Sagicor Financial Company Ltd. ($SFC)

Good morning. My name is Ena, and I will be your conference operator today. At this time, I would like to welcome everyone to Sagicor Financial Company's First Quarter 2026 Earnings 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 First Quarter 2026 results. Our disclosures are available on our Investor Relations website at investors.sagicor.com which include 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 the 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 filings and earnings releases. Unless otherwise noted, all dollar amounts referenced will be in U.S. dollars, consistent with our reporting 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 morning, everybody. Thank you for joining us to talk about our Q1 financial -- and I'd also like to acknowledge and thank our shareholders who joined us earlier this week in Barbados for our Annual General Meeting. This is a bit of an unusual quarter because while so many of our strategic initiatives and are trending in a very positive direction. In Q1, for the first time really in a couple of years, our core earnings were measurably softer than the core run rate of our business. . Our core earnings to shareholders of $25 million included $8 million of negative core insurance experience substantially all of which was due to mortality in our North American segment. which we often observe in our first quarter. However, like last -- unlike last year where this was mitigated by insurance gains elsewhere in our system -- this time, it brought our core earnings below our best estimate of our run rate. Absent that mortality, we estimate that we would have had a core ROE of approximately 13%. We also observed some adverse mark-to-market movements across all of our segments as asset prices broadly declined globally in Q1. And as we're net long assets, that effect is more than the evaluation our liabilities. The majority of these negative marks are fixed income instruments, which continue to perform on a fundamental basis, meaning dollar of foregone income in this quarter will mean $1 of more income in later periods. In addition, we took some charges in the Caribbean as we settle open issues and drive forward on our integration plans as we look to give our new public holding company that will hold all of our Caribbean assets the best start that it can have in 2027. So let's have Kathy give a detailed financial review of a few ones, and then we can come back to me. Kathy?

Thank you, Andre, and good morning, everyone. As Andre mentioned, Sagicor's first quarter 2026 core earnings to shareholders were $25 million. The company's operating segments generated steady new business production, leading to solid new business CSM of $37 million. Core ROE was 9.9% and -- when adjusted for core insurance experience losses, core ROE would have been approximately 13%, consistent with management's expectations. Reported net loss in Q1 was adversely affected by $49 million of market experience losses related to lower asset prices in the U.S. and Canadian fixed income and equity markets. This is partially offset by the mitigating impact of liability revaluation. Q1 was also affected by certain onetime charges related to our Sagicor Life segment as we prepare to merge our Caribbean subsidiaries. Now I'll give you some more details on the segment financials. Sagicor Canada's core earnings to shareholders of $23 million for the quarter decreased 9% year-over-year, driven by insurance experience losses from higher-than-expected mortality. Net loss to shareholders of $1 million for the quarter was lower than core earnings to shareholders due to unfavorable market-related impacts from higher interest rates and negative equity returns. New business CSM generated $10 million in the quarter, but net CSM decreased 2% quarter-over-quarter in U.S. dollars to $557 million due to a devaluation of the Canadian dollar. Sagicor Life's USA's new business production of $298 million was another solid quarter of production and in line with management expectations. Core earnings to shareholders for the quarter of $5 million decreased year-over-year and were impacted by adverse mortality experience similar to what we saw in Canada. Also, like our Canadian segment, net loss to shareholders of $7 million for the quarter was lower than core earnings to shareholders due to adverse market experience from higher interest rates partially offset by favorable changes in actuarial assumptions. Net CSM increased 5% quarter-over-quarter to $158 million. Sagicor Jamaica achieved robust insurance sales resulting in 7% net premium growth year-over-year. Sagicor share of Sagicor Jamaica's core earnings to shareholders of $10 million for the quarter was unchanged from year-over-year due to improved core net investment results from growth in loan and investment portfolios, offset by a modest amount of residual Hurricane Melissa related experience recognized in the quarter. Sagicor's share of Sagicor Jamaica's net income to shareholders of $6 million for the quarter was lower than core earnings to shareholders due to timing differences between the payment and recognition of asset tax throughout the year. Net CSM increased 2% to $298 million, driven by strong new business production. Sagicor Life's core earnings to shareholders of $10 million for the quarter decreased 7% year-over-year as a result of favorable mortality experience -- unfavorable mortality experience -- sorry, favorable mortality experienced in Q1 2025 that did not repeat this quarter. Net loss to shareholders of $11 million for the quarter was lower than core earnings to shareholders due to unfavorable mark-to-market impacts from interest rate movements and nonrecurring reinsurance-related costs. Net CSM was $268 million, an increase of 2% quarter-over-quarter driven by new business CSM of $8 million. At our head office, other operating companies and Adjustment segment core cost to shareholders were $22 million for Q1, consistent with the prior quarter. Net cost to shareholders were also $22 million for Q1. Even having been through the noticeable asset price devaluations in the quarter, Sagicor remained well capitalized in Q1. The group LICAT ratio was 134%, and our financial leverage ratio was 27.5%. Our book value per share was $7.18 in dollar or CAD 10.1. Our deployable capital or shareholders' equity plus net CSM to shareholders was $2.1 billion or USD 15.47 per share or CAD 21.57 per share. We are also pleased to announce our 26th consecutive quarterly dividend to shareholders since we've been listed on the Toronto Stock Exchange. And second, dividend at the higher level of USD 0.075 per quarter or $0.30 annualized. On that note, I will hand back to Andre to close our prepared remarks.

