February 6, 2017 / 9:00 PM / a year ago

Fitch Affirms Sagicor Financial Corporation Limited at 'B'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, February 06 (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. The rating action follows Fitch's rating action on Feb. 2, 2017 on Jamaica's sovereign ratings, which included the affirmation of both Jamaica's sovereign rating and country ceiling at 'B' with a Stable Outlook. SFCL's ratings remain constrained by Fitch's view of the economic environments and the sovereign risks in both Jamaica and Barbados, while the agency maintains internal viewpoints to establish the rating of SFCL. The constraint is driven by the company's business concentration in Jamaica and Barbados as well as the company's high investment exposure to Barbados and Jamaica sovereign debt. KEY RATING DRIVERS Fitch's ratings reflect the challenging operating and economic environments of the main insurance subsidiaries domiciled in Barbados and Jamaica; 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 the re-domiciliation of the SFCL holding company to Bermuda from Barbados, macroeconomic challenges associated with low interest rates, and asset liability duration mismatches in the operations of Barbados and Trinidad. 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 279% as of Sept. 30, 2016. The quality of SFCL's insurance subsidiary capital is lower relative to Canadian or international peers given a higher Tier 2 capital component. Historically, MCCSR at the consolidated SFCL level has remained relatively stable above 220% since 2011. 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 retranslation and discontinued operations have historically been sources of volatility for the company. Operating earnings for the first three quarters 2016 were improved over same period prior year levels due to the absence of residual losses from Sagicor Europe, for which the company is no longer liable as of year-end 2015, as well as higher investment and fee income but partially offset by currency retranslation losses primarily from Jamaica. SFCL's Fitch financial leverage ratio (FLR) is high at 42% (adjusted to exclude non-controlling interests from capital) as of the third quarter 2016, albeit lower than 49% as of year-end 2015. The higher leverage in year-end 2015 and subsequent decline in 2016 was due to debt issued in 2016, which was used in part to fund debt that matured in 2016. Fitch expects run rate interest coverage to be around 4x in the medium term, which is satisfactory for the current rating. 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 sovereign debt could result in sharp declines in capitalization ratios in adverse sovereign scenarios. Management has taken steps to actively reduce the company's exposure to these sovereign instruments, which declined from year-end 2015 to third quarter 2016. Where possible, particularly in the Trinidad and Tobago and U.S. segments, the company invests in investment grade and the investment portfolios are of high quality. Fitch views the re-domiciliation of the SFCL holding company to Bermuda from Barbados to be a credit positive for the company as the completion reduces the company's exposure to Barbados to solely its insurance operations in that country. SFCL is in the process of reorganizing its company structure to unstack the non-Barbados Caribbean operating subsidiaries, including those in Jamaica, such that they are no longer rolled up underneath the Barbados operating entity and will instead be held directly by SFCL. The company expects to be completed with the unstacking in the second quarter 2017. Fitch also views the unstacking positively and factors it into the current ratings, as it reduces organizational complexity and increases transparency of cash flows between regional entities and SFCL. 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, which would be a concern in a prolonged low rate environment. Concern over this duration mismatch is somewhat mitigated by the company's use of a Canadian accounting framework that requires SFCL 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'. However, in the case of SFCL the IDR has been pulled down due to concerns over risks tied to the concentration of the company's operations and sovereign debt exposure of 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, it does maintain internal viewpoints on the sovereign that were considered in SFCL's rating. 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 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 SFC's ratings. SFCL is a Bermuda-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 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 the ratings for Sagicor Financial Corporation 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; 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 of Jamaica; --Deterioration in key financial metrics, including consolidated MCCSR falling below 180% and 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: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018643 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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