Alignvest Acquisition II Corp

TSX:SFC

Earnings Call Transcript

[Operator]

Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to Sagicor Financial Company's Fourth Quarter and Full Year 2021 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Ms. Samantha Cheung, EVP of Investor Relations. Please go ahead.

[Samantha Cheung, executive]

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 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?

[Dodridge Miller, executive]

Thank you, Samantha, and thank you to everyone joining us today. As is customary, I will give some brief remarks focusing on our operating environment, our overall performance for the full year 2021 and some comments on our outlook going forward. Our COO and CFO, Andre Mousseau, will provide you with more details on our financial and operating performance.

As we look back on the last financial year, I want to commend our teams across the Sagicor Group for their exceptional contributions in delivering a milestone year of record results. 2021 was one of the strongest years in our overall 180-yearlong history. Once again, we have demonstrated the earnings power of our underlying business and the strength of our resilient franchise.

Total revenue for the full year 2021 increased 26% over 2020 to reach almost $2.4 billion. Net premium revenue from life and annuities increased by 28% year-over-year driven in part by strong sales in the U.S. as this business continues to grow to scale. We delivered net income to shareholders in 2021 of $133 million, the strongest in our history. All 3 main business segments made strong contributions to these results. We also continue to improve our products, our systems and processes as our markets adjust to and expect a wider range of digital engagement.

Turning to our outlook. The last 2 years have been challenging ones for many of our economies in our markets. As we look forward to emerging from the current global health and economic crisis, we at Sagicor remain optimistic and are well positioned for the future. We're excited to build on our performance in 2021 with continued initiatives to grow in 2022 and beyond.

In the Caribbean, we will launch a digital bank first in Barbados, where we have already received a banking license. This is a significant initiative and one which we believe would represent an exciting expansion of the scope of engagements with our clients in the Southern Caribbean. We believe it accelerates the pace of change and will pave the way for more digital initiatives throughout our business as we completely transform the way we interact with our markets and our customers.

We will also continue to support the growth of our business in the U.S. in a more targeted business model, where we are seeing excellent growth and profitability. With these initiatives, we believe we are well positioned for the future as we grow and execute on our plans and as our Caribbean economies recover, aided by the return of international tourisms.

As we continue to grow and expand, we also recognize that sustainability must be top of mind for us as it is for our customers, our investors and other stakeholders. Sagicor has always been committed to being an active and positive contributor to the communities in which we live and work. It is who we are.

However, many of our efforts in this area go unnoticed and certainly not shared. We are currently taking stock of what we do. First, we presented in a more formal ESG framework consistent with public company best practice but also to inform and guide our efforts in this important area going forward. We will update further on this during the year.

Finally, before turning the remarks over to Andre, we take this opportunity to bid farewell to Samantha Cheung, our EVP of Investor Relations, as Samantha will be moving on from Sagicor at the end of the month. Samantha joined Sagicor in 2018 to assist us in building institutional readiness for TSX listing, including our engagements with potential investors and equity market analysts. On behalf of the Board and management, we thank Samantha for her contribution to Sagicor over the last 3.5 years. We will miss her and we wish her the very best going forward.

And with that, I'll turn the remarks over to Andre Mousseau. Thank you.

[Andre Mousseau, executive]

Thank you, Dodridge, and hello, everyone. In finishing off a strong full year 2021, we also had a very solid quarter in Q4. We had a strong segment performance in aggregate, including excellent underlying profitability, particularly in Sagicor USA and Sagicor Jamaica and made good progress on a number of strategic initiatives.

We saw positive contributions from nearly all of our business and product lines. Our total revenue actually showed a decrease of 7% year-over-year to $630 million, but this was against an unusually high comparative quarter in Q4 2020. Net income to shareholders was strong at $42 million in Q4, a 44% increase compared to the fourth quarter last year. Profitability during the quarter was supported by robust sales of annuities and asset spreads in our Sagicor Life USA segment and a solid performance from Sagicor Jamaica overall. Sagicor Life posted robust profits despite continued economic headwinds in the Southern Caribbean.

In 2021, overall, total revenue of nearly $2.4 billion was up 26% from 2020. We were able to significantly increase new business, particularly in the U.S., where we're focused on selling annuities as we grow that business to scale. Our assets grew by over $1.1 billion to $10.4 billion.

Overall, net income to shareholders in 2021 was a record $133 million as our company showed its true strength throughout the year. Included in this net income are approximately $6 million of spending on IFRS 17 conversion, which will recur in 2022 but not thereafter as well as meaningful adverse mortalities throughout the year related to the COVID pandemic. While this may persist as well into some of 2022, it gives you an idea of our underlying profit potential when the pandemic abates.

