Sagicor Financial Company Ltd. (SFC) Earnings Call Transcript & Summary

Good morning. My name is Colin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Sagicor Financial Company Ltd.'s First Quarter 2021 Earnings Call. [Operator Instructions] Ms. Samantha Cheung, EVP of Investor Relations, you may begin your conference.

Hello, everyone, and thank you for joining our call today. A link to our live webcast and published information for this call is posted on our website at sagicor.com under the Investor Relations tab. Please refer to the cautionary language and disclaimers in our materials regarding the use of forward-looking statements and the use of non-IFRS financial measures, which may be mentioned as part of our remarks today. Unless otherwise noted, all dollar amounts referenced will be in U.S. dollars, which is consistent with our reporting practice. Joining me today are Dodridge Miller, our Group President and CEO; Andre Mousseau, our Group CFO; and Anthony Chandler, our Group Chief Controller. We'll begin with prepared remarks by Dodridge and Andre, followed by a question-and-answer session. With that, I'll turn the call to our Group President and CEO, Dodridge Miller. Dodridge?

Thank you, Samantha, and thanks to everyone for taking the time to join us. Today, as has been our practice in the last few quarters, I will give some brief remarks focusing on our operating environment and a snapshot of our overall performance for the first quarter. Then I will turn it over to our Group CFO, Andre Mousseau, who will provide greater details on our performance. We are pleased with our results for this quarter as we delivered meaningful revenue growth and strong net income to shareholders. In the first quarter, revenue grew 26% year-over-year to $432 million. Net income to shareholders in the quarter was $31.5 million, delivering a healthy 12% return on shareholders' equity on an annualized basis. Subsequent to our quarter end, you would have seen our communication on the successful completion of our $400 million senior note issue. We are very pleased with the execution of this bond issue, which allows us to materially lower our cost of capital. Over our long history, we have demonstrated resilience in the face of varying economic circumstances due to our prudent financial management and our ability to be agile and to take advantage of opportunities. Overall, we continue to deliver healthy financial results, maintain a strong liquidity position and strong capitalization levels well above internal targets. Turning to our operations. Before our CFO provides details on the operating segment's financials and drivers of performance, I would like to place some context on our operating environment given the current state of the pandemic. Our operations in the Caribbean continue to navigate through a challenging environment. As in other parts of the globe, second and third waves have periodically disrupted normal business operations in our markets. Through this, we have kept servicing our customers and have continued to generate robust new sales. And while the Caribbean economies are strong since 2019, our outlook remains modestly confident for a strong recovery as vaccinations in the target markets went through a struggle and was sped up over the last few months and as the vaccines are proceeding across the Caribbean. Throughout this period, we have stepped up our local efforts to support our clients, our staff and our vulnerable communities. With regards to our operations in the United States, 100% of our employees have access to vaccinations. We are also seeing COVID restrictions beginning to relax in some states given the effective vaccination rollout. Turning to our outlook. While we are clearly not yet through this global crisis, we have a sense of optimism. Our company is financially strong, and our operating results continue to improve quarter-over-quarter as we continue to progress our strategic initiatives. And with this, I will now turn the presentation over to our Group CFO, Andre Mousseau. Thank you.