Thank you, Kathy. I'm excited to talk about our strategic initiatives, but just to put a fine point on the financial piece. Just as we had asked our investors not to annualize the $46 million of core net income that we delivered in Q2 last year to 17% or 18% ROE run rate. We would advise against annualizing this quarter's $25 million figure. We believe our true ROE run rate today is approximately 13% and that really there's a little long-term information value in the quarterly oscillation around that figure. . Similarly, while we did have adverse market mortality in the quarter, our best estimate is that if Q2 closed today, the market volatility would be mildly positive in our favor. We do continue to make excellent progress on our strategic initiatives to drive our return on equity expansion into 2027 and beyond. You have seen in April, we're very pleased to announce the hiring of Eric Sandberg as President of our U.S. subsidiary, which was an addition that we've been hinting at for a while. Eric joined us from National Life where he was the CFO, where he was the CFO and Chief Risk Officer. National Life is a $60-plus billion U.S. insurer top 10 annuity provider in the market. And so Eric brings to us a lot of that expertise and discipline and he's going to be laser-focused in helping to drive our U.S. team to even faster growth than we've exhibited over the last 5 years. With the addition of our conviction on our U.S. growth opportunity is as high as it's been since we've launched our annuity strategy 5 or so years ago. In the Caribbean, we're also making excellent progress in this case, towards merging our Caribbean businesses. While we believe that -- the transaction will close towards the end of the year due to all the approvals involved. We're hard at work now to reengineer our business processes, upgrade our technology stack focus our vendor relationships and redesign our entire organizational structure in anticipation of closing. When completed, we will have radically transformed our businesses across the Caribbean, resulting in a better customer experience, which will solidify our competitive position on improved employee experience and significant margin enhancements. We do intend to further -- to incur some further costs in 2026 in anticipation of this merger, and all of these will be in service of a higher ROE going forward. So -- all of this gives us strong conviction on our growth prospects and the path ahead, which enabled us to reiterate our 2027 and 2028 targets for 14% and 15% core returns on shareholders' equity, respectively. With that, operator, ready to open the lines for any questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. And your first question comes from the line of Gabriel Dechaine from National Bank

I got a couple of questions. So firstly, on the mortality experience in Canada, your obviously flagging that we're, what, 1.5 months into Q2. Have you seen any normalization of that trend or improvement, suggesting that what we saw in Q1 is idiosyncratic? .

Thanks, Gabe. We don't get our information quite as real time as that on on mortality as they roll in, there tends to be a lag of several weeks. So it would be too early to have a view on that. As we have looked particularly at the Canadian business, we've only owned it for 2 years in each of the prior 2 years we had negative mortality in Q1. In 2024, it actually came back and was quite positive in Q2, well in 2025. Q2 was negative again. So we still think that we're appropriately reserved, but just due to the size of the book, there's going to be some oscillation around that.