Now I'll speak about the fourth quarter performance of our major operating segments. At Sagicor Life, our operating segment in the Southern Caribbean, total revenue was $130 million, a decrease year-over-year due to a large single premium annuity sale in the prior period. We had $6 million of single premium annuity sales in Q4 and $7 million of annual recurring new business sold in the quarter.

Net income to shareholders was $22 million, again, a decrease compared to an unusually profitable Q4 2020 but a meaningful proportion of its net income in 2021. Net income in Q4 2021 benefited from positive emergence from its existing book of business through its reserves, which was partially offset by some continuing adverse policyholder behavior, which we believe is a result of the slow economic activity in the region.

We continue to believe this effect is temporary, but it may persist until the economies fully benefit from the reopening and, in particular, when those economies see more cash inflows from increased tourism going forward.

At Sagicor Jamaica, total revenue of $202 million increased 14% year-over-year, measured in U.S. dollars. Our share of Sagicor Jamaica's net income increased by $5 million to $16 million, reflecting solid underlying performance. The segment benefited from strong individual life new business sales as well as growth in its banking segment.

Now on to Sagicor Life USA, which had another excellent quarter. This segment's growth and profitability is consistent with our strategy to grow our U.S. business to scale by adding fixed annuity liabilities that we're able to invest at attractive spreads. We drove $246 million of new annuity sales and did so at stronger than budgeted spreads in the quarter.

Overall, our U.S. business posted revenue of $285 million, which was down 3% compared to a slightly stronger production quarter in Q4 of 2020 but, again, consistent with our expectations. As a result of the present value of the anticipated profit from these policies being sold, the segment generated $17 million of net income in the quarter compared to $9 million in Q4 of last year.

We have further tightened the focus of our U.S. business in the past few months, exiting the term life markets so that we can focus our efforts in the U.S. on the annuities and accumulation product markets where we have significant channel penetration and are benefiting from stronger unit economics. The resulting focus will allow us to streamline our SG&A and further improve returns on equity going forward.

Now back to the total company performance. Our total comprehensive income to shareholders this quarter was $7 million, reflecting the positive net income, offset in part by the impact from other comprehensive income. The largest component of the OCI was the devaluation of the Jamaican dollar against the U.S. dollar. With that, our book value per share grew to USD 7.90 or CAD 10.08. We repurchased 171,000 shares at a discount to book value through our normal course issuer bid in Q4.

Looking at the balance sheet, you'll see our debt-to-capital ratio rose to 29% as we continued an additional $150 million offering of our previously issued 5.3% senior notes, which are due in 2028, and we were able to issue those at a premium. We have invested the net proceeds of this bond issuance into our U.S. subsidiary to support the growth of our U.S. business.

We're also pleased to declare a dividend of $0.565 per share to be paid in the second quarter. We have consistently declared dividends each quarter since we listed on the TSX. We remain well funded with significant excess capital at our holding company to execute on our growth initiatives in 2022 and beyond.

And with that, I'll turn it back to Dodridge and Samantha.

[Samantha Cheung, executive]

Thank you, Andre. We are now ready to take your questions. Operator, please open the lines to the analysts for their questions.

[Operator]

[Operator Instructions] Your first question comes from Meny Grauman with Scotiabank.

[Meny Grauman, analyst]

First question on the U.S. business. You had a very strong step-up in sales and profitability in the U.S. And I'm just wondering, as you look out to 2022, what the outlook is there from a sales perspective, more importantly from an ROE perspective. And you mentioned that the decision to suspend sales of term insurance would help the ROEs. I'm just wondering if you could quantify that. Will we see that impact in 2022?

[Andre Mousseau, executive]

Thanks, Meny. So maybe to -- in terms of the overall outlook, we are targeting to continue the growth of the U.S. business. And I think you can look at the production and general profitability of what we did in Q4 as reasonably representative of what we're going to be -- what we're planning to do going forward. It's very much driven by production volumes and then the spreads that we're getting on the business. But certainly, Q4 was a good quarter. We have seen so far in 2022, production that's been very consistent with what we've done. And so without giving specific guidance, I do think we are -- it is a strategic initiative to continue to grow that business.

With respect to exiting the term market, I think this has been driven by an overall review of our U.S. business and where we want to grow. I think the -- as we looked at the underlying unit economics and returns on equity of our spread business, which is the annuities business and accumulation life products versus the term business. I think the returns on equity are certainly higher in the annuities business. The term business is competitive at the best of times. And being subscale, I think we were never going to drive the sorts of returns on equity that we're able to see out of the annuities business.