Thank you, Dodridge, and good morning, everyone. As Dodridge said, it's good to be here reporting strong results once again as we continue to see robust performance after such a disruptive 2020. Total revenues increased 26% year-over-year to $431 million. This level of growth really comes from the comparison against Q1 2020, which had negative net investment income due to a sharp fall in asset prices in March 2020. Absent that, we actually had a quiet quarter from a premiums point of view, in part due to lower production quarter in the U.S. and in part due to devaluation of the Jamaican dollar year-over-year. Net income to shareholders was $31 million in Q1 compared to a significant loss in the prior year. Contributing to this was a $26 million of net income recognized on our investment in Playa Hotels and Resorts, which saw its share price improve significantly in the quarter as the outlook for hospitality assets improved with the global rollout of vaccines. I'll spend just a minute drilling a little bit more into this. In Q1, in early January, Sagicor Financial purchased 8.5 million shares of Playa from Sagicor X-Fund Jamaica, which is an investment company below our Sagicor Jamaica subsidiary that had taken in third-party shareholders. Sagicor X-Fund previously owned 20 million shares from having contributed some hotel assets that Sagicor Jamaica had owned. They contributed those hotels into Playa in 2018 and received back shares. They decided to sell and deploy the proceeds elsewhere. We at SFC decided, given our excess capital and our view on the recovery of the markets, that we would buy some of these shares. We bought 8.5 million shares at the top company at a net price of $4.80 per share, bringing our total shareholding at SFC to 10 million shares. Through the first quarter, the shares traded up closing at $7.30 near where they are today, and we have booked again. This transaction is also going to have the added benefit of greatly simplifying our reporting going forward. Prior to Q1, we had accounted for Playa as an associated company, which means we consolidated our proportionate share of Playa's net income or loss onto our income statement. Then we had to back out most of that income or loss out of our results to shareholders through our noncontrolling interest. Going forward, we will simply mark the investment to market every quarter. It will make understanding the results of our Jamaica operation much more simple. Now I'll speak about the first quarter performance of our major operating segments. At Sagicor Life, our operating segment in the Southern Caribbean, total revenue increased 15% year-over-year to $130 million. We benefited from single premium annuity sales of $13 million and $6 million of annualized new business sold in the quarter. Net income to shareholders of $8 million was $6 million higher than the previous year, which included asset price volatility at the end of the quarter. At Sagicor Jamaica, total revenue of $165 million, increased 25% year-over-year as in the prior year, it had take net investment losses. Net premium revenue was down 10% in U.S. dollars driven principally by a devaluation of 8% year-over-year in the Jamaican dollar. Sagicor Jamaica like Sagicor Life has some seasonality in it, with Q1 traditionally being our quietest sales quarter. And when you compare it against Q1 of last year, that was really the last quarter where sales were unaffected by the operating environment as the Caribbean didn't shut things down last year until about the third week of March. So most of Q1 last year was an unaffected sales quarter. Our share of Sagicor Jamaica's net income increased by $1 million to $10 million net of the effect of that currency devaluation. Sagicor Life USA grew its total revenue 22% to $111 million, growing revenue relative to a comparable quarter that had investment losses in Q1 of last year. Our net premium revenue was $87 million, including $82 million of new business. As a reminder, in our U.S. segment, we can choose to shift new business production up or down based on marginal pricing changes. In Q4, we had turned production higher. In Q1, we throttled back production a bit based on the spread environment. We've increased production in Q2 and would expect to be higher for the rest of the year. Net income to shareholders was $1 million, which was an improvement over last year. But the low level of profitability was, again, a reflection of the low new business sales. Our total comprehensive income to shareholders this quarter was just negative as we had some negative changes in bond prices back in capital in Q1 with rising rates in the U.S. And we saw a couple more points of devaluation of the Jamaican dollar, which ran through other comprehensive income. With that, our book value per share is USD 7.52 or CAD 9.46. One final note on an important development subsequent to Q1. As Dodridge noted, last week, we closed a refinancing of our top company bond. We managed to get very good execution and support from the bond market in an offering that was over 3x oversubscribed and issued a $400 million bond at 5.3%. This is going to replace our old bond, which was a $320 million note due next year that yielded 8.875%. So we saw more than a 350 basis point improvement in our debt cost of capital. We tendered for our old bonds and got $130 million of take-up. So about $188 million remains outstanding. The call premium goes to 0 in August. So you can imagine we would redeem those when it makes sense to do so. With that rate, we remain well capitalized, and we have added to our already significant liquidity by retaining about an extra $70 million to fund future growth. Pro forma for that transaction, we expect to have a debt-to-capital ratio of approximately 25%. And with that, I will turn it back to Dodridge and Samantha.

Thanks, Andre. We are now ready to take your questions. Operator, please open the line to our analysts for their questions.

[Operator Instructions] So your first question comes from Meny Grauman from Scotiabank.

First question is for Dodridge. It sounds like you're definitely getting more optimistic about the outlook for the Caribbean, but I'm hoping you could get -- or you could give a little bit more granularity in terms of how you see the pace of vaccinations and the overall reopening of the jurisdictions that you operate in, how that's all going to play out. If you look across your main geographies, Jamaica, Trinidad and Tobago and Barbados, which geographies are ahead? And just in general, when do you expect those economies to actually be fully open?

