Standard & Poor's Corp. has downgraded Cooper Gay Swett & Crawford Ltd.'s credit rating to B- from B due to disappointing operational performance through the first half of 2014.
However, S&P also upgraded its outlook on the London-based reinsurer from negative to stable, noting that its recent decline in profitability appears to have leveled off.
In a report released Friday, S&P analysts said CGSC's operational struggles were rooted primarily in ongoing deterioration of its organic growth rates through the first six months of 2014. Analysts said the decline in organic growth was driven in part by increased competition in Latin America, hardening market conditions in London and rising pressure on property rates in North America.
“Our weak business risk profile assessment reflects constraints resulting from CGSC's operations in the highly competitive and fragmented middle-market wholesale and reinsurance brokerage markets and our view that ongoing industry and economic uncertainty will further challenge the company in the intermediate term,” analysts wrote in the report.
Analysts added that CGSC's credit rating downgrade “reflects constraints resulting from CGSC's operations in the highly competitive and fragmented middle-market wholesale and reinsurance brokerage markets and our view that ongoing industry and economic uncertainty will further challenge the company in the intermediate term.”
On the other hand, S&P's report took note of CGSC's recent efforts to reverse the slide in its operational performance, including a series of strategic acquisitions and a recruiting campaign aimed at bringing in new management to re-emphasize cost reduction, tactical sales and targeted acquisitions.
“The stable outlook reflects our view that the company's performance deterioration has likely reached its trough and that performance will begin to strengthen from growth and cost-savings initiatives,” analysts said in the report. “We expect full-year 2014 revenue growth in the 8%-12% range, as acquisition earnings flow-through mitigates the organic declines and margins remain relatively flat from the depressed 2013 levels in the 14%-15% range.”
In a statement released Friday, CGSC CEO Toby Esser said the credit downgrade, coupled with the company's recently filed 2013 fiscal results, has motivated the company to redouble its efforts to reduce operating costs and increase efficiency.
“Our 2013 results brought the less efficient aspects of our operating model into sharp focus, and have been a catalyst for positive change in reviewing how we operate across the group,” Mr. Esser said in the statement. “2013 was the first time in CGSC's history that the business did not grow substantially in profit terms. The challenges facing the group continue to have an effect in 2014, but, as recognized by S&P, our focus on reducing costs, the significant acquisitions (of Newman Martin & Buchan L.L.P and Epsilon Insurance Broking Pty Ltd.), the launch of start-ups ProPraxis, Latitude, Cooper Gay Dubai and Swett & Crawford Latin America, and the tactical sales strategies we have implemented are all beginning to have a positive impact.”
Mr. Esser added that CGSC plans to take “corrective action” to address its operational issues.