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

Good afternoon. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to Sagicor Financial Company's Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. Mr. George Sipsis, EVP, Corporate Development and Capital Markets, you may begin your conference.

Great. Thank you, operator, and hello, everyone. Thank you for joining us today to discuss Sagicor's Second Quarter 2025 results. Our disclosures are available under the Investor Relations tab on our website at sagicor.com which includes a press release, financial statements, MD&A and the supplemental information package containing core earnings, drivers of earnings and additional disclosures. The link to our live webcast is also available on our website. This conference call is open to the financial community, investors, the media and the public with a reminder that the Q&A period is reserved for financial research analysts. I will begin by referring you to the cautionary language and disclaimers in our materials and public filings regarding the use of forward-looking statements and the use of non-IFRS financial measures and ratios, which may be mentioned as part of our remarks today. I would also like to remind the audience that actual results regarding forward-looking information could differ materially, and please note that a detailed discussion of Sagicor's risk factors is provided in our MD&A, which is available on SEDAR+ and on our website. A discussion of the assumptions underlying our expectations is provided in our previous filings and earnings releases. Unless otherwise noted, all dollar amounts referenced will be in U.S. dollars, consistent with our reported practice. Joining me today is our President and CEO, Andre Mousseau; our Chief Financial Officer, Kathy Jenkins, and Anthony Chandler, our Chief Controller. We'll begin with prepared remarks by Andre and Kathy, followed by a Q&A session. With that, I'll pass the call to our President and CEO, Andre Mousseau.

Thank you, George. Good afternoon, everyone. Thank you for taking the time to join us today. We're very pleased to report an outstanding quarter for the period ended June 2025. All of our operating segments generated excellent insurance results resulting in record core earnings to shareholders. All 4 of our operating segments generated positive core insurance experience gains and new production was solid across each of our segments. Our U.S. subsidiary continues to grow and surpassed $6 billion of total assets. Our Canadian business continued to show strong profitability and its contribution reflected the benefit of a recovery somewhat in the Canadian dollar. And both of our Caribbean segments showed robust profitability, reflecting the progress our teams have made in our initiatives to enhance our returns on equity. We also continue to progress on our strategic initiatives, to transform our businesses, which we will expect will continue to bear fruit in 2026 and beyond. Now I'm going to hand the call over to our CFO, Kathy Jenkins, to discuss our consolidated results and comment on the segment results in more detail. Kathy?