Thanks for your question. When I refer to my optimism, I'm looking largely the tourism-based Caribbean islands, which will be the Eastern Caribbean, Barbados, Jamaica. We know that Jamaica is going through the tail end of a recent surge, which seems to be coming back under control. But the Eastern Caribbean and Barbados, heavily tourism-based, they have had good experience. And through the pandemic, Barbados had an uptick early in January, that is now under control and the government is about ready to relaunch its tourism product. During the closure, they have spent a lot of time retraining staff and retooling the plant and getting ready for the coming winter season. So I -- based on what I'm hearing, they expect a good outcome as the source markets are way ahead of the vaccination and as the Caribbean is proceeding quite aggressively with their own vaccination program. Trinidad is in a slightly different situation. But again, that's not a heavily tourism-based country, and we're optimistic that they will, too, get that under control and reopen for business.

Andre, in talking about the U.S. segment, I think you were referencing better annuity sales in Q2. Is that just again a function of sort of you coming in and out of the market depending on spreads? And related to that, how much of a clear sight line do you have? It sounds maybe like conditions change pretty frequently in the U.S. market. So how confident are you in terms of the outlook for annuities for the rest of the year? And can it change quickly? Or is it pretty clear in your mind that the conditions will improve and sales will be able to ramp up as you move that through the year?

Thanks for that, Meny. We -- when we say come in out of the market, I mean, we're keeping our products on our producer shelves. And really, what it comes down to is where do you choose to price yourself relative to competitors that are selling similar products. And so what we have the ability to do is to nudge crediting rates, essentially pricing up and down, to be more or less relatively attractive. And to your question of how quickly can that be done, the process is not instantaneous, but a change in pricing can be done. It's measured in weeks, not in months. And so we're constantly evaluating the spread environment, which is a function of where the market clearing rates are relative to where we're able to add new assets to back the liabilities and kind of making a call on how much we want to be producing in a given week or month. We think about our annual production in terms of -- while we think about our production in terms of annual targets, I would say that our quarterly run rate for Q1 was well below our annual target. We're confident based on what we've seen so far in Q2. And based on our past track record of being able to throttle production forward and backward, we're still confident with our original target, which I don't think is a disclosed number, but it's well in excess of what the Q1 annualized rate would be.

And in terms of just the competitive dynamics in the U.S., are there irrational players in the market as you see it? Like is it very extreme differences in pricing when you decide to throttle back? Or is it much more subtle? I'm just trying to get a sense of sort of your competitors and how you view your competitors. Does it sometimes get totally out of whack? Are we talking about a relatively small difference here?

We're still talking differences that are at the margin. I mean we're talking about pricing ZIP Codes where you're in a very different competitive position by, call it, a 30 or 40 basis point change in your -- in the underlying crediting rate on annuities products. So it's not like we see folks out there usually who are way, way off base. But to the extent that ever does happen, we're -- you simply set it, stand aside and allow other people to take up the production. And we talk about these products in buckets so that we can summarize it. But the reality is, within annuities, there are several different kinds of annuities that we sell. And even within those annuities, we're selling multiple different tenors, right? So within -- even within the MYGA product, which is the biggest ones that we're selling right now, we're selling 3, 4, 5, 7 year. And so if you see a player who is being particularly aggressive in one tenor, you can choose to let them take up the majority of the production and be somewhere else. So different players are getting different economics out of that business based on what they choose to do with the assets. But in general, we see ourselves as being able to be competitive.

And then final one for me. Just wondering if there's any notable reserve releases in any of the segments. I don't think there was any reference, but I just wanted to double check if there's anything there.

I would say no, it was a very kind of quiet actuarial quarter. As we've talked about before, there was -- we do our big work around Q3, and then some of that gets followed often into Q4 when we do our annual numbers. But from an actuarial point of view, this was a pretty unaffected quarter.

Your next question comes from Doug Young from Desjardins.

