The board of directors of Sagicor Financial Corp. has voted unanimously to move the company’s headquarters out of Barbados after the deteriorating sovereign credit rating of the country led to a rating downgrade of Sagicor Life.
The life insurance and financial services group, which in Cayman sells life insurance and investment services, was downgraded by Standard and Poor’s on Dec. 30, 2014, two weeks after the rating agency lowered the sovereign rating for Barbados from B to BB-. Barbados struggles with fiscal deficits, a high debt burden that continues to grow, and fewer financing options.
The rating of Sagicor Life is now BB- down from BB+. Meanwhile, S&P lowered the rating on Sagicor Finance Ltd.’s US $150 million, 10-year senior unsecured note to B.
The rating agency explained that on a stand-alone basis, Sagicor has a potential rating of BB+, supported by the company’s moderately strong capitalization, improving operating performance and adequate competitive position.
However, due to a life insurer’s sensitivity to country risk, the critical role of regulation and access to funding, the rating action on Barbados caused a similar downgrade of the company. The rating outlook is negative, reflecting the outlook on the Barbados rating, and remains susceptible to any further rating action on Barbados.
“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,” S&P said.
The rating agency said its insurance industry country risk assessment on Sagicor is based on its weighted assessment for all of the company’s operating countries.
Sagicor Life, which serves Barbados, Belize, the Eastern Caribbean, the Dutch Antilles, Panama, and Trinidad and Tobago, represents 41.5 percent of the group’s gross written premiums. Sagicor Life Jamaica, which operates in Jamaica and the Cayman Islands, represents 28.8 percent, and Sagicor USA Inc., which operates in the U.S., has a share of 29.7 percent of gross written premiums.
With the exception of Trinidad and Tobago, most countries in the Caribbean represent on average a high country risk for insurance companies, mainly because low income levels limit insurance product penetration. “We also view these countries’ institutional frameworks as weak,” S&P added.
The rating agency 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 percent and 9.8 percent as of year-end 2014, respectively.”
In the first nine months of 2014, Sagicor Group recorded net income of US$39 million, compared to a loss of US$1.9 million for the same period in 2013. The Group’s continuing operations recorded net income of US$39.6 million for the nine months in 2014, slightly up from US$39.3 million for the corresponding period in 2013.
According to S&P, the Sagicor rating could be upgraded if the company maintains the positive trend in its operating performance, adequate capitalization levels in line with the BBB benchmark, completion of its plans to relocate its country of domicile to a country with at least investment grade ratings, strong regulations and adequate access to funding.