So I think that as that rolls off, we'll start to see a -- if not a reduction in SG&A out of the U.S. business, the ability to continue to scale our U.S. business without adding too much incremental SG&A as we take the focus, as we remove some of the direct expenses from the term business.

[Meny Grauman, analyst]

Are you able to quantify how much of an expense benefit you'll get from the decision to stop selling term insurance? Is it material savings?

[Andre Mousseau, executive]

I think it would be material savings, again, as we're pushing to grow the U.S. annuities business, you would see that rather than a step change reduction, it will mean that we were -- we won't have to ramp up our SG&A proportionately with our premium or our asset growth.

[Meny Grauman, analyst]

And then sticking to the U.S., you talked about the additional bond offering and using those proceeds to invest in growth in the U.S. And I'm just wondering if you could give us a little better sense of what that's being used for. What are the key spending priorities in the U.S.? So just some more understanding of that deployment of those proceeds.

[Andre Mousseau, executive]

Sure. It's really about capitalizing the U.S. balance sheet to support the growth with our capital being governed in the U.S. Our capital requirements are governed by U.S. statutory accounting. And so as you get bigger, you need to inject capital, both for the capital to support the business but also as you write new business in the U.S., it generates statutory losses that unwind over time.

And so the U.S. has a very punitive capital regime that requires you to inject capital if you're growing significantly faster than your return on equity. I mean punitive relative to other international jurisdictions. And so it's basically to support the statutory balance sheet.

[Meny Grauman, analyst]

And then just turning to the Caribbean. I just wanted to get a better sense of how this most recent tourism season, how it looked from your perspective relative to prepandemic levels? Where were we this year? And is the expectation to go totally back to normal for next year, is that a reasonable expectation that you have?

[Dodridge Miller, executive]

Andre, this is Dodridge. I will take that, Meny. The season so far appear to be quite strong. I wouldn't say it's back to prepandemic level, but it's fairly close. Barbados also hosted the cricket series against England, and that does normally see a lot of activity from English supporters. So I would say, overall, it's been a good season for the Caribbean, but I can't confirm that it's back to prepandemic.

[Operator]

Your next question comes from Aditya Gupta with Desjardins.

[Aditya Gupta, analyst]

Just on inflation, just wanted to get your high-level thoughts on the different moving pieces that may impact the business from both the positive and negative side. I think the impact on interest rates is well understood. And I think you cited medical cost inflation in Jamaica. I just wanted to get just some color on that on the different moving pieces.

[Andre Mousseau, executive]

Sure. Well, there -- as you say, there are different pieces in different directions. With respect to Jamaica, where we have a large group insurance business, where we're kind of on risk, so to speak, for the year. We did see medical inflation, which took a few million dollars' worth of anticipated margin out of that business. A big -- well, a proportion of that is not simply inflation. It's also that the majority of that business is Jamaican dollar business. And to the extent they're purchasing medical supplies in U.S. dollars, the devaluation of the Jamaican dollar compressed their margin. But that is annual renewable business. And so I think the view is that we can stabilize that over time.

With respect to inflation and interest rates in the U.S., we have a very well-matched business in terms of the assets and the liabilities. So as interest rates increase with inflation, you see it a little bit through our other comprehensive income as asset prices not only go down, but that would resolve itself over time over the life of the policies because you're not fundamentally changing the unit economics of the policies. It's just when the profit is recognized.

In terms of the -- in the Caribbean, both in Jamaica and in the Southern Caribbean, our net business is invested short just given the challenges of finding long-term assets to match the really long tail liabilities. So we have -- in the Caribbean, we have a positive exposure to a rising interest rate environment.

[Aditya Gupta, analyst]

I appreciate the color there. And just on the U.S., I think it was cited that there was some policyholder behavior that impacted results. Was that like -- is this business sensitive to movements in rates? Or is there another -- other factors in play that kind of -- that are causing this? Anything there that you'd point to?

[Andre Mousseau, executive]

I think the policyholder behavior that we're seeing in our business right now is actually in SLI in the Southern Caribbean. And that is, we've experienced higher lapses and surrenders than budgeted. And I think that, that's really the effect of just less cash in the system as employment in the Southern Caribbean has been running below potential.

And so the way that works through the income statement is to the extent we've had negative reserves or taken future profit estimates for that business to the extent losses or surrenders are higher than some of that unwinds itself. And I think the view is that is a temporary effect of the economy and that we're properly reserved for that going forward.

With respect to the U.S. business, I don't think we've seen meaningful changes in policyholder behavior.

