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

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Sagicor Financial Company's Third 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 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 COO and CFO; and Anthony Chandler, our 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 joining us on this call today. In keeping with our usual approach, I will give some brief remarks focusing on our overall performance for the third quarter, provide some comments on our operating environment and share our thoughts on our outlook going forward. Our Chief Operating Officer, Andre Mousseau, will then provide you with greater detail on our financial and operating performance for the quarter. Turning to the highlights for the third quarter. The Sagicor Group delivered an excellent quarter of very strong growth in revenue and profitability, with many key performance metrics progressing well. Total revenue of $782 million for the quarter grew 94% year-over-year, and led to net income to shareholders of $50.4 million for the quarter. Earnings per share was USD 0.35, and book value per share grew 9% year-over-year to reach USD 7.92. During the quarter, we maintained strong and stable capital levels. On a year-to-date basis, revenue grew 44% to $1.7 billion, and net income to shareholders reached $91.2 million. During the third quarter, our U.S. segment was again a strong contributor to both growth, group revenue and net income, demonstrating that our strategy of getting this business to scale is delivering positive results. Our operations in Jamaica and the Southern Caribbean also posted continued solid operating performances in the face of intermittent restrictions stemming from various COVID spikes. Annual actual review show that in aggregate, our liabilities were [indiscernible] and resulted in some further emergence of earnings. I'm proud to announce that the Sagicor Group surpassed $10 billion in assets, another milestone in our 180-year history. We believe we are on a solid footing as we continue adding to our strong record of growth. Turning briefly to our outlook. The business environment in most of the countries in which we operate is gradually returning to normal as the level of vaccinations increases and the countries are relaxing restrictions. Global tourism, a critical part of the Caribbean economy, is also showing a positive sign of rebound, and the Caribbean is expected to enjoy a strong upcoming winter season. Let me now take this opportunity to update you on executive and Board changes. Subsequent to the quarter end, we announced that Bart Catmull, formerly the President of Sagicor USA, has been appointed to the position of Group Chief Risk Officer at Sagicor Financial Company. Andrew Gallagher who previously held that role, has taken on the role of President and CEO of our affiliate reinsurer, Sagicor Reinsurance Bermuda Limited, as that company is expected to play an increasingly important role in our capital management strategy. We also announced the retirement of Timothy Hodgson as Board Chair and the succession of Mahmood Khimji effective at the end of this year. Tim was instrumental in the development and successful completion of our transaction in 2019 with Alignvest, which delivered us a listing on the Toronto Stock Exchange and a significant amount of new equity to fund our growth. We thank Tim for his strong leadership over the last few years. We welcome Mahmood to the role of Board Chair. Mahmood is currently the Chair of our Capital Allocation Committee, and we look forward to working with him in this new role. I now turn the presentation over to our Group COO, Andre Mousseau. Thank you.

