The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian insurer yesterday voiced optimism it will soon break free of its "Hurricane Dorian hangover" and escape any potential downgrade by the industry's main creditworthiness assessor.

Timothy Ingraham, Summit Insurance Company's chief executive, told Tribune Business that yesterday's decision by AM Best to cut its outlook on the company from 'stable' to 'negative' was simply the rating agency "saying the future does not look as bright as it used to" rather than a reflection on its financial strength.

While it maintained its A- (Excellent) and 'a-' (Excellent) ratings on Summit's financial strength and long-term creditworthiness, AM Best altered its outlook on the basis that the Bahamian property and casualty underwriter's profits and financial performance have not rebounded to levels enjoyed pre-Dorian and there remains "uncertainty" over when they will.

Its action effectively warns of, or flags up, the possibility that it may downgrade the financial strength and creditworthiness of Summit, which is the carrier through which Insurance Management places much of its general business, within the next 12-24 months if the necessary rebound fails to occur.

Mr Ingraham, though, told this newspaper he is confident that Summit will escape any such downgrade and that "the drag as a result of Hurricane Dorian will begin to loosen its grip". The Bahamian underwriter's margins have also been squeezed in prior by not fully passing on reinsurance rate increases to all its customers, but it is now taking action to remedy the situation.

"Obviously since Dorian reinsurance rates have been rising, but we haven't increased our rates charged to clients at the same level in all cases. Margins have been compressed over a period of time, and there are one or two contributing factors that play into it that we can address and have begun to address," Mr Ingraham explained of Summit's recent financial performance.

"We are optimistic that we will see the drag as a result of Dorian begin to loosen its grip. Our performance hasn't been very strong compared to our peer group in the region at the moment. We are performing adequately compared to our Caribbean peer group.

"There has been a drag on the results since Dorian because of various factors on the [reinsurance] treaties, penalties on the treaties. There have been penalties on the reinsurance treaties as a result of Dorian. We anticipate we will start to be clear of those and things will start to improve," he added.

"We obviously still have a situation where costs are still increasing, especially reinsurance costs that are increasing at a faster rate than we've previously been able to pass on to all our customers. That means margins get compressed for a while, but we are optimistic we will soon be out of this cycle and margins will soon return to normal."

For 2022, Summit generated a $907,185 profit, which represented a slight increase upon the prior year's $700,041. Prior to Dorian, the bottom line would have been in the 'several millions', but Mr Ingraham said yesterday's AM Best action was no reflection on the insurer's financial strength or ability to pay claims.

"The financial strength, I don't think, is an issue even with AM Best," Mr Ingraham said. "They didn't see any issues with that - the balance sheet strength. It's just the results, the performance over time, but the balance sheet strength remains....It's them saying the future does not look as bright as it used to look. It's not dim, it's not dark. It's just not as bright as it's been in the last few years.

AM Best's move is similar to what the likes of Moody's and Standard & Poor's (S&P) have done in the past with The Bahamas' sovereign credit rating, cutting the country's outlook to 'negative' to signal the possibility that a downgrade may be coming.

However, in relation to Summit, Mr Ingraham told Tribune Business: "Barring any major storm losses I think we're confident that the balance sheet strength will remain as it is and continue to grow stronger. What it [the lowered outlook] means is that for the last few years the results have not been historically what they were prior to Dorian.

"That was the result of Dorian, which we hope was a once-in-a-century storm, but the company's balance sheet remains very strong. AM Best did affirm that, and affirmed the 'A-' rating. As far as being concerned about the financial strength of the company, that's 'A-' (Excellent), and they have not changed the long-term issuer rating of 'a-' (Excellent).

"These are components that people need to pay attention to, as they speak to the financial strength of the company. It's kind of the hangover from Dorian which produced a drag on the results for the last few years since it occurred."

To counter this, and the reinsurance market "operating cycle" of increasing rates, Mr Ingraham added: "Most of our clients would have seen a rate increase in the last year to counteract some of that. We are managing some classes of business as tightly as possible - the motor account, where we have a bit more control. We don't control the claims, but don't have so much reinsurance pressure there.

"There are one or two other measures we think will help bring things around." AM Best, in justifying the outlook cut, said: "The negative outlooks reflect the decline in Summit’s operating performance results over the past several years.

"Operating metrics have deteriorated from levels that supported the company’s strong assessment level to what is more in line with an adequate assessment level when compared with Caribbean peers. This trend has taken place over multiple years with Hurricane Dorian in 2019 as an approximate inflection point.

"Underwriting pressure post-Dorian is reflective of the operating environment in The Bahamas, where reinsurance dependence is very high and primary market pricing has been historically soft," the rating agency added.

"While the Caribbean market is correcting and providing Summit and its peers opportunities for material rate increases and gross premium growth, this shift was driven by reinsurance market hardening, which will limit opportunities for both net premium and profit growth.

"Summit’s management has taken actions toward restoring historical operating performance through a combination of expense reduction initiatives and rate increases. However, it remains uncertain if results will recover to levels that fully support a strong operating performance assessment," AM Best continued.

"High geographic concentration and competitive pressures also are reflected in the company’s limited business profile assessment, which also reflects high economic and financial system risk and the moderate political risk of The Bahamas."

However, on a more positive note, AM Best said: "These credit ratings reflect Summit’s balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, limited business profile and appropriate enterprise risk management....

"Summit’s balance sheet strength is assessed at the strongest level, based on its strongest level of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), in addition to its conservative investment portfolio predominantly composed of cash and short-term assets, and the company’s utilisation of quality reinsurers to reduce its net exposure to natural catastrophes and especially wind events.

"The organic growth of surplus over the years has been achieved through favourable earnings, but limited by shareholder dividends. AM Best expects the company’s risk-adjusted capitalisation to moderate over the near term due to premium growth in excess of equity growth, and higher catastrophe probable maximum losses from higher reinsurance retentions.

"However, capitalisation is expected to remain supportive of the company’s strongest level balance sheet strength assessment."