[Aditya Gupta, analyst]

Great. Last one for me, just on the U.S. in terms of the asset mix that backs the general account. Just wanted to get a sense of like how you guys compare versus some of the competitiveness in the market. Like is there an opportunity to optimize this asset mix in a way that can generate higher yields? And if so, is there significant room to go on this?

[Andre Mousseau, executive]

Yes. There is a big opportunity for us to optimize our U.S. balance sheet and emulate the investment strategy, the investment asset allocation of the companies that have taken a best practice approach to how they invest their assets. We've spoken about this a little bit in some of our earlier calls. Sagicor, the U.S. balance sheet historically has been dominated by liquid corporate bonds. And I think we've done a very good job managing those.

But if you look at credit spreads and how much as an investor, you get paid, you pay a lot for the liquidity of owning liquid bonds. And so what you've seen is that many other insurers, particularly those that are focused on the annuities market, where liabilities are very sticky, have allocated meaningful proportions of their assets to other asset classes, where you have -- where you can have still strong credit but you get higher yields because you're trading liquidity for yield in a sense.

And so if you look at what some of the sponsor-backed names, and some of them are private, some of them are public, they would allocate 50% of their more -- 50% or more of their portfolio to assets other than corporate bonds. And so we started off on this journey, call it, 1 year or 1.5 years ago with over 90% of our invested assets in the U.S. in liquid corporate bonds. I think there is a sizable opportunity for us to expand our spread as we push forward on a more sophisticated asset allocation.

[Operator]

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

[Darko Mihelic, analyst]

I just wanted to go back to the U.S. business and the decision to exit term life. I just have a few questions around that. The first is I understand that you're not selling it any longer, but have you actually reinsured the block? Or is this block simply going to go into runoff?

[Andre Mousseau, executive]

We're evaluating that right now. We had a meaningful proportion of the book with third-party reinsurers already. So we're going to evaluate whether it makes sense to reinsure the rest, whether it makes sense to go with someone else to administer the rest versus keeping it and run it off. So we would expect to update that later this year.

[Darko Mihelic, analyst]

And does it have any other knock-on effects? I guess what I'm interested in understanding is you have -- presumably you have some mortality exposure. Maybe you have longevity exposure. Like does the decision to stop doing this affect anything like your ratings? Or any -- or does it have any impact on the sales channel?

And I guess, lastly, you understood the statutory requirements long ago. And for some reason, it was once considered a great strategy to be in term life in the U.S., but now it's not. So what's changed?

[Andre Mousseau, executive]

I think of all the things you talked about there, the one we wanted to be most careful with was relevance to the sales channel. And so I think the underlying hypothesis may have been that having a term business, having that product available for sale may make you more relevant to the agents in your sales channel.

So we took a very careful look at that to push and see whether that was really the case. And I think the outcome of that was that it was important to retain some other accumulation life insurance products, but that the actual cross-sell when you got granular between term life and annuity was not meaningful.

So as we have gotten our name out there and become more relevant with our channel through our annuity sales and through other accumulation products, we got comfortable that we did not need to have term as a loss leader in order to push our sales.

[Darko Mihelic, analyst]

So presumably, I guess, the difficulty here is you mentioned expenses like SG&A, but what I'm more interested in understanding is typically, when I look at the insurers, there's sort of 2 things happening at once in any given quarter. You mentioned you had, I think, you said $246 million of sales in the quarter. Most of that presumably would be the annuities, I'm assuming.

[Andre Mousseau, executive]

Yes, correct.

[Darko Mihelic, analyst]

Annuities. And there would be a positive sort of gain. And then the sale of a term would be strain. So can you net out -- I mean is it significant in terms of how much term you would sell in a quarter and then you would see strain associated with it in every quarter? And if we just took it away now, what would be the impact?

I guess the best way to answer that, maybe, Andre, if you can tell me, the $246 million of sales, how much earnings did that produce? And then how much offset was the strain on term in the quarter?

[Andre Mousseau, executive]

The -- we don't go all the way to a source of earnings. But what I can say is that the strain from the term business would be relatively small on a new business strain from a new business strain point of view. But then when you combine it with the fixed costs and fixed expenses, it would be -- it's enough to notice. It, I'd say, is incremental in terms of improving the economics of the business but not radically transformative. It would be in the range of a couple of million dollars a quarter in terms of the P&L impact.

[Darko Mihelic, analyst]

Okay. And so ultimately, it's just -- it's not a big impact on the net income. You're saving yourself some capital. Maybe there will be a capital release if you reinsure the rest of the business. Am I thinking about it -- is that the best way to sort of sum it all up?

[Andre Mousseau, executive]

Yes, that's right.

