The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FamGuard Corporation yesterday said A. M. Best’s decision to downgrade the company’s rating “just defies logic”, especially after its mortgage book’s share of total investment assets was reduced by 15 percentage points over a five-year period.

Patricia Hermanns, the BISX-listed life and health insurer’s chief executive, told Tribune Business that the insurance rating agency’s move was “excessively predicated” on the company’s $64 million mortgage portfolio, and failed to account for the differences between the US and Bahamian markets.

Confirming that FamGuard and its subsidiary, Family Guardian, disagreed with the decision to lower the latter’s financial strength rating to ‘B++’ (Good) from A- (Excellent), and issuer credit rating to ‘bbb+’ from ‘a-’, Ms Hermanns said there had been “long-standing dialogue” with A. M. Best over the mortgage issue.

Arguing that the rating agency was using “a one-size fits all” approach, the FamGuard chief executive said its assessment appeared to be coloured by conditions in the US mortgage market, particularly the sub-prime lending debacle.

Pointing out that the Bahamian real estate market was markedly different, Ms Hermanns said that since 2007 Family Guardian had reduced mortgages as a percentage of total investment assets from 48 per cent to “around one-third”.

And just 7.37 per cent of its mortgage book was delinquent at end-June 2012, a ratio that compares favourably to the Bahamian commercial banking sector’s 19.3 per cent total arrears rate, and even its 13.4 per cent non-performing loans.

“We have challenged the issue around the mortgages,” Ms Hermanns told Tribune Business. “Our view is that A. M. Best takes a one size fits all approach to assessing companies outside the US market.

“There is a very big emphasis on the mortgage issue, primarily because of the perception they have on the US mortgage market. With small countries, the focus on differentiating markets is not there.”

Hitting back at the rationale for the A. M. Best move, Ms Hermanns, who is also Family Guardian’s president, added: “We have challenged it, mainly because over the last five to six years we’ve reduced mortgages from 48 per cent to around one-third of our total investments....

“In addition to which, our delinquency ratio at the end of June 2012 was 7.37 per cent, substantially better than market delinquencies in the Bahamas.

“We not only have a smaller mortgage portfolio as a percentage of total investments, but reflect a very positive delinquency ratio compared to the overall market ratio.

“This is excessively predicated on the mortgage portfolio which, even at the point when we were rated ‘A-’ , was lower in dollar amount than it is now. It just defies logic, from our point of view, the over-accentuation on mortgages in their assessment.”

Pointing out that Bahamian home lenders “know our borrowers”, unlike in the US, where there was often great distance between the two parties thanks to securitisation, Ms Hermanns added of the A. M. Best report: “It’s one of those things.

“It is what it is. Their views are very different, their rating is very different, and we’re being assessed against their [US] market conditions.

“Persons who understand the mortgage market in the Bahamas understand this issue does not deserve the level and attention it has been given by A. M. Best.”

The Family Guardian chief executive added that because the range of investment options in the Bahamas was not as broad as in the US, mortgages represented an attractive asset for life and health insurance companies seeking a decent return on investments.

“In this region, we know real estate is a prime investment for most entities, because of the lack of variety of investment options,” Ms Hermanns added.

“It’s unfortunate they’ve taken such a US-oriented approach to reviewing mortgages as an investment asset, as it does not do justice to the investment environment outside the US. The scope of investments is not as broad in the Bahamas as it is in the US. That is just a challenge of being in this market.”

Still, Ms Hermanns said A. M. Best’s move would not impact Family Guardian’s operations, and the rating agency had assigned a ‘stable’ outlook to Family Guardian, indicating the revised ratings were not liable to further change.

And the remainder of A.M. Best’s report focused on Family Guardian’s positives, including the fact it had achieved a 13 per cent annual growth rate for premium income over the past five years despite being stuck in a mature market that was not really growing.

“They have identified more than adequate risk capital from a risk-adjusted capital perspective,” Ms Hermanns added. “They’ve also noted the rate of premium growth has been very strong over the last five years, in a market they themselves indicated was very difficult to grow in.”

Indeed, the A. M. Best report reads, in some instances, like a document warranting a rating upgrade rather than downgrade.

The insurance rating agency said of Family Guardian: “The rating actions for Family Guardian reflect A. M. Best’s concerns regarding the risks associated with Family Guardian’s high concentration in mortgage loans relative to its total equity, and the continued delinquencies in its mortgage loan portfolio, which are attributable to the current weak economic environment in the Bahamas.

“However, A. M. Best notes that the company’s level of mortgage loans as a percentage of total investment assets, as well as a percentage of total capital, has declined over time.

“While Family Guardian faces inherent risks associated with its group health division, A. M. Best acknowledges a trend of improving results in this line of business. Moreover, the overall weak economic environment in the Bahamas continues to present challenges to Family Guardian’s longer-term financial results and growth opportunities.”

And it added: “A.M. Best recognises that in spite of the limited growth opportunities in the local market, Family Guardian has consistently recorded growth in premium income, and over the past five years achieved an annual rate of premium growth of 13 per cent.

“Offsetting these negative rating factors related to the economy and the size of its mortgage portfolio relative to its total equity is Family Guardian’s more-than-adequate level of risk-adjusted capitalisation, overall profitable operating results fuelled by a turnaround in its group health division led by BahamaHealth, and its sustainable marketing presence as one of the two leading life insurance companies in the country.

“A.M. Best also notes that the company trends favourably when it comes to profitability and capital, with consistent growth in stockholders’ equity despite dividend payments.

“Family Guardian’s three core business segments - home service, financial services and group division led by BahamaHealth - provide business diversification and competitive advantages in a generally limited and mature marketplace.”

Going forward, A. M. Best said: “Key rating factors that may result in negative rating actions for Family Guardian include adverse operating profitability, increased delinquency rates in its mortgage loan portfolio, any future significant impact on its reserving practices and profitability from the low interest rate environment, and any overall deterioration in the Bahamian economic environment.”