Thank you, Andre, and good afternoon, everyone. As Andre mentioned, we are reporting an outstanding second quarter of 2025. Our core earnings to shareholders were up 82% from Q2 2024 to $46 million. Revenues were $736 million for the quarter compared to $606 million for the same quarter last year. New business CSM of $39 million for Q2 continues to reflect strong sales across all segments. Now I will give you some more details on the segment financials. Sagicor Canada's sales production of $18 million of annualized new premium in Q2 was consistent with management expectations, resulting in new business CSM of $11 million for the quarter. Core earnings to shareholders of $25 million were strong and reflected strong investment earnings, a recovery in the Canadian dollar and modest positive insurance experience. It decreased $1 million from Q2 2024 when we observed more significant positive insurance experience. Net income to shareholders of $4 million for the quarter was lower than core earnings to shareholders due to negative mark-to-market experience from higher interest rates in Canada. Net CSM was $581 million, an increase of 7% quarter-over-quarter. Sagicor Life USA generated $283 million of new business production for the quarter, consistent with internal targets, that pushed the segment's assets to over $6 billion. Core earnings to shareholders for the quarter was $16 million, including $5 million of core insurance experience gains. This was more than double the core earnings in the same quarter of the prior year, driven primarily by that positive insurance experience and higher expected net investment results. Net loss to shareholders of $1 million for the quarter was lower than core earnings to shareholders due to mark-to-market experience and $5 million of other onetime non-core adjustments to reserving methodologies, which subtracted from net income but increased CSM. Net income was $159 million, an increase of 3% quarter-over-quarter. For both of our North American segments, we expect this quarter's negative market experience to reverse over time. We have observed that pattern since implementing the current accounting standard in 2023. Sagicor Jamaica had strong net premium growth across most business lines and improved margins from repricing of short-term products. Sagicor's share of Sagicor Jamaica's core earnings and net income to shareholders of $15 million for the quarter increased over the same quarter in the prior year due to policy enhancement initiatives performed in Q2, favorable claims experience and increased revenue from policy repricing. Our share of the results include about $3 million of core insurance experience gains. Net CSM was $277 million, a decline of under 2% quarter-over-quarter. Sagicor Life's short-term business continued to benefit from price adjustments while the long-term business had improved insurance experience leading to the segment's best quarter under IFRS 17. Core earnings to shareholders of $16 million increased 89% from the same quarter in the previous year, reflecting improved profitability in the short-term business and favorable insurance experience in long-term business. Net income to shareholders of $21 million for the quarter with higher than core earnings to shareholders in the quarter, primarily due to positive market experience. This was our one segment with positive market experience gains as asset prices in those markets follow different interest rate movements. Net CSM was $259 million, an increase of 4% quarter-over-quarter. At our head office, other operating companies and adjustment segment. Currency volatility generated some net income and comprehensive income movement. You will recall that we had CAD 510 million or approximately USD 374 million of debt denominated in Canadian dollars as at Q2, which is an excellent natural hedge for our positive net asset position in Canadian dollars. This debt liability gets mark-to-market every quarter through the income statement. However, our larger USD 859 million or roughly CAD 1.2 billion net asset position in our Canadian subsidiary gets mark-to-market through other comprehensive income. So there is a strong positive correlation between the valuation of the Canadian dollar to our other comprehensive income and an opposite effect about half the size through our income statement. This quarter, that resulted in an $18 million non-core income statement charge with a $45 million gain through OCI. This contributed to both the difference between our core earnings to shareholders and reported net income to shareholders and also explains why our total comprehensive income to shareholders was so much higher than our reported net income. So having said all that, Sagicor remained well capitalized in Q2. Group LICAT ratio was 141%, which was an improvement of 4 percentage points over the prior quarter Q1 2025 and our financial leverage ratio was 27.1%. Our book value per share increased in U.S. dollars to $7.29 or CAD 9.94. Our deployable capital or shareholders' equity plus net CSM to shareholders was $2 billion or USD 15.63 per share or CAD 21.32 per share. With this strong capital position, we are announcing our 23rd consecutive quarterly dividend to shareholders since we've been listed on the Toronto Exchange, and the third dividend at the higher level of $0.675 per quarter or annualized USD 0.27 per year. We are also updating our previous guidance on select key measures for 2025. Given strong performance through the first half of the year, we are now increasing our guidance on core earnings to shareholders for 2025 to be between $120 million and $130 million. At the same time, we are adjusting our guidance on new business CSM slightly lower to $155 million to $175 million for the year. We've made this adjustment as we have seen higher-than-anticipated profitability for our U.S. new business reflected in investment income, rather than CSM amortization, compared to our previous forecast. We expect that we will continue to refine our forecasting and reserving methodologies going forward as we continue to learn under the new IFRS 17 accounting standard. With that, I will hand it back to Andre.

Thank you very much, Kathy. We really are pleased with another solid quarter. It does reflect our continued progress on our strategic priorities. We do remain on track with our North American growth initiatives. It's particularly gratifying just to see the strong insurance performance coming out of our Caribbean operating segments. Many of the initiatives there, that have contributed to this turnaround have long cycle times around the analysis, product redesign, repricing, often regulatory approval, and so it can take a long time and a lot of what we're observing here in 2025 reflects the work that was done -- the hard work that was done in 2023 and 2024. As we look ahead, we remain committed to building on this momentum to generate positive and disciplined growth for our shareholders. We're confident in our continued focus on driving increased returns on equity, through our strategic initiatives across all our segments that is going to position us for continued success well into the future. With that, we'd be pleased to start the Q&A period. Operator?

