July 17, 2017 / 6:24 PM / 10 days ago

Fitch Affirms Sagicor Financial Corp Limited's IDR at 'B'; Outlook Stable

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(The following statement was released by the rating agency) NEW YORK, July 17 (Fitch) Fitch Ratings has affirmed Sagicor Financial Corporation Limited's (SFCL) Long-Term Issuer Default Rating (IDR) at 'B'. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release. SFCL's ratings are constrained by Fitch's view of the economic environment and the sovereign risks, including transfer and convertibility (T&C) risks, in Jamaica which are due primarily to the regional segments' significant earnings contribution and capital relative to the consolidated group. Fitch's sovereign rating for Jamaica is 'B' (Local and Foreign Currency IDR) and the country ceiling is 'B'. In Fitch's view, the funds available in external accounts, which are largely owned by non-Barbados subsidiaries, reduces much but not all T&C exposure to Barbados, but T&C risks tied to Jamaica largely 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 SFCL's ratings and SFCL's IDR has been notched down to 'B' as a result. KEY RATING DRIVERS Fitch's ratings reflect the challenging operating and economic environments of two of the main insurance subsidiaries domiciled in Jamaica and Barbados; very high capital exposure to below investment-grade sovereign debt, partially offset by good operating company capitalization; and good and improving profitability. The ratings also consider the company's high financial leverage, the positive impact of senior management's actions to reduce Barbados exposure and increase transparency of cash flows, and the macroeconomic challenges associated with low interest rates. While Fitch does not publish a sovereign rating or a country ceiling for Barbados, it maintains internal viewpoints on the sovereign that were considered in SFCL's rating. The high debt burden of the Barbados government has increased concerns of the likelihood of a sovereign restructuring event in Barbados. Fitch believes that potential investment losses from a Barbados sovereign debt restructuring could increase up to 10%-15% of capital and views that as manageable relative to the company's earnings, capital position, and provisions in place for credit and interest rate risk. The capitalization of SFCL's primary insurance subsidiaries is considered good. Management uses Canadian regulatory capital standards to help manage capital, and the consolidated MCCSR for SFCL is strong on an absolute basis at 291% as of year-end 2016. Historically, MCCSR at the consolidated SFCL level has remained relatively stable above 250% since 2011. The quality of SFCL's insurance subsidiary capital is lower relative to Canadian or international peers given a higher Tier 2 capital component. The company's minimum target MCCSR range at the consolidated level is 175%. Fitch considers SFCL's operating earnings to be good and improving with an upward trend over the last four years as the company's Jamaica, Barbados and Trinidad operations have been drivers of increased SFCL profitability. Losses due to currency re-translation and discontinued operations have historically been sources of volatility for the company. Operating earnings for 2016 were improved over the prior year due to the absence of residual losses from a divested business segment and higher investment and fee income but partially offset by currency re-translation losses primarily from Jamaica. SFCL's financial leverage ratio (FLR) is high at 43% (adjusted to exclude non-controlling interests from capital) as of year-end 2016, but down from 49% as of year-end 2015 due to the redemption of preferred shares, but partially offset by an increase in short-term debt. Fitch expects leverage to remain around current levels in the intermediate term. Interest coverage remains satisfactory and within rating expectations. SFCL's investment portfolio is concentrated in the sovereign debt of its countries of operations, including Jamaica and Barbados, and as a result, the company has a significant concentration of below investment-grade debt. The concentration of investment exposure to Barbados and Jamaica's sovereign debt could result in sharp declines in capitalization ratios in an adverse sovereign scenario. Management has taken steps to actively reduce the company's exposure to these sovereign instruments, which declined over 2016 due to the sale of Jamaica government bonds related to a company strategy to rebalance the investment portfolio. Where possible, particularly in the Trinidad and Tobago and U.S. segments, the company invests in investment-grade securities and the investment portfolios are of high quality. Fitch's ratings also factor in the positive impact of senior management actions to reduce exposure to Barbados and increase transparency of cashflows, including the completed re-domiciling of the SFCL holding company to Bermuda from Barbados, the expected completion of the unstacking of operating subsidiaries out from the Barbados entity directly into the holding company, and the company's progress towards the designation of assets at the Bermuda holding company, which would be available to pay annual debt service, if needed, and also help to mitigate T&C exposure for the company. SFCL is a Bermuda-based financial holding company and leading provider of insurance products and financial services in the Caribbean. 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 SFCL 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 and Dutch Caribbean islands and select Latin American countries. RATING SENSITIVITIES Key rating triggers that could result in an upgrade of all the ratings for Sagicor Financial Corporation Limited include: --A higher country ceiling of Jamaica, without any heightened sovereign concerns in Barbados or decline in performance of the company; --A shift in country mix, including a significantly greater percentage of profitability and capital in countries with higher sovereign ratings and a decline in Barbados and Jamaica sovereign debt concentration; A key rating trigger that could result in an upgrade of the Long-Term IDR for Sagicor Financial Corporation Limited includes: --An increase in liquid assets assigned to the Bermuda holding company sufficient to cover at least 1x annual debt service at SFCL; Key rating triggers that could result in a downgrade include: --Perceived deterioration by Fitch in the economic environments of Jamaica, including a downgrade in Jamaica's sovereign rating; --Higher than expected investment losses associated with a potential sovereign debt restructuring in Barbados; --Deterioration in key financial metrics, including consolidated MCCSR falling below 180%, financial leverage exceeding 50%, and ROE below 5% on a sustained basis. Fitch affirms the following ratings with a Stable Outlook: Sagicor Financial Corporation --IDR at 'B'. Sagicor Finance (2015) Limited --Senior unsecured notes at 'B/RR5'. Contact: Primary Analyst Nelson Ma, CFA Director +1-212-908-0273 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Milena Carrizosa Director +57-1-3075180 Committee Chairperson Julie Burke, CPA, CFA Managing Director +1-312-368-3158 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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