Sirius placed under review with negative implications due to Phoenix deal

Rating agency AM Best has placed Bermuda-based Sirius International Group's (SIG) outlook "under review with negative implications" following the company's recent  announcement to acquire control of Israeli insurer Phoenix.

Additionally, AM Best has placed under review with negative implications the financial strength ratings of A (excellent) and the long-term ICRs of “a” of SIG’s main subsidiaries - Sirius Bermuda Insurance Company, Sirius International Insurance Corporation (Sweden), and Sirius America Insurance Company.

The agency confirmed that these credit rating actions follow the announcement that SIG’s parent, Sirius International Insurance Group (SIIG), is exercising its call option to acquire all of Delek Group’s remaining holdings (47.35 percent) in The Phoenix Holdings, a leading insurance group in Israel that writes life and non-life business, for a cash sum of NIS 2.3 billion (approximately $653 million).

The transaction will provide SIIG with a controlling stake (52.25 percent) of The Phoenix, complementing the acquisition made in September this year of an initial 4.9 percent of shares for NIS 208 million in cash. The acquisition is expected to close in the first half of 2018 and remains subject to regulatory approvals.

According to the statement, the under review status with negative implications reflects concerns that the acquisition carries execution risk stemming from the size of the group being acquired, and changes SIIG’s strategic direction, as The Phoenix is specialised in primary business with significant life insurance and asset management activities. Whilst The Phoenix has a track record of solid operating performance, the successful integration of its activities will depend on SIIG’s ability to retain key management.

The under review status with negative implications also reflects the potential pressure the transaction could put on SIIG’s balance sheet strength, should it fail to finance the acquisition as planned, with the use of own funds complemented by equity capital raised from new investors (with a back-stop from SIIG’s parent, CM Bermuda). Whilst SIIG’s risk-adjusted capitalisation is not expected to deteriorate significantly provided the additional equity is raised, financial leverage is likely to increase as a result of the transaction.

AM Best stated that the ratings will remain under review until the sale is completed, and the agency has assessed the impact of the closing terms on SIIG and the rating fundamentals of its rated subsidiaries.

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