AM Best monitoring BF&M and Argus stock battle

Insurance ratings agency AM Best is monitoring the battle between Bermuda domestic insurers BF&M and Argus Group, although it says it does not warrant a ratings action for BF&M.

The agency, which affirmed BF&M’s financial strength rating of A, said it did not consider the investment by BF&M into a fund holding a 16.3% share in Argus Group to be of sufficient materiality to warrant rating action.

But it indicated concern over “less than full alignment” between the board and key stakeholders.
It said: “However, the recent announcement by BF&M regarding its strategic partnership with Equilibria Capital Management to engage in a merger defence strategy, in addition to the board’s adoption of a shareholder rights plan in response to Argus’s pending acquisition of a large minority stake in BF&M, continues to imply less-than-full alignment between the board and other key stakeholders.

“AM Best will continue to monitor the status of this transaction and may take rating action if the exercise of BF&M’s exclusive option to purchase an additional 13.7% of Argus is determined to be material to its business strategy, corporate governance or balance sheet strength.”

It added: “AM Best also continues to monitor the status of the pending purchase of a minority stake in BF&M by a subsidiary of Argus Group Holdings Limited, announced in early June 2023.

“AM Best expects BF&M to continue in its normal course of business operations while the transaction remains pending. AM Best will review any potential impact on strategy and operations should this transaction ultimately close.”

AM Best said its ratings reflected BF&M’s balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

It said over the past five years, BF&M, led by CEO Abby Clifford, had maintained a consistent level of GAAP capital. Given low premium growth this absolute level of capitalisation remains more than sufficient to support its underwriting and investment risks.

“BF&M mitigates volatility in capitalization levels with significant catastrophe reinsurance protection. This protection continues to be prioritized despite a hardening reinsurance market, though BF&M has retained slightly more risk in 2023 to mitigate price increases and secure sufficient limits.

“BF&M’s available capital gives it the flexibility to make these minor adjustments to the structure of its reinsurance program without exposing its balance sheet to unacceptable levels of volatility.”

AM Best noted that a loss in 2022 and consistent dividends had limited equity growth, although it noted that 2022 was anomalous as it had seen pressure on underwriting income and unrealised investment losses due to the market downturn.  

It said: “Pressure on underwriting income was due to a combination of factors, including loss-cost pressure on property and motor claims, some adverse severity in property claims, higher reinsurance costs and increased utilisation of health benefits.

“The company is mitigating these pressures with selective rate increases on some products, but pressure on health and property/casualty (P/C) lines of business is expected to continue over the near term. The company also has a significant pension management business that provided additional fee income in the period, though a decline in asset valuation in 2022 negatively impacted results in this line.”

BF&M’s property and casualty growth was likely to be impaired in the Bermuda and Caribbean markets, where it operates as Island Heritage, due to limited reinsurance capacity.

It added: “However, this capacity constraint is region-wide and BF&M is relatively well-positioned to pass on additional reinsurance costs to customers and restructure reinsurance coverage to provide more opportunities to grow its policy count.”

On health, AM Best said BF&M had been hampered by uncertainty over national health policy.
It said: “Premium growth in BF&M’s health line of business has been stagnant since the local government moved to fund its largest health provider and its authority, the Bermuda Hospital Board, with a block grant annually in 2019. This was considered phase one in what was expected to be a lengthy process toward a national plan, which then was delayed due to COVID-19.

“The health strategy of the Bermudian government now is less certain as its Bermuda Health Strategy 2022-2027 document contains the overall policy goals of the government but fewer details on implementation. AM Best will continue to monitor the developments of the Ministry of Health’s future market reform plans and how BF&M adapts to them.”