By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
Family Guardian believes the restoration of its A- (Excellent) financial strength rating vindicates the stance it took over its mortgage portfolio, telling Tribune Business its solvency was “as strong as any of the major international insurers”.
Patricia Hermanns, president of the life and health insurer and its BISX-listed parent, FamGuard Corporation, told Tribune Business that it had spent much time providing information to A. M. Best, the global credit rating agency for the industry, “comfortable” about the weighting of mortgages in its investment portfolio.
The strategy paid off last week as A. M. Best restored Family Guardian’s top financial strength rating, just one year after downgrading it to ‘B++’ (Good) – a move that the Bahamian insurer then said “just defies logic”.
A. M. Best also upgraded Family Guardian’s issuer credit rating to ‘a-‘ from ‘bbb+’, and did the same for FamGuard, raising its own to ‘bbb-‘ from ‘bb+’.
Ms Hermanns told Tribune Business: “We are happy that they have given full consideration to the issues that have been raised, and that has factored into their decision to upgrade us back to ‘a-‘ level.
“Family Guardian is an extremely financially stable company, and that was very heavily weighed in their decision to upgrade our rating. It was very clear we are a very strong, stable company that has stood the test of time for 48 years, delivering on our promises to clients without any financial hiccups.
“Today, we are very strong from the perspective of capital and solvency…… By any standard, Family Guardian’s solvency – measured on a local or international level – is as strong as any of the major insurance companies in the world.”
Family Guardian had argued that A. M. Best’s 2012 decision to downgrade it was “excessively predicated” on the company’s $64 million mortgage portfolio, and failed to account for the differences between the US and Bahamian markets
This was especially after Family Guardian’s mortgage book share of total investment assets was reduced by 15 percentage points over a five-year period.
Ms Hermanns had told Tribune Business last year that there had been “long-standing dialogue” with A. M. Best over the mortgage issue. Arguing that the rating agency was using “a one-size fits all” approach, the FamGuard chief executive said then that its assessment appeared to be coloured by conditions in the US mortgage market, particularly the sub-prime lending debacle.
Pointing out that the Bahamian real estate market was markedly different, Ms Hermanns said last year that since 2007 Family Guardian had reduced mortgages as a percentage of total investment assets from 48 per cent to “around one-third”.
Reiterating that point in an interview with Tribune Business last week, Ms Hermanns said: “Our mortgage and commercial loans represent slightly less than one-third of the total [investments] portfolio, and when you take that in the context of investment opportunities in this market, that’s very reasonable as a percentage of total assets.
“That’s what we tried to acquaint them [A. M. Best] on in this market, and they came to appreciate that perspective. Our mortgage portfolio has very good quality in terms of the delinquency rate; I know it’s below the rate quoted by the Central Bank.
“As it relates to the wider market we face here, there are no significant issues with our portfolio at all. They [A. M. Best] understand and appreciate what we’ve been doing, and how we’re managing our portfolio.
“They are comfortable with what they’ve seen. We’ve provided significant information to A. M. Best to make them comfortable.”
Family Guardian’s mortgage portfolio has a total worth of around $60 million, and Ms Hermanns said the insurer had reshaped its overall investment portfolio to enable it to be compared on an international basis.
This was despite the Bahamas being “very different” from North America in terms of access to, and breadth and depth, of investment options. Ms Hermanns added that Family Guardian had to adopt “a level of conservatism in how we manage our affairs” in order to meet its obligations to policyholders.
Explaining the rationale for its ratings upgrade, A. M. Best said they were based on Family Guardian’s “improving financial performance and adequate reserves specific to its investment in direct residential and commercial loans”.
The rating agency added: “While A.M. Best remains concerned regarding the risks associated with Family Guardian’s high concentration in mortgage loans relative to its total equity and the continued delinquencies in its mortgage loan portfolio, A.M. Best notes that the company’s level of mortgage loans as a percentage of total investment assets, as well as a percentage of total capital, have declined over time and now represents one-third of investment assets. In addition, the company holds mortgage loan provisions, which have proven to be adequate over time.
“Although Family Guardian faces inherent risks associated with its group health division, the division has experienced a stabilisation in results in this line of business. The overall weak economic environment in the Bahamas continues to present challenges to Family Guardian’s longer-term financial results and growth opportunities. A.M. Best recognises that in spite of the limited growth opportunities in the local market, Family Guardian has consistently recorded growth in premium income in core lines.”
Ms Hermanns told Tribune Business that Family Guardian had been reporting steady improvements in its BahamaHealth division for consecutive quarters, adding that further efficiencies were expected from Aetna being appointed as its third party administrator for clients going to the US and overseas for health care.
She added that further efficiencies, and cost savings, were likely to be derived from the implementation of a new computer system that had caused Family Guardian “challenges” in 2010 and 2011.
“That has helped us to put it back on a sound footing again,” Ms Hermanns said of the health business.
Emphasising the positives, A. M. Best added: “Offsetting these negative rating factors are Family Guardian’s more-than-adequate level of risk-adjusted capitalisation, overall profitable operating results fuelled by stabilisation in its group health division, and its sustainable marketing presence as one of the two leading life insurance companies in the Bahamas.
“A.M. Best further notes that the company trends favourably with respect to profitability and capital with consistent growth in stockholders’ equity, despite shareholder dividend payments. Family Guardian’s three core business segments -home service, financial services and group division led by BahamaHealth - provide business diversification and competitive advantages in a generally limited and mature marketplace.”
Ms Hermanns told Tribune Business that the 2012 A. M. Best downgrade had little to no impact on Family Guardian’s daily operations in the Bahamian market.
“In a small market like this, people on the ground have a stronger feeling for the company and what it’s capable of doing, so we didn’t see any change in customer perceptions even with the change in rating from last year,” Ms Hermanns told Tribune Business.
“People on the ground in small communities like the Bahamas know a lot about the companies they deal with, and companies of the stability and integrity of Family Guardian, which has been demonstrated over the past 48 years, they know what to expect of us.”
But, ending on a negative note, A. M. Best added: “Downward rating actions could result if a material deterioration were to occur in the company’s operating results, worsening delinquency rates within the mortgage portfolio were recorded and/or a further deterioration occurred in the Bahamian economic environment.”
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