SAGICOR Financial Company Limited’s (SFC) net profit attributable to shareholders grew by 278 per cent to US$35.28 million ($5.43 billion) during its second quarter (April to June), as total net revenue climbed 30 per cent to US$672.31 million ($103.42 billion) despite being impacted by market volatility during the period.

The bulk of the revenue growth in the second quarter came due to its USA segment which saw a 97 per cent rise to US$419.49 million, driven largely by new annuity sales which allowed it to invest at attractive spreads. The segment’s net asset balance rose 31 per cent year over year to US$585.17 million as total assets improved nine per cent to US$4.69 billion. The segment benefited from the additional US$150-million bond issuance in December which was geared towards its growth. Net profit increased 350 per cent to US$72.22 million.

Sagicor Group Jamaica Limited’s revenue dipped nine per cent to US$160.13 million ($23.13 billion) and was impacted largely by realised and unrealised losses on financial assets carried at fair value through profit or loss. SFC’s share of profit increased eight per cent to US$7.56 million while SJ’s net profit attributable to shareholders grew 25 per cent to $6.04 billion. Despite Sagicor Life Inc’s revenue only rising six per cent to US$130.12 million, its net profit increased 70 per cent to US$11.56 million.

“The Sagicor Group delivered another solid quarter of growth. The group continues to successfully execute on its growth initiatives to deliver strong results while navigating substantial market volatility and inflationary pressures in the markets we operate in. Asset price volatility has created a favourable environment for us to grow premiums and invest at higher yields, which particularly benefited Sagicor Life USA. Notwithstanding a challenging economic environment in the Caribbean, we delivered net premium revenue growth across all of our business lines at Sagicor Life, as well as in our life, health and property and casualty business lines at Sagicor Jamaica,” said SFC President and Chief Executive Officer Dodridge Miller in a news release.

When asked by Meny Grauman from Scotiabank on the USA’s very strong performance, SFC Chief Financial Officer and Chief Operating Officer Andre Mousseau said in a conference call on August 17, “The tailwind was the rapidly increasing yield environment, and what we found was that crediting rates on annuities in the second quarter through the competition were not moving up nearly as quickly as asset yields, and so we saw a particular point in the market where we were able to invest those funds at significantly wider spreads than what we have in our models and were able to do so basically being flat from a credit point of view, not pushing any further from a credit risk point of view.”

SFC’s head office was impacted heavily by the volatility during the quarter as its net loss moved from US$21.29 million to US$42.34 million, largely relating to a US$34.81-million other investment loss. This largely comprised a US$15-million cash charge on a call option relating to its US$541.32-million bond, and US$19 million in unrealised losses on Playa Hotels and Resorts. Mousseau stated that SFC continues to have conviction in the value of Playa, which they believe has intrinsic value in excess of the current market price.

“It’s our aspiration to, at some point in the next few years, get to investment grade. Once we become investment grade and we have a receptive bond issuance window, we would expect to refinance our debt. So, it [call option] could have some value one day. As interest rates have gone up, our bonds have traded below par. I don’t think it has anything to do with credit, I think it’s just about market yields. I think there’s $2 million still of embedded asset option value in our numbers at the end of the quarter,” Mousseau responded to RBC Capital Markets analyst Darko Mihelic on the bond.

Barita Investments Limited has given the 2028 bond at 5.30 per cent interest rate an overweight recommendation, which means investors should increase exposure to the asset between five and ten per cent of their total portfolio. SFC is rated BB by Fitch and BB+ by S&P, which is one rung below the investment grade of BBB–.

Mousseau noted that a significant amount of the excess return related to the USA segment would be going back to the contractual service margin (CSM) to be amortised over the life of policies as the group implements IFRS (International Financial Reporting Standards) 17 at the start of 2023 which will impact the segment reporting next year and replace IFRS 4. The CFO noted that the firm would be providing an update in the fall surrounding the expected impact to the balance sheet and income statement. SFC expects to resume specific guidance on earnings targets when the timing of the economic recovery becomes more certain.

“In terms of volatility, we’re still working through that. I think, in principle, you would think of IFRS 17 as closer to cash earnings and, as long as you get the asset movements right, actually reduce earnings volatility. We’re working through that now to make sure we do the right elections on how we treat our assets and we’re getting interesting, real-time testing of that as we’re working through our 2021 numbers under IFRS 17, as obviously there’s been a lot of asset volatility,” Mousseau added.

As noted in the SJ’s 2021 audited financials, “The standard requires a current measurement model where estimates are re-measured each reporting period. Contracts are measured using the building blocks of discount probability — weighted cash flows, an explicit risk adjustment, and a contract service margin (CSM) representing the unearned profit of the contract which is recognised as revenue over the coverage period. IFRS 17 requires the increased use of current market values in the measurement of insurance assets and liabilities. Additionally, the treatment of the CSM liability will reduce both tangible and overall equity; however, the group expects that the CSM will be considered as equity for the purposes of measuring regulatory solvency.”

The CSM is a new liability that reflects the unearned profit of the contract which is recognised as revenue over the coverage period. CSM is released into earnings as insurance contracts are fulfilled as expected.

Canadian-based insurance companies Great-West Lifeco Inc, Manulife Financial Corporation and Sun Life Financial Inc noted in a joint release that the adoption of IFRS 17 will not change the underlying fundamentals of their businesses, their financial strength, or ability to pay claims. Sun Life noted in an online presentation that IFRS 17 would have no impact on business strategy and that underlying net income would be more stable. However, it noted that 15-20 per cent of shareholders’ equity would be transferred to liabilities to establish the CSM and that there would be a mid-single-digit reduction in underlying net income in the comparative 2022 year.

SFC’s net profit attributable to shareholders for the six months stands 89 per cent higher at US$77.09 million relative to the US$133.18 million earned in 2021.

SFC declared a quarterly dividend of US$0.05625 which is the eleventh dividend declared since being listed on the Toronto Stock Exchange (TSX). It will be paid on September 14 to shareholders on record as of August 24. SFC repurchased 18,160 shares during July and cancelled 19,184 shares relative to the 142,666,230 shares at the end of June. SFC’s stock price trades at CAN$6.30 relative to the book value of US$7.51 or CAN$9.63. SJ will be considering a second interim dividend on September 8.

“In terms of sustainability, our business plan shows enough capital to continue to support this growth, and that’s through a combination of the capital that we have at the top company and then reinsurance, which allows you to unlock some of the capital that you’ve invested and back more growth,” Mousseau closed.