Sagicor Financial Company Limited (SFC) and its subsidiaries have had their credit ratings put under watch and review by Fitch Ratings and AM Best, respectively, following the announcement of its intention to acquire Canadian middle-market individual life insurer Ivari in a transaction valued at CA$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 the announcement was made public by SFC. Fitch has placed SFC’s issuer default rating (IDR) of BB and senior unsecured debt ratings of BB– on rating watch positive (RWP). This is driven by the expected stronger company profile at the operating company level which would occur from the acquisition of Ivari.

Ivari is rated higher than most of SFC’s operating subsidiaries which are rating watch negative (RWN) and have an issuer financial strength (IFS) rating of A–. Ivari operates in a stronger operating environment ranking second with a 26.3 per cent market share of the universal life insurance business in Canada. The inclusion of Ivari would result in a material positive shift in SFC’s operating group business mix and result in geographic diversification towards investment grade sovereign jurisdictions. Also, 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 risky asset ratio.

“While the acquisition of Ivari will lead to a material improvement in SFC’s operating environment and company profile, this improvement is counterbalanced by SFC’s historically higher financial leverage ratios, which could be driven up by the additional debt needed to finance the deal and puts downward pressure on holding company notching,” Fitch said on the potential downside risks for SFC at the holding company level for the acquisition.

SFC intends to take on CA$320 million worth of new debt financing in the form of a five-year senior secured term loan facility from JP Morgan, RBC and National Bank. The overall transaction consideration is CA$365 million which will be funded by 80 per cent debt and 20 per cent cash as per SFC’s investor presentation on the acquisition. SFC currently has a US$542.32 million unsecured senior note due May 2028 and US$142.15 million of other loans payable due between 2023 and 2027. SFC had US$409.71 million in cash spread across the group and US$87.44 million in restricted cash as of June.

“In addition, future cash flows from Ivari available to SFC to service debt at the holding company level will be subject to greater regulatory restrictions than those from most of SFC’s developing market subsidiaries. Such regulatory restriction can temper some of the benefits of improved financial strength at the operating company level related to the IDR and debt ratings at the holding company level, under Fitch’s notching methodologies,” Fitch said in its accompanying release.

With the transaction set to close in the next six to 12 months subject to regulatory approval and customary closing conditions, Fitch said that it will review the leverage and capitalisation levels with original rating expectations once the transaction closes. Fitch will also review Ivari’s standalone credit quality and level of new cash flow to be derived for SFC. In resolving the rating watch, Fitch will balance the credit positives tied to the improvement in group credit quality with the credit negatives of higher financial leverage plus regulatory restrictions on the acquired cash flows.

In an investor call explaining the transaction, SFC president and Chief Executive Officer Dodridge Miller is that the purchase price is really CA$125 million, but that SFC would repay the seller, Wilton RE Limited, approximately CA$200 million related to the need for Ivari to receive a capital injection to meet the minimum equity target under International Financial Reporting Standards (IFRS) 17 and Life Insurance Capital Adequacy Test LICAT) 23. He also highlighted that the transaction was very attractive since the company is being bought at a 4.5 times price to earnings basis based on 2021 profitability and that there was a CA$700-million (US$532.42-million) discount to book value once change of control accounting is taken into account.

“The Caribbean itself is still a core market for us, but we also mentioned that we wanted to increase the proportion of our balance sheet that’s in investment grade assets, and that is certainly looking at North American opportunities. We think this is a unique opportunity which fits very well with our strategy, and we think that it will advance our strategy as we move forward,” said Miller.

Based on the pro forma financials, SFC’s debt securities held would move from 69 to 83 per cent being investment grade. Investment grade reflects a credit rating of BBB– by rating agencies with credit ratings denoting the risk of an issuer defaulting on their debt payments. Miller pointed out that when SFC’s numbers are ran through an S&P model, they would come out in the range of A to A+ which is upper medium grade, but they get notched down because of their holdings in non-investment grade jurisdictions.

“Our credit rating is currently capped by the weighted average sovereign credit on our consolidated balance sheet. We believe that this transaction should remove that — should move the cap to the point where it will not 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 on the company’s journey to investment grade.

Despite all the positives expected to be derived from the transaction, AM Best still put SFC and its various subsidiaries under review with developing implications. AM Best 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 issuer credit rating (ICR) under review. AM Best also placed SFC’s long-term ICR on its 2028 senior notes under review. AM Best is an American credit rating agency specialising in the insurance industry and does business in more than 100 countries. There have been no announcements by the 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 earnings and increase its geographic diversification while lowering its overall investment risk. However, there is some uncertainty concerning the execution of the transaction and integration risk from the acquired block of business. AM Best will continue to monitor this impending transaction as it evolves and provide updates as conditions warrant,” the press release stated.