Just wanted to understand first just a little bit about the earnings emergence. And so common shareholder earnings was USD 31.5 million, $25 million of that was due to gains from the sale of the Playa in the accounting there. And so it's $6.5 million net of that. And so I'm just trying to get a sense of, like what drove the earnings? Like was it new business? Obviously, new business was a negative for the U.S. division. So I'm just trying to get a sense of what the puts and takes from new business experience. You just mentioned the assumption changes were not material. Were there additional investment gains or yield enhancement that came through? Just hoping to get some bigger-picture kind of themes and trends for the quarter.

So thanks, Doug. Bigger picture, there were no material changes that would run through. And I think if you're thinking about source of earnings analysis, when I responded to Meny's comment or question, there were no material basis or assumption changes. So if you back out the Playa net income, which is from the marking at the fair value, we end up with a net income number that is pretty low at $6 million in the sense that it would be below a normalized targeted run rate. And I'd say that's reflective of seasonality and the -- in our Caribbean operations, where traditionally, the first quarter is a quiet quarter as a lot of our new business generation is driven by the direct sales force that is driven by annual quarters on the calendar cycle. And so Q1 tends to be quiet. And if you look in the past, you could see that pattern over the last number of years in terms of the proportion of our net income out of those subsidiaries compared to the full year. And then with the U.S., it's not so much seasonality as there is a bit of lumpiness based on whether we decide to throttle production on and off. And so what we're saying is we would -- over a full year, we would expect to be generating higher run rate sales out of the U.S., which would mean more new business, which would mean significantly more net income from new business generation in the U.S. segment.

Okay. And then the head office had net income of $12.2 million. I assume that's the Playa? Or is there something else that was in there?

Yes, that's correct. That's where it ended up. Our head office and other is a mixture of head office SG&A, our finance costs like our outside bonds and also several different noncore operating businesses that we own that end up being bucketed into that segment.

Okay. Perfect. Then just on the Sagicor U.S., and you talked about production and some of the puts and takes there. But -- and I apologize, but I just thought for this question. But on Page 19, in the benefit section, there was just a mention there was lower benefit payments in the U.S. resulted in higher provisions for future benefits being maintained. And I just didn't understand what that was. And so I don't know if you can just simplify and elaborate on that.

Page 19 of the MD&A?

Yes. And if it's easy to follow up, I'm happy to do that as well.

Okay. Well, we're...

When you're looking for that, I can throw another one. And we talked before about using reinsurance in the U.S. as a way to improve the profitability and capital efficiency within the U.S. division. I didn't see that there was any additional insurance or reinsurance that was done in the quarter. Is that correct? And any updates in terms of the outlook for further using reinsurance?

That is correct. There was nothing in the first quarter. And I'd say you can expect us to -- you can expect us and we would expect to announce details of further reinsurance this year.

Okay. And so that's still on plan. It's just there wasn't -- I would assume that's just going to be lumpy from time to time as well?

Yes. Correct. I mean we may -- we could evolve it eventually into a flow arrangement where it would be less lumpy. But there's a lot of the U.S. balance sheet to do, so it's going to be lumpy first.

Yes. No, that's fair. And then just on credit. I mean credit wasn't big in the quarter, but I did see in Sagicor Jamaica, there was a build. And I would assume that involves -- that's related to the bank, and that would be involved in higher impairments and then potentially some changes for your allowances for performing loans, and so either a release because of forward-looking indicators improved or build because of some of the challenges that continue to go on. And I just wanted to get a little bit of clarity if there was any big items underneath that Sagicor Jamaica credit item.

I may ask Anthony to elaborate a little bit. If you think about the Jamaican book, it's directionally evenly weighted between larger loans and credit card portfolio. And so you've got a little bit -- you've got both. Dodridge and Anthony, off the top of your head, it's a small credit number, but it is still -- it's $400,000 in Jamaica. Was there anything large in it?

No. But Jamaica will have the bank, where the proportionate credit events will be a little more significant than in some other areas. So that's largely what's happening there.

Yes.

Andre, this is Dodridge. There were no material credit events in the Jamaica bank. What you may be seeing is an uptick in credit cards.

Yes.

But that goes up and down as the collection efforts are intensified.