[Operator Instructions] Your first question comes from the line of Gabriel Dechaine from National Bank.

There were a lot of experience gains this quarter in all segments. That's great. I just want to get a sense, maybe not the Canadian doesn't sound like it was too material, but maybe the dump down explanation of what happened in the Caribbean and the U.S. Is U.S. mostly mortality? Or...

Kathy, do you want to take this?

So in the U.S., we had a $5 million gain, and that was a reversal of $7.5 million loss we had in Q1, and this was primarily due to a reversal of the experience on our legacy block of business. You recall last quarter, we spoke about the difference between statutory and IFRS accounting on our hedging of equity exposure on the FIA. We do that on a stat basis, but it provides a bit more volatility on an IFRS basis. So it's primarily due to that, not really much in terms of like -- policyholder behavior, that sort of thing. That was to expectations. Jamaica, we had a $5 million gain, and that was a reversal of the $2.4 million loss in Q1. And we're really seeing the impact of policy repricing that we spoke about earlier. And similarly, we're seeing in SLI, the $3 million gain, we're continuing to see the positive impact from our product repricing initiatives that we spoke about.

For Caribbean it was all repricing?

Yes.

Okay. And as far as the guidance goes, maybe you can correct me if I'm wrong, but my interpretation of the guidance increase for this year is, because this quarter was so strong, we should look at that increase as pretty much what happened this quarter. In the second half, you're not really changing what you expected previously? Or is that misinterpreting your message?

I think that's closer right than not. I do think that we're ahead of plan in terms of many of our strategic initiatives to increase the margins across the business. That said, this quarter benefited from three out of four positive emergence out of insurance experience and one that was neutral to mildly-positive. So we do budget for those numbers to be flat over time. And so we don't want to -- you look at our core earnings to shareholders of $45 million or $46 million. We don't want to just multiply that by 4. If you look through and you take out the insurance experience and adjust for the minority interests and stuff. The last couple of quarters, excluding minority interest have been running at about $35 million kind of unadjusted core net earnings, which is a good number. It's a little earlier in the business plan than we thought we would hit those numbers. I mean we have aspirations of getting there and further in our 2- to 3-year planning cycle, call it. But even that unadjusted core number of $35 million for 2 quarters in a row, includes some better-than-expected emergence in the short-term business, that we're going to wait to see whether it's repeatable or not. So we don't want to adjust our guidance way, way up just to subvert and miss that. So we're putting something in place that we think we can meet or exceed. But at the same time, I think we'd be more comfortable today saying that with nil insurance experience, we're probably at that run rate in the low 30s which would come out to run rate core earnings somewhere in the 120s.

Fair enough. And then I guess something we saw in Q4, you had given guidance on 2026 that you'd be up 10% versus your expected 2025 range. And now that ranges -- or the guidance range is higher? Is that still applicable? Or should we be adjusting our expectations that 10% is not really -- maybe less than 10% now or not?

Well, we're still comfortable with a long-term core earnings generation run rate -- growth run rate of well into the double-digits for this business between just the compounding of retained earnings and the initiatives that we have to expand ROE. When you look through any quarterly noise, we're still comfortable that we are increasing the profitability of this company by more than 10% a year. Now -- depending on insurance experience in the last couple of quarters of this year, it's possible that our core earnings come in higher than our guidance. If our core earnings come in higher than our guidance, we will have to go back and really study where that's coming from before seeing whether we chin up to a short-term target of 10%-plus because right now -- because of the net positive experience, our reported core net income is a little bit ahead of where we see the core profitability.

That's fair. And then last question, the sales. I mean we're down versus Q1, the fixed annuity sales I'm talking about, but still a good number. And your -- is there any reason why we shouldn't expect you to exceed your sales target for the year? Based on what you've achieved in the first half? And maybe touch upon some of the market conditions that affirm that perspective?