Thank you, Dodridge, and good morning, everyone, or good afternoon to our colleagues and shareholders in the Eastern Caribbean. As Dodridge referred to, we had a very solid quarter in Q3. We benefited from a lot of things going right, including robust underlying profitability, exceptional growth in our U.S. business, positive emergence from our annual review of actuarial assumptions and mark-to-market gains from our investment in Playa Hotels and Resorts. Total revenues increased 94% year-over-year to $782 million, with revenue growth driven by our U.S. business. Net income to shareholders was $50 million in Q3, a strong performance by any measure, and particularly when compared to our third quarter last year when we showed a modest loss. In Q3, as we do this quarter every year, we conducted a review of our actuarial assumptions compared to the actual emergence from our book of business. Based on our updated experience, we benefited from net release of reserves of $12 million. This was driven by a $37 million release in Sagicor Jamaica, of which $18 million accrues to SFC shareholders, primarily related to better-than-modeled policyholder behavior in lapse and morbidity. This $18 million was offset by a $7 million strengthening of reserve in our U.S. segment due to our refreshing of reinvestment and a bit of strengthening of mortality assumptions. Sagicor Life's review resulted in reserves being virtually unchanged on a net basis. At Sagicor Life, our operating segment in the Southern Caribbean, total revenue was flat year-over-year at $122 million. We benefited from a -- from single premium annuity sales of $8 million and $7 million of annual recurring new business sold in the quarter. As with Q2, pretty consistent with our expectations. Net income to shareholders of $7 million was down $1 million compared to 2020. Net income margins in SLI were negatively affected by higher-than-budgeted lapses and surrenders, reflecting the continuing strain on our policyholders of the slow economic recovery in these jurisdictions. We believe this effect is temporary, but may persist until the economies fully get the benefit of reopening, and in particular, more cash in the economies from the upcoming tourist season. At Sagicor Jamaica, total revenue of $174 million increased 12% year-over-year measured in U.S. dollars. Our share of Sagicor Jamaica's net income increased by $6 million to $27 million, reflecting solid underlying performance plus the positive emergence from the actuarial review of its portfolio. Now on to Sagicor Life USA, which had an excellent quarter of growth. This segment's growth is consistent with our strategy to grow our U.S. business quickly to scale by adding annuity liabilities when we are able to invest at attractive spreads. This quarter, we were able to drive significant new annuity sales at stronger-than-budgeted spreads. Overall, our U.S. business more than quadrupled its revenue to $465 million as a result of taking the present value of a portion of the anticipated profit from these policies being sold. The segment generated $23 million of net income in the quarter compared to a loss in Q3 of last year. Net income would have been closer to $30 million had it not been for the strengthening of reserves for our annual study. We anticipate we will continue our push in the U.S. to increase our assets as well as improve our investment yields by adding assets other than public bonds in that portfolio to trade some of our liquidity for enhanced returns. We anticipate in Q4, we will continue to grow our U.S. business, albeit at a slower pace than in Q3. Outside of the segment net income, as I mentioned earlier, we benefited from about $9 million mark-to-market gains in our shares of Playa Hotels and Resorts. We do continue to believe these shares have upside potential from here based on our knowledge of these assets and the anticipated recovery in tourism in the Caribbean. Our total comprehensive income to shareholders this quarter was $51 million, reflecting essentially flat -- other comprehensive income. With that, our book value per share grew to USD 7.92 or CAD 10.05. We repurchased 2.3 million shares at a discount to book value through our normal course issuer bid in Q3 and continued to repurchase here in Q4. Looking at the balance sheet, you'll see our debt-to-capital ratio normalize down to 24% as we repaid the remainder of our old notes that we refinanced in Q2. With that, we remain well-funded and optimistic that we can build on this run of solid performance as the global economy recovers. And with that, I'll turn it back to Dodridge and Samantha.

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

[Operator Instructions] And your first question will be from Meny Grauman at Scotiabank.

First question, just on the U.S. You highlighted extremely strong performance there. I'm just wondering if you could give us a little more detail in terms of -- specifically the market dynamics during the quarter especially from a competitive point of view. What was the -- sort of the environment that allowed you to deliver the kind of performance that you delivered in Q3? It seems like there was a sort of a -- a lack of competition, if you will. Somehow, there was a lot of business going your way. If you could just give us a little more detail in terms of what the dynamics were and that would be helpful.

Sure. Thanks, Meny. I can take that. If you look at the competitive dynamics for the annuities products, which are now the large majority of what we're selling in the U.S., you can think of competition in terms of the rates that you have relative to other providers. And then when you look through to profitability, you have to compare the rates that you need to credit versus the investments that -- versus the investment rate that you think you can put on the books when you're matching assets against those liabilities. And so what you see out in the market is the notional rate. And while we did get more share, we're a small -- we're still a small proportion of the market. But what you don't see are the spreads that people are getting. And what we saw towards the end of Q2 and in Q3 was an ability to be more aggressive on the rate than some of our competitors, but still be able to invest at wider spreads than we would have anticipated. And so it's really the spread dynamic that we felt drove the opportunity to put a lot of business on the books. And so this is -- this is, in effect, the opposite of what we had seen back in the first quarter, so we were able to put much more much more premiums on our books than we had at any other point in the year and still have stronger spreads. If you look at implications for the rest of the year, we have scaled that back a little bit. We're still seeing strong net spreads, but I think our -- our view of that would be that, for the U.S. production, would look probably more like Q2 than it did like Q3 when I talk about Q4, the quarter we're in now.

