The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas First’s top executive is “very confident” the government and general insurers will reach “a mutually beneficial resolution” to end the uncertainty over VAT recoveries on claims payouts.

Patrick Ward, the property and casualty underwriter’s president and chief executive, told Tribune Business in a recent interview that it was hoping the agreement between the government and industry could be “concluded as quickly as possible” so both sides knew where they stood and could move on.

The Bahamas First chief, revealing that he was “even more” optimistic than rival Insurance Company of The Bahamas (ICB) about the prospects of a settlement, said: “I’m very confident that the VAT issue will be resolved.

“We’ve certainly had some constructive discussions with the government, and our expectation is that we will see a mutually beneficial resolution to this issue that is perfectly acceptable to the industry and the government.

“That’s certainly our hope, and every indication we’ve had so far suggests that will be the case. From Bahamas First’s perspective our concern is that we want to get rid of the uncertainty, and now we’re in a place where that’s likely to be the case we hope to conclude this as quickly as possible.”

Mr Ward’s comments echo the optimism of Tom Duff, ICB’s general manager, who told Tribune Business last week that the property and casualty industry and government within touching distance of settling a VAT-related dispute that has dragged on for over a year.

The quarrel stemmed from whether general insurance underwriters could recover VAT on all or only some claims that were settled on a cash basis.

While the insurance industry felt it had achieved “a clear understanding” with the former Christie administration that VAT was recoverable on all such claims, its successor adopted the position that this was only the case where the insured client was a VAT registrant - meaning a business with a turnover greater than $100,000 per annum.

As a result, Bahamian property and casualty insurers were faced with being unable to recover “the VAT portion” of any Hurricane Matthew-related claims paid out to residential homeowners and other non-VAT registrants. Given the $400m in insured damage inflicted by that storm, this left the industry facing a massive, unexpected multi-million dollar financial burden.

These concerns were reiterated by Mr Ward in Bahamas First’s annual report, where he told shareholders: “The threat of an industry-wide adverse value added tax (VAT) ruling relating to legacy claims dating back to the initial introduction of VAT on insurance seems to have been averted, as a result of constructive negotiations with the relevant authorities in the Government of The Bahamas.”

Elsewhere, Mr Ward told Tribune Business both Bahamas First’s agency and brokerage acquisitions from 2018 were on target to achieve the maximum purchase price for their former owners.

The final prices paid for CMA Insurance Agents & Brokers and Response Agency depend on Bahamas First retaining a minimum percentage of the insurance portfolios it acquired from them one year later, which is 85 percent in both .

Both deals were concluded on October 1 last year, and Mr Ward told this newspaper: “That’s historically been the way we’ve approached these type of acquisitions so, at the end of the year, as long as the portfolio hits the target in terms of retention then the full acquisition price is paid. If not, it’s reduced by a percentage.

“In the case of both of them, at this stage it appears as if both will hit the minimum target set as part of the agreement. Both of them have 85 percent minimum targets.”

In CMA’s case, the purchase price was $1.5m. Some 75 percent, or $1.125m, was paid on the acquisition date, with the balance of $417,900 due on October 1, 2019, depending on whether the portfolio meets its retention target and an audit of retained earnings.

Bahamas First also allowed CMA’s owners to take out a pre-completion dividend of $832,439, representing 50 percent of the company’s retained earnings as at end-September 2017. In the case of Response, the agreed purchase price is $850,000, some $680,000 of which was paid by year-end 2018. The balance, again, depends on hitting the minimum retention rate.

Both acquisitions are likely structured this way because the true value to Bahamas First lies in retaining these two agencies’ client portfolios within its NUA subsidiaries, rather than see theme defect to rival carriers, so that it captures an increased earnings stream over several years.

The release of Bahamas First’s annual results also coincided with the affirmation of its financial strength rating of A- (Excellent), and long-term issuer credit rating of ‘a-’, for both its Bahamian and Cayman businesses by A.M. Best, the international insurance rating agency. The outlook was ‘stable’.

“We’re always very happy to have our rating reaffirmed, particularly since they gave a stable outlook for both The Bahamas and Cayman,” Mr Ward said. “We spend a lot of time and energy to ensure we do everything possible to maintain that level of creditworthiness.

“Customers have an independent verification of our financial strength, and it gives them third party assurance from a recognised rating institution that our claims paying ability is outstanding relative to our peers and not just by local standards but international standards.”

A. M. Best, in its statement, said: “The ratings of Bahamas First and Cayman First reflect the group’s balance sheet strength, which AM Best categorises as strongest, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).

“The balance sheet strength is derived from the group’s risk-adjusted capitalisation being at the strongest level, and its ability to raise capital if needed. This is offset partially by a high dependence on the reinsurance markets to protect capital in the event of natural catastrophes. Furthermore, capital growth may be constrained because of the operating companies’ continuing obligation to pay dividends to Bahamas First Holdings (the parent) to service its outstanding debt.”

It added: “In recent years, the group’s operating performance has been favourable, especially in years with little impact from major hurricanes affecting the Bahamas or Cayman Islands. Overall earnings have supported capital growth, despite highly competitive markets and difficult economic conditions.

“The business profile is considered neutral because the group has leading market positions and operations in the Bahamas and Cayman Islands. As a consequence, it benefits somewhat from geographic diversification and product mix, which help to stabilise earnings through market cycles and reduce the impact of catastrophic events.

“AM Best anticipates that the group will continue to produce favourable earnings in non-catastrophe affected years, and that its strong surplus position and comprehensive reinsurance programme will continue to keep the balance sheet at the strongest level.”