The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian insurer will “significantly reduce our cost of capital” by redeeming $5m in preference shares as it awaits regulatory approval to acquire an agency owned by one of its main shareholders.

Anton Saunders, RoyalStar Assurance’s managing director, told Tribune Business that replacing its 6.25 percent Series A preference shares with a loan from CIBC FirstCaribbean International Bank (Bahamas) would better position it to achieve its target 13-15 percent return on equity (ROE) in non-hurricane years.

The redemption of the property and casualty underwriter’s preference shares, which were perpetual in nature, is scheduled to close this September. Mr Saunders described it as “90 percent closed”, and added that “there is no impediment” to the transaction being finalised.

And he confirmed previous Tribune Business revelations that RoyalStar is poised to acquire a majority 80 percent ownership interest in Star General Insurance Agents & Brokers by year-end, in a move that secures a key distribution channel presently owned by one of its major shareholders.

Star General is the minority partner in SunStar Ensure Ltd, the vehicle that collectively owns a majority 53.05 percent controlling stake in RoyalStar Holdings. SunStar is in turn majority-owned by Sir Franklyn’s Sunshine Holdings, with Star General’s stake in that entity thought to translate into just over 20 percent of RoyalStar Holdings.

Selling the insurance agency business effectively represents estate planning for Star Group’s principals, chairman James (JM) Pinder, and Herbert Thompson, although Mr Saunders confirmed that the duo are not exiting their RoyalStar shareholding. Rather, they are only selling majority interest in their insurance agency.

The RoyalStar chief, explaining the rationale for the preference share redemption, said the insurer’s Board of Directors had elected to reduce its net equity to $50m in the belief they did not need the present $55m.

To achieve this goal, they opted to redeem $5m worth of preference shares using cheaper bank debt rather than financing the investor payout from cash flow. “We negotiated with FirstCaribbean where we were able to reduce our cost of capital significantly, and decided to replace the preference shares with a long-term loan for $5m paid back within six years at lower cost,” Mr Saunders explained.

“It is beneficial to the company and its shareholders. The benefit was to sustain our cash flow because our cost of capital is reduced significantly. Replacing the preference shares with long-term bank debt gives us the flexibility of cash flow for that period. The transaction is 90 percent closed. There is no impediment to closing.”

Mr Saunders declined to say by how much RoyalStar’s capital costs have been reduced, but added that the underwriter felt it would be better able to achieve the target 13-15 percent return on equity it “shoots for” in non-hurricane years from a $50m capital base as opposed to $55m.

Confirming the Star General transaction, the RoyalStar chief said it had been concluded between the parties and now just awaited the completion of regulatory scrutiny and approval by the Insurance Commission of The Bahamas.

“The investment climate is such that there are not many opportunities in The Bahamas to generate the return on equity we want,” Mr Saunders said. “The Star General principals, at their age, wanted to monetise some of their investments, and for us Star General is an integral part of RoyalStar.

“So it was better for us to secure a distribution channel outside the group than have to compensate for the portion of business they wrote for us. It’s one of our major agents who happens to be among our major shareholders. It does not change the beneficial ownership of RoyalStar. It changes the beneficial ownership of the agency, but they will not be exclusive agents for RoyalStar.”