Got it. And just wanted to ask, shifting to this Caribbean. Just wanted to get a better sense of your outlook for the tourism season? We're getting closer to that peak tourism season. Just wondering what your views are and if there's any data points that you have at your fingertips in terms of, kind of what it's likely to look like for the Caribbean, as winter rolls around up here in the north?

Meny, this is Dodridge. I think when we were last on the call, there was some uncertainty as to what the winter season would look like because of the prolonged impact of lockdowns coming from the pandemic. We've seen increasingly that the countries are removing the restrictions. They're ramping up in vaccinations. The source markets have also had a good response on the vaccinations and the indications are that there's strong forward bookings for the winter season across the Caribbean. And in addition, we're seeing an uptick in arrivals so far in the third and into the fourth quarter. So the signs are positive, and we're still are cautious about it, but we're optimistic that it will be a strong winter season for the Caribbean.

So relative to 2019, are we still most likely going to see significant declines from that pre-pandemic year or not so much? What's your view on that?

The indication -- the indications are that we will still be behind 2019, but closing the gap as we go along.

Thank you. Next question will be from Darko Mihelic at RBC Capital Markets.

I just wanted to follow up on the U.S. business first. Last quarter, I had asked about reaching scale. And obviously, this quarter got you there -- in getting you there a lot quicker. So the question is what happens when you hit scale? Maybe you can give us an idea of, dollar for dollar, what the difference would be. And maybe the way to think of it is if we had this kind of production, a year from now and the balance sheet is, I think, you said $4 billion or so. What would look different for us and for investors on today's level of sales if you were at scale?

Well, I think what we're -- our thesis is that we can add -- is that we can add assets at this rate without increasing our SG&A, and so fundamentally, you would have -- you would have more gross margin off the back book over the same amount of SG&A. And so all things being equal with another $1 billion of assets, the return on the net income and the gross margins are going to look a lot better. Now, as you're aware, under IFRS 4, when you have a business that is growing this quickly, a significant proportion of the U.S.'s net income right now is on the basis of the -- a portion of the anticipated profitability on some of these products. And under IFRS 17, that's going to change to amortize that profitability over the -- over the life of the policies. And so by the time we'll have made that switch, your -- the size of the back book will be more important and drive more proportional difference on your income statement starting in 2023.

I guess that would incentivize you to get as much sales on the books as possible because you would then have to sort of calculate your contractual service margin and bleed that in over time. It's almost -- it's almost like double dipping on earnings, I guess, but yes. So I understand that dynamic, I suppose. The one dynamic that, since you touched on IFRS 17, the one dynamic that's a little bit blurry for me is the switchover to IFRS 17 and your MCCSR ratio. The regulator here in Canada has given us some ideas on how and what might happen with the LICAT ratio, so I can mentally kind of work through some of those gymnastics. But can you give us the quick and dirty on -- sort of what happens with your IFRS 17 changeover in your MCCSR ratio?

Well, the quick and dirty is that many of the regulators in our environment are in the Caribbean, where MCCSR still applies, are gravitating towards adding CSM into capital in effect to try and make it as comparable from 2022 into 2023. Now, that will be directionally quite comparable. It won't be exactly -- it won't be exactly dollar for dollar, but I think that's the -- that's the assumption that we're going under now. If you look -- for example, we have a covenant in our TopCo bond around the MCCSR that we just -- that we just refinanced because we're not ready on LICAT yet given all the changes that are happening with LICAT live in the Canadian market. And so -- for example, we explicitly put into that covenant that we will add the CSM into capital for purposes of calculating the MCCSR.

Thank you. [Operator Instructions] And your next question will be from Aditya Gupta at Desjardins.

