A.M. Best Affirms Credit Ratings Of BF&M Limited

September 23, 2016

In a filing with the Bermuda Stock Exchange [“BSX”], BF&M Limited noted that that A.M. Best affirms the credit ratings of BF&M Limited and its subsidiaries.

The statement said, “A.M. Best has affirmed the Financial Strength Rating [FSR] of A [Excellent] and the Long-Term Issuer Credit Ratings [Long-Term ICR] of “a” of BF&M Life Insurance Company Limited [BF&M Life], BF&M General Insurance Company Limited [BF&M General] and Island Heritage Insurance Company, Ltd. [Island Heritage] [Cayman Islands].

“In addition, A.M. Best has affirmed the FSR of A- [Excellent] and the Long-Term ICR of “a-” of Insurance Corporation of Barbados Limited [ICBL] [Barbados]. A.M. Best also has affirmed the Long-Term ICR of “bbb” of the parent, BF&M Limited [BF&M]. All companies are domiciled in Hamilton, Bermuda, unless otherwise stated. The outlook of these Credit Ratings [ratings] is stable.

“The ratings of BF&M Life, BF&M General and Island Heritage reflect their good earnings, strong risk-adjusted capitalization, increased business diversification and operational efficiency. These companies have posted favorable net income for the past five years.

“The majority of earnings is generated by BF&M Life’s group health line of business, which in recent years benefited from a moderated medical cost trend achieved in part through enhanced wellness initiatives and improved pricing for overseas treatments. The positive operating results have contributed to the strong level of capitalization at each company. The capital levels at BF&M Limited’s insurance subsidiaries remain more than adequate to support their current level of business and insurance risks.

“While Bermuda remains the core market for BF&M Life and BF&M General, the organization has been successful in its geographic diversification efforts, in particular the property/casualty [P/C] line, with the acquisition and subsequent integration of Island Heritage, a specialty P/C writer domiciled in the Cayman Islands and with P/C business written across 15 Caribbean islands. The recently completed integration of the Bermuda and Cayman P/C operations is expected to produce economies of scale and increase the organization’s overall efficiency.

“These positive rating factors are partially offset by investment income volatility and its impact on net earnings and Bermuda’s limited growth opportunities. In addition, the organization’s geographic locations are exposed to catastrophic weather events and dependence upon reinsurance with quality reinsurers to mitigate this exposure. The organization’s investment income has experienced substantial fluctuations, primarily from changes in the fair value of fixed-income securities due to movement in interest rates.

“In addition, during 2015, investment earnings were impacted by mortgage impairments, including a $6.5 million write-down of a large mortgage. While the exposure of BF&M’s investment portfolio to local mortgage loans has diminished over the past five years, the organization continues to use this asset class to support longer term liabilities and increase investment yield. However, as economic weakness in Bermuda persists, there is a risk of additional future impairments. However, investment volatility is mitigated through active asset liability matching.

“Furthermore, BF&M Life and BF&M General operate mainly in the local Bermuda market that has been impacted by the global economic downturn, which has affected tourism, population growth and property values on the island. These factors result in limited local market growth opportunities for BF&M Life and BF&M General.

“The ratings for ICBL reflect the company’s supportive risk-adjusted capitalization, favorable operating results in recent years and leading market position in Barbados. The company’s shares, which are traded on the Barbados Stock Exchange, offer the potential for increased financial flexibility. Partially offsetting these positive factors are ICBL’s concentration of risk on the island of Barbados, which is subject to exposure from severe weather events, and its reliance on reinsurance as a catastrophic risk mitigation strategy.

“Additional factors include country risk, including macroeconomic pressures such as elevated unemployment levels, high domestic debt, a contracting insurance market and an increasingly competitive market environment, which may adversely impact insurance operations.

“The rating of BF&M is in accordance with A.M. Best criteria “Insurance Holding Company and Debt Ratings” in which the holding company rating is typically three notches below the rating of the operating entity.”

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