primary insurance subsidiaries and the corresponding regions for SFC include Sagicor Group Jamaica Ltd. (Jamaica and Cayman Islands), Sagicor Life Inc. (Barbados and Trinidad and Tobago), and Sagicor Life USA (U.S.). Aside from these main subsidiaries and regions, the company also has insurance operations in many of the Eastern Caribbean islands.
Key rating triggers that could result in an upgrade of the ratings for Sagicor Financial Corporation include:
--A higher country ceiling of Jamaica, without any heightened sovereign concerns in Barbados, together with successful completion of the reorganization as outlined in the Offering Memorandum;
--A shift in country mix, including a significantly greater percentage of operations and invested assets in countries with higher sovereign ratings, such as the U.S. and Trinidad and Tobago;
--Improvements in key financial metrics, including consolidated MCCSR above 250%, financial leverage below 30%, and consolidated ROE above 10%.
Key rating triggers that could result in a downgrade include:
--Perceived deterioration by Fitch in the economic environments of Jamaica or Barbados, including a downgrade in Sovereign rating and country ceiling of Jamaica;
--Inability to term out a majority of debt maturing in 2016;
--Deterioration in key financial metrics, including consolidated MCCSR falling below 180% (with operating leverage above 5x) and financial leverage exceeding 50% and ROE below 5% on a sustained basis.
Fitch assigns the following ratings with a Positive Outlook:
Sagicor Financial Corporation
Sagicor Finance (2015) Limited
--Senior unsecured notes 'B(EXP)/RR5(EXP)'.
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action which is different than the original rating committee outcome.
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub. 14 Jul 2015)
Dodd-Frank Rating Information Disclosure Form