Yes. That makes -- okay. And then just lastly, the MCCSR was down 6 points sequentially. Any big moving pieces there? Was there implications from interest rates? Or -- and I didn't see anything. I know you did a debt restructure that kind of went after the quarter, but I didn't see anything in the quarter that I -- that would have drove that down. But I'm just hoping to get a sense of what drove that down 6 points.

I don't think there were material movements, Doug. I think you can expect to see that the MCCSR kind of wander a path in and around a number, but kind of go up or down 5 to 10 points in any given quarter based on the precise capitalization and dividend timing at the subsidiaries.

[Operator Instructions] Your next question comes from Darko Mihelic from RBC Capital Markets.

I just want to first revisit Playa for a moment. Andre, you gave us a bit of history there and what happened in terms of the transactions. Can you just remind me the -- when the fund originally decided to sell its stake, you guys have made a decision to buy it. Why was that decision made?

At the fund level or at the SFC level?

At the SFC level.

We have a view on the assets, including having some expertise around our investors and Board table around hospitality assets in general and this one in particular. And I think we saw disproportionate relative value at $4.90. We saw ourselves having a significant excess capital position to be able to take advantage of that. And so that's a bit of a one-off in terms of -- it's not a strategy necessarily to go and do more of these, but we made a decision on it. And so far, it's worked well.

And what's the intention?

Pardon me?

What's the intention? What do you intend to do with this asset? Hold it forever? Or...

I think we would continue to reevaluate that on a quarter-by-quarter basis. And it's a mixture of how the stock trades relative to our view on value and also where we are with our capital position. I think right now, we have a significant amount of excess capital. And so we're in a comfortable position of being able to be a supportive shareholder.

Okay. Okay. And then just moving back to the U.S. for a moment. I'm just trying to get some sort of sense of -- I don't know. I need a reference point. I need materiality. So can we talk about what you sold in the quarter relative to last year's run rate? It sounds like you don't want to give out targets in terms of sales. But I just need some sort of -- how much were sales down? How much were they -- how much do you expect them to improve? I see other players in that market actually put up record sales in Q1. Perhaps they were pricing inappropriately. I don't know. But I certainly see other ones, especially even in MYGA sales. They had very good results in Q1. So I'm just -- first, I'm looking for some reference, like a reference point in terms of materiality or in terms of how much it moved down relative to the past and the future run rates. Can you help me with that at all?

I can certainly help you to -- for reference points, and that is if you look in our segmented financials, the sizable majority of our net premium revenue for the U.S. is going to be annuity sales, which are going to be annuities new sales. So there is some periodic premium in there. But over 90% of that is going to be new annuity sales. So if you look at that number, and I'm looking at Note 3.1 to our financials and where you say, okay, we did $87 million of net premium revenue, of which I said in my comment, I think $82 million was new sales. The prior year in Q1 was $120 million. So that is off by approximately 30%. As I talked about earlier, we're picking our spots based on the spread environment. You're right, some folks were aggressive and had more sales. We're not giving specific targets, but we certainly have aspirations to be producing well in excess of the run rate that we had in Q1. And I'd say it would be well in excess of the run rate that we had this year in Q1. And we're seeing that already so far in Q2.

Okay. And as I understand the market, I mean there's -- rates are changing quite a bit. And you mentioned tenors. You mentioned 3-, 4-, 5-, 7-year tenors. And so there could be an onslaught of these things that in a year or 2 would be up for potential surrender or whatever. So is this a phenomenon that you're working on? Because I understand the MYGA, that's fine. But fixed annuities. Is this something that you can shed some light on in terms of, first, whether or not you are preparing to build other products for what potentially could be a meaningful shift later in the year? And if you do that, I guess what I'm interested in understanding is the MYGA sales versus fixed annuities, profitability and the whole search for scale. I mean, as I understand the U.S. business, right, you guys are at scale. For some reason, you turned off sales in the first quarter. So am I sensing here that, all right, maybe margins in the product wasn't as high as you wanted. You turn them off and you're preparing to shift into new products. As time wears on, you're expecting sales to rebound. And in fact, profitability per sale will go up. Or is this purely just about the marketplace and the movement in rates?

