The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Family Guardian yesterday said it took a near-$6 million hit at year-end 2016 as a result of the Prime interest rate reduction, which impacted “more than 70 per cent” of its investment assets.

Lyrone Burrows, the BISX-listed life and health insurer’s president, told Tribune Business it had met its 2016 profit targets, despite having to increase reserves to compensate for the Central Bank’s pre-Christmas move to cut interest rates by 50 basis points.

Although the rate cut took effect early this year, Mr Burrows said its impact had to be factored into Family Guardian’s 2016 year-end financials, given that policyholder reserves have to be calculated on a “forward looking” basis.

“We were significantly impacted by the change in the Prime rate,” Mr Burrows explained. “This would have been taken into consideration for determining the reserves from 2016, as they are forward looking.

“We had to take on additional reserves because of the falling interest rate environment. In excess of 70 per cent of our investment assets would have been impacted by the 50 basis point reduction in Prime.

“That constituted a significant hit for us in terms of the reserves,” Mr Burrows continued. “That would have been just short of $6 million, but even with that we were able to achieve a fairly reasonable level of return to get the profits we had.”

The Family Guardian president added that this was reflected in the $689,373 net loss incurred for the final three months of 2016, which represented a negative $2.48 million reversal from 2015’s fourth quarter profit.

Despite this, Mr Burrows reiterated that Family Guardian was “able to hit our targets for the year”, although the 0.5 percentage point Prime rate reduction’s impact has affected its plans for 2017.

“It required us to take some other measures to soften the impact of the Prime rate reduction,” Mr Burrows said.

“We had to make some adjustments in the expense line to limit or mitigate the impact of the Prime rate reduction. We would have reduced some of the things we were looking at engaging in in 2017.

“We had to take a second look at our administrative costs and, in some instances, had to defer some of the things we were looking to do in the course of the year. Anything that we had an opportunity to defer, we deferred into future years.”

Mr Burrows’s comments show the impact that the Central Bank’s Prime rate cut has had on insurance and bank balance sheets, as the reduction works its way through the Bahamian economy in early 2017.

With returns on Family Guardian’s fixed income investments, such as deposits, bonds and preference shares, tied directly to Prime, the interest rate cut has reduced these yields, forcing it to increase reserves to compensate.

Reserves for future policyholder benefits increased by 7.5 per cent year-over-year, growing from $187.288 million to $201.292 million, partly to compensate for the Prime rate cut.

Still, Family Guardian’s BISX-listed parent, FamGuard Corporation, produced a relatively flat bottom line performance year-over-year, with net income down 5.8 per cent at $6.496 million compared to $6.893 million the year before.

Total comprehensive income was also down by 8.1 per cent, standing at $7.129 million for 2016 compared to $7.761 million the year before.

However, the way in which 2016’s net income is distributed has increased ordinary shareholder earnings per share (EPS) from $0.46 in 2015 to $0.50. This is because the share of profits to ordinary shareholders rose by 3.4 per cent to $4.99 million, while the earnings for Family Guardian’s ‘non-controlling interests’ dropped by 48.7 per cent to $880,324.

Mr Burrows, meanwhile, said Family Guardian “definitely wants to be in expansion mode” on its general insurance business, FG Insurance Agents & Brokers, and open to acquiring rival companies if they were “a good fit”.

“We’re always open to opportunity,” he told Tribune Business. “We are mindful of how there are a lot of other agents and brokers out in the market, and if a buying opportunity presents itself, we will be more than willing to look at it over the next several months.”

Mr Burrows added that Family Guardian was also targeting “organic growth” on the general insurance side, training its life personnel to sell the latter product suite and vice versa, in a bid to exploit cross-selling opportunities.

He said Family Guardian was optimistic about its 2017 prospects, especially if Baha Mar’s anticipated opening and improvements in the US economy resulted in increased tourism inflows and Bahamian jobs. The latter development would generate increased consumer demand for many products, including insurance.

The BISX-listed group, though, is also focused on what it can control and its internal efficiencies. Mr Burrows said the key focus for 2017 is implementation of a new technology platform, which will “improve efficiencies in operations beyond” this year.

“We’re focusing on efficiencies within our operations,” he told Tribune Business. “We are embarking on introducing a new policy administration system for our home service division and financial services division.

“Home service will be in place before the end of the summer, and financial services by the middle of next year. We’re doing the same on group health, and anticipate that this new system will deliver a significant level of efficiencies from an operational standpoint, allowing us to better serve our market and expand our product offering and service to clients.

“The more efficient we get, we’re able to drive down those policy unit costs, which makes the product more profitable and enables us to price those products more efficiently to be more competitive in the local market.”