The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must “take concrete steps” to reverse the trend of sovereign credit rating downgrades after the country’s two largest life and health insurers saw their own financial strength assessments slashed as a result.

Patrick Ward, Bahamas First’s president and chief executive, made his call before A. M. Best, the international insurance credit rating agency, on Friday downgraded both Colina Insurance Company and Family Guardian  due to the latest sovereign downgrade imposed on the The Bahamas by Moody’s.

Pointing to the extra risk generated by the fact the both BISX-listed life and health insurers have business portfolios almost entirely concentrated in The Bahamas, A. M. Best cut the financial strength rating for both to ‘B++’ (Good) from ‘A-’ (Excellent).

And the long-term issuer credit rating for each was also slashed to ‘bbb+’ (Good) from ‘a-’ (Excellent), with both parent companies - Colina Holdings (Bahamas) and FamGuard Corporation - seeing their own long-term issuer credit ratings  to ‘bb+’ (Fair) from ‘bbb-’ (Good).

The A. M. Best actions show there are real consequences for The Bahamas, its economy and the companies that operate in it as a result of the continual downgrades to the country’s creditworthiness from the likes of Moody’s and Standard & Poor’s (S&P). They also came just days after Mr Ward warned this nation needs to take practical steps to show the rating agencies it is making the necessary fiscal and economic structural reforms.

“Any downward pressure on the rating of the country puts it in a category of country where more risk is involved in making investments in that territory,” the Bahamas First chief told Tribune Business of the Moody’s downgrade. “It just gives the overall impression... there are more inherent risks in the economy that could prove dangerous to companies operating there.

“I think rating agencies like A. M. Best will monitor the situation. They have a view to what that means, and it could have an impact on their assessment of country risk on an overall basis. The starting point for a rating is the country’s own underlying financial condition.

“I think we’re concerned about it. What we’re more concerned about is there needs to be concrete steps taken to improve the overall environment that satisfies the rating agencies we’re headed in the right direction.”

Mr Ward said he was not yet concerned about having to take provisions against, or discount, Bahamas First’s own holdings of government debt as a result of the continual downgrades “although that is a potential danger if we go too far down this scenario where the country gets downgraded”.

Moody’s pushed The Bahamas further into so-called ‘junk’ status by cutting its sovereign creditworthiness from ‘Ba3’ to ‘B1’ on the basis that its access to borrowing on the international capital markets is being squeezed by a combination of global interest rate rises, increased emerging market spreads and concerns about its own fiscal condition.

Mr Ward said the existence of such a squeeze was “probably true”, but was not The Bahamas’ fault. He added that the country was especially vulnerable to natural disasters and, as a result, the Government’s “headroom is getting less and less” because of having to constantly step in with “emergency funding” for post-hurricane rebuilding.

Both Family Guardian and Colina are among the largest sources of long-term investments and savings in The Bahamas, holding hundreds of millions of dollars in government bonds and other securities on the balance sheets as they seek to match long-term assets to liabilities.

A. M. Best, in downgrading Family Guardian and Colina, made clear its decision was based on external sovereign factors rather than issues with both companies. Colina, in a statement responding to the move, said: “Colina’s continuing investment strategy includes, but is not limited to, acquiring long-term sovereign debt securities as these assets provide the best asset/liability matching.

“Moreover, the company’s investment options are limited by the country’s exchange control regime. Colina’s investments in The Bahamas’ sovereign debt comprise a significant proportion of the company’s total assets, and the country’s downgrade has negatively impacted its A. M. Best rating. However, Colina still considers The Bahamas’ sovereign obligations as creditworthy.”

In its assessment of Family Guardian, A. M. Best said: “The ratings reflect Family Guardian’s balance sheet strength, which A. M. Best assesses as strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management (ERM).

“The balance sheet strength assessment reflects Family Guardian’s risk-adjusted capital at the strong level, as measured by Best’s Capital Adequacy Ratio (BCAR), the elimination of financial leverage and continued good liquidity, which is offset partly by the company’s limited investment options and high concentration of sovereign debt holdings. The company’s BCAR levels declined in the past year due to downgrades of the Bahamas’ sovereign ratings.

A. M. Best added: “Family Guardian’s operating performance remains strong, with return on equity levels consistently over 10 percent and a continued trend of positive net earnings, which have supported capital growth.

“The business profile assessment considers Family Guardian’s good market position in The Bahamas and creditworthy product offerings offset by its geographic concentration in The Bahamas. The company’s ERM framework and governance structure are appropriate for its risk profile.

“There are ongoing concerns regarding global economic conditions and their negative impact on The Bahamas. A. M. Best will continue to monitor the economic conditions in The Bahamas and take appropriate rating actions as they change.”