Andre?

Yes?

Can I just take a shot at answering Darko's question? Darko, we have long relationships with a group of independent brokers. And we're also on some specific platforms. And we monitor the market on an ongoing basis. And what we target to be in a band of prices that put us in the top 3 on those platforms and in our relationships with the brokers. What we see from time to time is that someone who might have been lagging in production, maybe a little bit more aggressive with their prices, and we may have drop to #4 or #5. And we have to take a view, is it worth competing against that person in the short term and destroy margins? Or do we wait it out and then step back in? So those are things that we are constantly monitoring and in discussions with our platform leaders and with our brokers. To your point, we used to be heavily into the indexed annuity. We've seen the shipment we've responded and we're in the MYGA. And we're constantly monitoring where the market is going and preparing new products to step into the market. But for the first quarter, we see -- we were -- we got good sales in the first quarter, right? Sorry, in the fourth quarter. We saw a couple of players stepping in and being aggressive in the first quarter. We chose not to respond to that. And we are ramping back in the second quarter. So it's constantly monitoring market, constantly in discussion with the independent agents and watching to see where is the shift and when does the shift to different products. Our development team are constantly working on what's the new and next thing that the market is looking for. I hope that helps.

Yes, it does help. And it sounds like the competitive environment is -- well, it is competitive. So the -- I guess the question then becomes, how long are you willing to drop down in sales from top 3 to 4, 5, 6 spot before you lose and you fade sort of your recognition, your brand and people start to move on to other companies? I suppose it sounds like you're back in the market in Q2, and you expect things to rebound. So my question, again, to Andre is the profitability dollar for dollar the sales of these annuities that you had in first quarter versus second -- I expect there to be -- if you tell me there's a rebound, I expect it to be a rebound. But is the profitability per sale the same or better in Q2 and why?

Well, the changes in profitability come down to, in large part, to the spread that you think you're getting out of it. And so that's a function of your crediting rate and the assets you're putting behind it. I don't think we would want to shift. I don't think we would want to shift or signal a shift in unit economics necessarily because I don't know that we're seeing things materially more or less based on where we can get the sales. But I think we're saying that we expect to -- at some point in the second quarter we have throttled on, and we expect to see higher levels. And you'll see as it evolves, the marginal difference in net premium down to the segment net income.

And Darko, we're not doing these things without discussing with our partners in the market. So there's no risk to the brand. And you would see that we were able to ramp up in the fourth quarter without any difficulty. And we're, again, starting to do that in the second quarter. These discussions and decisions are taken in conjunction with our production partners and our distribution partners in the market.

Right. No, I anticipated that. I just -- hopefully, you understand the line of question where I'm coming from is a sense that you're building out a U.S. business, but it seems like from time to time, you hit moments where pricing pressure is there and sales pull back while bigger competitors continue to charge ahead. So it just -- effectively, what I'm looking for and what I'm trying to better understand about the U.S. business is, we all know it's not to scale, and it's showing -- at least this quarter, it seems to show that it may not be as easy to get to scale depending upon competitive forces. And that's, I guess, what I'm trying to figure out is how willing you are to get to scale in this business irrespective of the competitive environment.

So Darko, we said this when we started to reengage the market and retain the business we wrote in early part of 2018. And what we've been able to demonstrate since then that given the competitive pressure and the different scenarios that we have to play out, we're able to meaningfully grow the business. So I wouldn't judge our ability to do so on our trough back in Q1 because if you look back from 2017 to where we are now, we've had significant growth and we're able to successfully do that in the face of a competitive environment. So I think as we go forward, we'll demonstrate our ability to engage the market profitably and while building the business on. But I understand your question.

Ladies and gentlemen, that's all the time we have for questions today. I'll now turn it back to Samantha for closing remarks.

Great. Thanks, Colin. Thanks, everyone, for joining our call today. Following the call, a telephone replay will be available for 1 month. As well, a transcript will soon be available on our website. If you do have additional questions, please do not hesitate to reach out to any of us. Our Annual General Meeting for shareholders will be held virtually on June 4, and details are available on our website at www.sagicor.com. With that, thanks again for your participation and interest today. Have a great day. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.