Standard & Poor’s downgrades Sagicor Life Inc

I tend to bang on about these rating agency downgrades, but they are important.

For those of you not familiar with these companies, their essence can be distilled thus:  ratings agencies are arbiters of creditworthiness.

In other words, agencies like Moody’s, Standard & Poor’s and Fitch bestow upon companies and countries¬† grades that indicate the likelihood that the rated entity will be able to pay its debts.

These ratings range from the gold standard – triple-A – which suggests the likelihood of default is minute, to Cs, which suggest the company or country poses a substantial risk to its creditors. The lowest grade – D – is reserved for those entities that have actually failed to pay their debts.

On that – last week, S&P lowered its rating Sagicor Life to BBB from BBB+, which is a one-notch downgrade. Here is the statement, highlighting and bracketed commentary is my own:

S&P: Sagicor Life Inc. Rating Downgraded To ‘BBB’ From ‘BBB+’; Outlook Stable

* Sagicor’s financial flexibility and liquidity could be under pressure if Jamaica’s economic environment continues to deteriorate.
* We are lowering our ratings on Sagicor, including lowering the long-term counterparty credit and financial strength ratings on the company to ‘BBB’ from ‘BBB+’.
* The outlook is stable.

MEXICO CITY July 24, 2009–Standard & Poor’s Ratings Services lowered its long-term counterparty credit and financial strength ratings on Sagicor Life Inc. to ‘BBB’ from ‘BBB+’. The outlook is stable.

At the same time, we lowered to ‘BBB-‘ from ‘BBB’ our rating on the long-term senior unsecured debt rating on the $150 million senior unsecured obligations with up to 10-year maturities issued by Sagicor Finance Ltd., a Cayman Islands-based subsidiary of Barbados-based Sagicor Financial Corp. Sagicor and Sagicor Financial Corp. irrevocably, unconditionally, and jointly guarantee these notes.

“The rating action reflects our opinion that a continued worsening in Jamaica’s economic conditions compromises Sagicor’s financial flexibility and liquidity,” said Standard & Poor’s credit analyst Alfonso J. Novelo. “Also, profits could be pressured as a result of poor conditions in the financial markets and the likelihood of a prolonged period of weaker-than-expected economic conditions in the main countries where the insurance company operates, in particular in Jamaica, where Sagicor has placed 27% of its financial investments.”

On June 10, 2009, we lowered our long-term foreign currency sovereign credit rating on Barbados to ‘BBB’ from ‘BBB+’; in addition, our rating on the Republic of Trinidad and Tobago, another one of the countries where Sagicor has a leading position, is on CreditWatch with negative implications. The U.S., the U.K., and other countries of operation are also facing economic challenges.

[In S&P speak, any country or company on “CreditWatch with negative implications” is likely to be downgraded in the very near future]

The counterparty credit and financial strength ratings reflect Sagicor’s strong operating performance, conservative underwriting discipline, good profitability, and strong capitalization. The ratings also reflect the company’s dominant market position as the leading life insurer in the Caribbean and its increasing geographic diversification.

These positive factors are partially offset by a relatively high concentration in revenues and investments in Jamaica, and the aggressive inorganic growth strategy the group has implemented in the past three years, somewhat mitigated by Sagicor’s long and successful track record in mergers and acquisitions.

The rating on the senior unsecured obligations reflects the subordination of the notes to obligations owed to policyholders and creditors of Sagicor’s subsidiaries.

The stable outlook incorporates our expectation that Sagicor will maintain extremely strong capitalization and good profits, even under the more challenging economic environment that the different countries where the group carries out business are experiencing.

We could lower the ratings if capitalization decreases dramatically, even if it remains at more than the 175% target, or if profits deteriorate substantially. Furthermore, ratings will be pressured in the case of negative rating actions on Barbados or Jamaica and the degree of a downgrade of Trinidad and Tobago.