[Darko Mihelic, analyst]

Okay. And then just a quick question -- sorry. Go ahead, Dodridge.

[Dodridge Miller, executive]

I was going to say, Darko, there are some other issues that you'll see around managing the book of business that may not be apparent. For example, you have to manage all the channels on which your term product and annuity products are being listed on. The technology changes almost every quarter. You're shifting resources to respond to changes in the regulatory environment for each of these products.

And what we found is that to respond to the accumulation product channel better and more efficiently, we either have to bring more resources to play or use the resources that we may allocate to the protection products. And we took the view that it's better to shift the resources to responding to the accumulation side because the protection side wasn't a meaningful contributor. So there are lots of things other than just the strain coming through the SaaS. There's the whole platform and the environment that we needed to manage.

[Darko Mihelic, analyst]

Okay. Okay. That's good color. And so just 2 other questions that come to mind. The first is just a technical question. I mean just, Andre, when I look at the corporate -- I'll just grab my model here real quick. I'm just trying to better understand any kind of help you can provide on some of the bouncing around of investment income and the impact just because it tends to have fairly big swings in this segment intra-quarter.

Is there anything you can provide or give me an idea? I think Playa goes through there, but I don't think that it would fully sort of explain some of the movements that are happening there. So how should I think about that part of the business? And how should I think about how you're budgeting for the head office and other?

[Andre Mousseau, executive]

Head office and other, as you point out, has a lot contained within it. Economically speaking, it is dominated by our -- by the investment in Playa. And then we still have some pretty meaningful cash and cash-like instruments up at the top company. And so that runs through as well. They show up as equities largely because we are in -- because we're in very short corporate paper ETFs. Those are yielding today just short of 1%. And so that's a couple of million dollars of income.

But then there are -- but there are other things that run through that line certainly. And from a modeling point of view, if you wanted to send us some questions on specifically how you're looking at that, we could off-line help you go through the public disclosure and connect the dots.

[Darko Mihelic, analyst]

Yes. Okay. That would be helpful. I think we just need a refresher because I was quite off this quarter on that line item. I guess my last question is related to Dodridge's remarks regarding the bank in Barbados, the digital sort of bank offering. I'm just curious as to what is the intent there. Is the intent to launch the bank, see how it performs in Barbados and then launch it in other countries? And how significant of an expenditure would it be? Like if you were to do that going forward, what would -- what are your sort of expectations around that business and the gain or expenses around offering that in other jurisdictions.

[Andre Mousseau, executive]

Dodridge, do you want to talk about the strategy piece first?

[Dodridge Miller, executive]

Yes. Darko, you summed it up reasonably well, but it's not just about a digital bank. It is about digital transformation of our business in the East, in the Caribbean. Starting with the bank, but we will also be moving that into our insurance because what we saw throughout the last 2.5 years is the market not demanding but expecting a wider range of digital engagement.

We know that banking in the Caribbean needs to change. We have the relationship with the customers. We believe we're in a good position to do so. And the opportunity is there, and we would like to capitalize on it. But naturally, we also expect that the insurance will also change. So we see the two moving together, with banking leading the way.

[Andre Mousseau, executive]

With respect to the financial piece, I think we disclosed we've been working on this for well over a year. So one of the pieces within the head office and the other line item is several million dollars' worth of cost in 2021, working towards launch of that business. And I think we'll probably look at breaking that out as a separate segment going forward as it launches commercial operations.

[Darko Mihelic, analyst]

Okay. Great. And just as we're talking about it, I thought of the IFRS 17 cost. And I'm just curious, Andre, are you also in a position now where you are running IFRS 17 in a parallel run as an accounting system? And secondarily, when do you think you'd be in a position to give us some first broad strokes on the impact to your company?

[Andre Mousseau, executive]

We're not running final parallel runs yet. I think that would be an endeavor for Q2 internally. I think communications with respect to what the impact to us will be a Q3 communication time line. As we've -- we talked about this, I think, on the last call that as we've continued to iterate, we've had some decisions to make with respect to specific tactical postures.

And so we're running that through the system now. So I think it would be during calendar Q3 is when we would be looking to have specific communications. And I think that's relatively consistent with what we've heard from others.

[Operator]

There are no further questions at this time. Please proceed.

[Samantha Cheung, executive]

Great. 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. If you have additional questions, please do not hesitate to reach out.

In addition to Sagicor's upcoming first quarter report in May, the company's Annual General Meeting for shareholders will be held in June. And the details and relevant information will be available on our website at www.sagicor.com in advance of the meeting.

With that, thanks again for your participation and interest. Have a great day.

[Operator]

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