Head office of Sagicor FInancial Company at the Cecil F De Caires Building in St Michael, Barbados.
Sagicor Financial Company Limited (SFC) and its subsidiaries had their credit ratings placed on watch and reviewed by Fitch Ratings and AM Best, respectively, following the announcement of its intention to acquire the Canadian individual life insurer mid-market Ivari in a deal valued at C$325 million (US$251.27 million) or $37.88 billion.
Fitch was the first rating agency to make an announcement on August 26, the day after SFC published the announcement. Fitch has placed SFC’s Issuer Default Rating (IDR) of BB and Senior Unsecured Debt Rating of BB– on Positive Watch (RWP). This is due to the expected strengthening of the company’s profile at the operating company level that would result from the acquisition of Ivari.
Ivari is rated higher than most of SFC’s operating subsidiaries which have a Supervisory Negative Rating (RWN) and an Issuer Financial Strength Rating (IFS) of A–. Ivari operates in a stronger operating environment, ranking second with a 26.3% market share of universal life business in Canada. The inclusion of Ivari would result in a material positive change in the composition of SFC’s operating group business and result in geographic diversification into investment grade sovereign jurisdictions. Additionally, on a consolidated basis, SFC’s investment and asset risk factors would improve due to the higher proportion of investment-grade assets, which would reduce the ratio of risky assets.
“While the acquisition of Ivari will result in a significant improvement in SFC’s operating environment and business profile, this improvement is offset by SFC’s historically higher leverage ratios, which could be driven by the additional debt required to fund the deal and put downward pressure on the holding company notch,” Fitch said of the potential downside risks for SFC at the holding company level for the acquisition.
SFC intends to accept new debt financing in the amount of C$320 million in the form of a five-year senior secured term loan facility from JP Morgan, RBC and the National Bank. The aggregate consideration for the transaction is C$365 million, which will be financed 80% by debt and 20% by cash, in accordance with SFC’s investor presentation on the acquisition. SFC currently has a US$542.32 million senior unsecured note maturing in May 2028 and US$142.15 million of other debt due between 2023 and 2027. SFC had 409, US$71 million in cash allocated across the group and US$87.44 million in restricted cash in June.
“In addition, Ivari’s future cash flows available to SFC for debt service at the holding company level will be subject to greater regulatory restrictions than those of most of SFC’s developing markets subsidiaries. Such regulatory restriction may temper some of the benefits of improved financial strength at the operating company level linked to IDR and debt ratings at the holding company level, according to Fitch’s notch methodologies” , Fitch said in the accompanying statement.
With the transaction expected to close within the next six to 12 months subject to regulatory approval and customary closing conditions, Fitch said it would review debt and capitalization levels along with initial rating expectations once the transaction closed. Fitch will also review Ivari’s credit quality and the level of new cash flow to be derived for SFC. By resolving rating watch, Fitch will balance the credit positives of improving the group’s credit quality with the credit negatives of higher financial leverage as well as regulatory restrictions on earned cash flow.
In an investor call explaining the transaction, SFC President and CEO Dodridge Miller explains that the purchase price is actually C$125 million, but that SFC would reimburse the seller, Wilton RE Limited, approximately C$200 million related to the need for Ivari to receive a capital injection to meet the minimum capital objective under International Financial Reporting Standards (IFRS) 17 and the capital adequacy test of the life insurance) 23. He also pointed out that the transaction was very interesting since the company is bought at a price of 4.5 times for on the basis of profits on the basis of profitability of 2021 and that there had a write-down of C$700 million (US$532.42 million) to book value after accounting for the change in control.
“The Caribbean itself is still a key market for us, but we also mentioned that we want to increase the proportion of our balance sheet that is in quality assets, and that certainly looks at North American opportunities. is a unique opportunity that fits very well with our strategy, and we believe it will advance our strategy as we move forward,” Miller said.
Based on pro forma financial data, the debt securities held by the SFC would increase from 69% to 83% in investment grade. Investment grade reflects a credit rating of BBB– by rating agencies, with credit ratings indicating the risk that an issuer will default on its debts. Miller pointed out that when SFC’s numbers are run in an S&P model, they are in the A to A+ range, which is upper-middle grade, but undercut due to their holdings in lower-grade jurisdictions. .
“Our credit rating is currently capped by the weighted average sovereign credit on our consolidated balance sheet. We believe this transaction should remove that – should move the cap to the point where it will no longer be a constraint on our rating once the transaction closes. So we see ourselves as having a clear path to investment grade ourselves,” Miller added of the company’s journey to investment grade.
Despite all the expected positive aspects of the transaction, AM Best still put SFC and its various subsidiaries under scrutiny with development implications. AM Best has listed Sagicor Life Inc, Sagicor General Insurance Inc, Sagicor Life Insurance Company, Sagicor Reinsurance Bermuda Ltd and Sagicor Life Jamaica Limited as the main subsidiaries with their various financial strength ratings and long-term credit rating (ICR) under exam. AM Best has also placed SFC’s long-term ICR on its 2028 senior bonds under review. AM Best is an American rating agency specializing in the insurance industry and operates in more than 100 countries. There has been no announcement from Caribbean Information and Credit Rating Services Limited (CariCRIS) on SFC or its Jamaican subsidiaries.
“AM Best expects the transaction to be accretive to Sagicor Financial Company Ltd’s operating profits and increase its geographic diversification while reducing its overall investment risk. However, there is some uncertainty regarding the execution of the transaction and the risk of integration of the acquired block of business. AM Best will continue to monitor this impending transaction as it develops and will provide updates as conditions warrant,” the press release reads. .