And how -- what segment would have been in like some more small number of high net worth or more broad-based type cases? .

It's pretty broad-based. Our book is a large number of names relatively smaller exposure, and we have -- we significantly reinsure it on a no-names basis. .

Got it. Switching over to the U.S. It sounds like it was also mortality, but I was reading the release and it sounded more like described as seasonal factors. I'm just wondering was meant by that -- just for clarification.

Seasonal also immune's mortality in the U.S. sense. And so just to...

Flu season that thing? .

Yes, indeed. And this is something that is described and hotly debated among the insurance community. A lot of the primaries reinsure a lot of the mortality risk. So if you want to read about this, you can go to the reinsurers disclosure, RGA, for example, does talk about this effect. With the U.S. is, again, as the both year in a row where we've had negative mortality in Q1. In 2 of the 3 years, we were quite positive in Q2 in the U.S. So in 2023 and 2025, we had very positive emergence. In 2024, which was backwards of what I just told you from ivari, the negative piece persisted into Q2. So again, -- these are big numbers relative to our quarterly income statement. But if you look at the overall liability profile, we think we're properly reserved -- and we just see this as noise.

Yes. Is there any way you can maybe address that in the line item sense that your experiences -- you have some patterns there. So maybe it goes through the expected insurance earnings -- and then we have some sort of a seasonal expectation where Q1 is the low watermark typically for the year and it ramps up from there on out as opposed to going through an experience outline .

As a nonactuary, you'd love to do that because if you look at other principles, if you have onetime items, you kind of -- you take it and you amortize it over the period. I think what we've been told is that the pretty black and white principle of IFRS 17 is that when you have insurance experience outside of market experience, when you have insurance experience, you take it now. and you don't get to amortize it. So if you go back and you look at the supplement and look at our insurance experience, you'll see that 3 years in a row, Q1, going back to 2023, 3 years in a row, Q1 was the lowest quarter.

Okay. Last one, just on expenses. On the last call, I believe you were talking about the -- this year being more of an investment year to ultimately get you to that mid-teens ROE target. Did we see any of that this quarter? I'm looking at -- does that go through your insurance earnings or there's the other OpEx, which was $112 million, but that's not really a core number, I don't think. So it's -- I don't know what the answer is to my own question, which is why I'm asking you. .

Right. No, no. There -- most of what we are referring to there, we believe, is going to run through -- we believe, it's going to run through noncore. Not all of it will -- so if you think about investments that we're making to build, we've just brought on a new executive to run our U.S. business. So that's a definable cost that we'll start seeing running through in the U.S. business. But if you look at the the onetime reinsurance costs, which were noncore, for example, we had a small recapture of a piece of business that we move to another reinsurer, which is net income accretive going forward, but you incur a bit of a cost upfront. There was another long-standing issue out there with the reinsurer where we added disagreement and -- we've taken a provision on what we believe will be the ultimate settlement. Again, in an attempt to have that balance sheet be clean and pristine for 2027. And so that's what you saw in Q1 going forward throughout the year, as I said in my remarks, we're not waiting in particular on the Caribbean to do all of our restructuring work in terms of bringing the companies together. It's an unusual situation because ultimately, we control both companies even if we don't even if the ownership is disproportional. So we're able to get going on merger integration earlier than what would be usual. And so Usually, when you would merge by an entity, you kind of -- you stuff the integration costs into the same quarter as closing, whereas if we start moving -- continue to move ahead of that, we may take through noncore some additional costs in 2026 that normally you would run through as just part of part of merging a business.

Okay. All right. Well, I look forward to the next catch-up.

And your next question comes from the line of Mike Rizvanovic from Scotiabank.

Just sticking to the mortality. Just wondering -- how would you characterize the magnitude this quarter? I'm just trying to get a sense of is this as bad as it can get in terms of a single quarter of negative mortality experience? And then secondly, is there any way to minimize these types of quarters in future periods?