Just on the capital release opportunity in the U.S. using the internal reinsurance. We haven't seen any new transactions in 2021. I just wanted to get a sense of opportunity here to free up additional capital. And also, if you could just provide some color into the whole process of this and maybe give us like a hypothetical timeline from when you identify a block to completion?

It's -- thanks for the question. We are in process of working on -- working on putting the next block into Bermuda. I think we would expect that that would be concluded in the first half of 2022 as opposed into -- in Q4 of this year. Basic timelines is, we get together, we do the work. We have a governance process that needs to involve the sister company, so to speak, negotiating ceding commissions. And then we need to put it in front of the U.S. regulator in Texas for U.S. business and Bermuda for Sagicor Re Bermuda. And all of that takes, front to back, the better part of 6 months. So I would expect that we would include the large block of production that we've done in Q2 and Q3. And on that timeline, you would be looking at Q1 or Q2 of next year.

[Indiscernible] just to be clear -- Just to be clear, we did our first transaction in 2020. The second one was completed in April, I believe, of 2021, and we expect the third one to be done in the first quarter of 2022. So we did complete the second transaction in 2021.

And just a follow-up. Like, my understanding is there's still a lot that can be done on this side before you would think about changing the reinsurance arrangement to a more flow arrangement. Is my understanding correct?

Yes, that's correct. I think once we're through this next large block, then we would look to put a floor arrangement that would just make it happen automatically. There are certain pieces of the U.S. capital charges that make -- you get more of an advantage on business as it ages because the U.S. company has to carry the business risk portion of the capital charge, whether it reinsures it or not. So you get more bang for your buck in older business, and that's why we're doing it first.

Great. And my last question is just on the actuarial assumption review. Just curious, did you guys look at experience that came maybe up to the latest quarter? Or was the experience study done from an earlier date? Basically, what I'm trying to get at is, if you took into account the experience in this COVID pandemic here or not and why?

Our actuarial cutoff was the end of Q1 of this year, I believe, and so it -- it would have had significant COVID experience, but not Q2 and Q3 of this year.

Thank you. Next is a follow-up from Darko Mihelic at RBC Capital Markets.

Yes. Sorry, I've forgotten to ask a bit of a numbers question here just for the model. One of the things that we've noticed is, in Sagicor Life, tend to have a bit of a better fourth quarter typically, and the benefit ratio typically falls as well. Should we be expecting the same thing? I mean, I know previously, we've been sort of highlighting some issues in that business of ops and so on. So just wondering if you can give me an idea of kind of what to expect and think about going forward? Your benefit ratio did improve in Q3, a little bit from Q2. Can we expect a similar level of improvement into Q4 for Sagicor Life?

Short answer is yes. There are a couple of different things in play with SLI with respect to Q4. One is, there is -- there tends to be some production seasonality in our markets there with the direct sales force, and we do take some negative reserves of some of the annual new business. So we've seen that bump pretty consistently over the last couple of years. The second thing is, there are some assumptions from an asset liability matching point of view that SLI does in Q4 as opposed to in Q3, and we've seen a little bit of emergence of that in the last couple of Q4s. I -- we would be cautious in guiding towards the same level of performance that we've seen in other Q4s from SLI? I'd like -- we specifically not like to point to that. But we would expect that Q4 sitting here today would be higher than Q3.

Sorry, the ratio would be higher? Do you mean the ratio would be higher? Do you mean -- Do you mean...

No, I'm just talking net income overall.

Right.

And so the benefits ratio would be lower.

Yes, yes. Okay. Okay. I figured that. Yes. So yes, okay. That's very helpful. Andre, appreciate that. And if we don't talk, have a great holiday season.

Thank you. At this time, I would like to turn the call back over to Samantha Cheung.

Great. Thanks, Sylvie. Thanks, everyone, for joining our call today. Given there are no further questions, we certainly can conclude our call for now. Following the call, a telephone replay will be available for 1 month. As well, a transcript will be soon available on our website. If you do have additional questions, please do not hesitate to reach out to us. And with that, thanks again for your participation and interest today. Have a great day. Thank you.

Thank you, Ms. Cheung. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.