If you look back at Q1 2024, the mortality piece was the dispersion was different, but it was quite similar in North America, and it actually had a looking at SLI, it had other negative experience, which was more around policyholder behavior. And so just looking -- if you look through at the supplement, Q1 had, had negative experience in each of the last 3 years. And in 2 of those years, it had gone on to be . In one of the years, it had gone on to be net positive and the other 2, have been -- 1 was negative and 1 was just slightly negative. So I'll to say this quarter seems to be at the edge, but not necessarily an outlier in terms of something that you would see once a year. And if you look back again at our supplement, last year, in Q2, we had even more of this in terms of positive emergence of $15 million or $16 million. So this is volatility that we do believe is a feature of IFRS 17 as opposed to being a bug in the system. And that applies equally to the market volatility piece. I talked about in the prepared remarks that we don't see much information value around it as long as the investments are money good. It's just net income moving through time, and we feel very good about our investment portfolio. With the market volatility, it would be possible to make a choice and basically by completely taking any sort of market movement out of your assets back in capital, which would mean basically taking your balance sheet in all your segments in your asset back in capital to cash, which would have a couple of point reduction in your expected ROE going forward kind of indefinitely. And so -- and similarly, right now, we hedge away half of the equity exposure that we have that's kind of an output of our the asset management piece of our Canadian business. And we take a couple of points of reduced ROE just on the basis of that hedge. And so if you hedge the other half, it would be another couple of points of ROE. So we think that our north star here is to generate the best risk-adjusted returns on equity to our shareholders over a long period of time. And we'd rather do so at mid-teens core ROE and core compounding of value while accepting some of this market volatility then have something in the high single digits that had no market volatility.

Okay. Okay. And then maybe just a quick 1 on the dividend -- sorry, on the very minimal this quarter. Any updated thoughts on the buyback? I know it's not a priority in terms of how you want to deploy capital. But just with the stock trading below book, any thoughts on maybe getting potentially a bit more aggressive on the buyback.

Yes. We have -- as you pointed out, we've lightened up on the repurchases just in the last couple of quarters as we have been trying to let the market develop a little bit more liquidity. And you can see the purchases are publicly disclosed, and we've had a little bit of a magic number around the days where the stock was below $9 a share, which hadn't happened much in Q1. And so while we're conscious of wanting to get -- give the market the opportunity to develop it the further we get from both value, the higher the ROE to all the shareholders as we buy it back and sitting here in our position or allowed we're in a position to have quite a bit of conviction around our forward guidance. And so I think you could infer that the further that we get from book value, the more we're going to lean in to buybacks.

[Operator Instructions] And your next question comes from the line of Darko Mihelic from RBC Capital Markets. .

I have a couple of questions, but I just wanted to revisit your answer to Mike's question on mortality. You -- in your answer, you didn't discuss a couple of things I was hoping you would touch on. The first is your risk appetite around adverse mortality -- and if that adverse mortality -- the sensitivity tables you just provide, if this kind of quarter changes that. And then secondarily, you didn't touch on reinsurance, which is always available. I presume in this market, it's not pricing necessarily very well given the path that you've just discussed. But I wonder if you could just touch on if this kind of quarter kind of makes you sort of reassess your appetite for adverse mortality. And then as an addendum to that, maybe, obviously, I think your ROE target must at some point and at some level, bake into it adverse mortality on a seasonal basis. So sorry for that long-winded question, but I just really wanted to revisit it, Andre, in light of the quarter sort of played out. .

Right. And so it's a good question, and this is something that we talked about this week at in the Boardroom. The short answer is we're managing this basis on an annual and a longer-term basis. And so this does not change our appetite to assume the level of mortality risk that we have. And that mortality risk has been developed through the risk appetite over the years, and we do -- you can see in the line items, we do carry quite a bit of reinsurance on our book. And on the Canadian book, in particular, because it is a big old book of business that's been developed with hundreds of thousands of policies. Our -- it's our view that our net mortality experience is not negative in aggregate. It just happens to be negative in Q1. And so if we were managing this business to nail annualized targets on a quarterly basis you might have -- if that was your North Star, you might avail yourself of a little bit more reinsurance, and that would cost you with some core earnings. We're not managing this basis this business on a quarterly basis. We're managing this for the best long-term return on equity. And we think we are properly reinsured and adequately reserved. .

Okay. And I just wanted to follow up on a couple of other questions. But first, what fronted the change to the discount rate for your liabilities. It's a bit unusual. We don't hear that too often. I don't think the nature of the liabilities change much often. So if you can just discuss real quick, why the discount curve changed for your liabilities? .

The discount change every quarter. And so this is a function of IFRS 17. Like if you think about the old world of IFRS for you would take your asset price movements, which are observable. And then you would almost have a fix or sell through your liabilities to get them to match the asset price movement. -- precisely, which is why you didn't see this market volatility unless you actually had an asset that went back. When IFRS decoupled the assets -- IFRS 17 decoupled the assets from the liabilities, it decoupled that it removed the explicit fixer cell but you're still required to revalue your liabilities using a discount curve every quarter, that is informed by the market movement. And so whereas before it was explicit, you would just have your assets back in capital going up and down through -- usually through -- now you have your assets back in capital going up and down largely through the income statement, plus you have some tracking error where your actuaries have gone out in the U.S. and calculated the liability curve in Canada. We have 1 that is prescribed for us every quarter and that revalues your liabilities as well. But as long as you have a net asset position because you have assets back in capital, you would expect your assets to be more volatile than your liabilities. .

Okay. Maybe I misunderstood. I'm aware of that liability curves have changed every quarter. I thought it was the way you guys have made it sound in your written work that there was a change in maybe methodology, for example, that would have shifted the curve -- but it doesn't sound like that's the case. So .

There was 1 small -- in the U.S., in particular, where the curve is not prescribed. There was 1 small change in methodology this quarter, where we added 1 of our asset classes that have been excluded before. And so as we had seen illiquid assets becoming a larger proportion of our portfolio, we said even though it's harder to calculate these because they're less observable than the public assets getting to a material portion of the U.S. balance sheet. So we should take an estimate on that and put it into the calculation. So we did do that in Q1. .

I see. So it's like a reference portfolio and it's got a wider credit spread. Is that the right interpretation? .

Yes, it is. .

Okay. Great. And then so my last question, Andre, is clearly, volatility hit this quarter. That's fine. -- should expect some sort of normalization. But it's still -- the question for me is still a couple of things we sort of still stand out. One is it does sound competitive in the U.S. with crediting rates. And the question is, does that do you see that also as something that will ease into the future and maybe this year? And/or are you contemplating other changes like new products or so on to to sort of improve maybe not just production but also profitability? Or am I reading too much into the competitive environment in the U.S.? .

So the competitive environment is robust in the U.S. Although I would say we had a pocket in time in Q1 where it appeared less so. A lot of our competitors in the annuity space are affiliated with some of the big private capital pools that have been going through their own private capital in digestion with respect to taking liabilities that allow for redemption. And so in Q1, there was a pocket of time where rates and spreads went up and the competitive environment did not adjust to that. And so the spreads that we earned on our Q1 vintage were actually well above our target, but I'd be cautious. I wouldn't say that's necessarily something that's going to persist. I think if you look through in Q2 as spreads have come in even as rates have gone up, that has mitigated itself. -- somewhat. I do think that we are -- we want to continue to grow. We're excited about the opportunity, and that was a big part of bringing in dedicated leadership. He comes from a place that was writing 3x as much annuities in a given year as we were under a broader product set than ours which has been particularly focused on the MYGA product, the multiyear guarantee of annuity. So we would expect to drive forward with further product diversification. And our goal is to grow that business faster than we've grown it over the last 4 or 5 years. .

Okay. That's helpful. So the pathway to the higher ROE is predominantly normalization of mortality from here plus continued growth in the U.S.? And roughly, how do you characterize that sort of, call it, waterfall of improvement in ROE. Is it like 90% mortality improvement or normalization and just 10% sort of growth in the business? Or just give us a rough guideline of how we get back to your typical 13 to plus, I would say, ROE from here? .

So if you asked us for an estimate of Q2, there the best estimate would still be in the ZIP code of that 13% number. And that would, over the course of 1 quarter be more or less 100% the reversion to the mean on mortality. As we see the ROE growth potential into the mid-teens and pushing through that. It is evenly dispersed between the growth of the U.S. balance sheet where we think on a marginal basis that we are adding assets at a high-teens structured ROE and getting to economies of scale as gross margin grows faster than the SG&A. And so that's a portion of it. We think there is a meaningful uplift in the ROE of the combined Caribbean business going forward. That is more or less an equal part to it over the next 2 years or so. And we also think that there is the opportunity. I haven't talked a lot on this call, but to take some of the thinking that we've done on asset allocation in our U.S. business bring adult of that to the Canadian balance sheet, which because of its size is quite tweaky and we think there's a point or 2 in aggregate of ROE with that opportunity as well. So all of those things are not Q2 issues. This is why we're focusing on 2027 and 2028 as we tweak up the guidance beyond what our current best estimate is, which is around that 13% number.

Great. That's very helpful. Thank you, Andre. Have a great long weekend. .

All right. Thank you. You too. .

And your last question comes from the line of Trevor Reynolds from Acumen. .

Yes, I think we've -- you touched on it quite a bit. But in terms of forecasting for future Q1s and the mortality that we've seen in Q1 for the last 3 years? Is it not safe to be assuming that we'll see this kind of every Q1 and potentially the offset in Q2. .

I think it would be, Trevor. So if I was doing a quarterly forecast model, and I do focus myself internally on the annual numbers. But if I was putting together a forecast model for this company on a quarterly basis, I'd figure out what I wanted to do for the annual ROE and then I would notch it down by some number for Q1. And I would actually notch Q2, Q3 and Q4 up proportionately and say the 1 thing we can observe with significance is that Q1 is the negative outlier, but then I would notch the other ones up. .

Yes. Okay. That's fair. And then in terms of -- I think you mentioned it in your pre remarks, but kind of where the market sits to today in terms of the mark-to-market, it's probably safe to assume that we see a big bounce back in terms of that in Q2 given where things sit today? .

Yes. I mean it's quite easy to observe where things sit today. The equity piece of the volatility, right? And so I think the equity volatility was $10-ish million of negative in Q1 and equity levels are higher now than they were at the end of December. And so we'd expect that to if it closed today to reverse and more. But obviously, that's subject to the whims of all the geopolitical and all that. Fixed income is a little tougher because you can observe data points. Broadly, you would say fixed income maybe as flat to negative-ish, although our investments, people might tell you something a little bit different based on some of our names. But if you ask for an estimate today, I would say that the positive piece of -- from the equity would overwhelm the flatness of very slight negativeness of fixed income.

Great. And then just lastly on the lingering impacts from Hurricane Melissa, do you think that's pretty much worked its way through. And -- and maybe what -- I know you mentioned previously like probably about a $5 million overall impact net of reinsurance. Is that still like -- is that still kind of the right range?

Yes, as we're taking our running tally, we -- the provision and Kathy, if you're on, I think the provision to us this quarter was about $1.5 million 1 million to 1.5 million. And our -- the total is still less to us than $5 million.

Yes. That's correct. It's around $1 million, slightly less than $1 million actually for this quarter inside the core. Yes, after tax. .

Right Yes, right Okay. .

That ends the question-and-answer session. I will now hand the call back to Mr. Georg Sipsis for any closing remarks. .

Thank you, operator, and thank you for joining the call today, everyone. That concludes today's Q1 2026 results call. A replay of this call will be available for 1 month on our website and a transcript will be posted as soon as available. If you have any additional questions, please do not hesitate to reach out to any 1 of us. With that, thanks again for your participation and interest today.

And this concludes today's call. Thank you for participating. You may all disconnect.