Sagicor first quarter results apply international reporting standard
Sagicor published its first quarter results on Monday applying for the first time the new international Financial reporting Standard (ifrs) 17 which replaces the old ifrs 4 standard.
The change primarily affects the treatment of long-term insurance contracts of over one year, which are now a separate segment from short-term insurance contracts, replacing the previous individual and employee benefit lines based on groups verses individuals. Consequently, the new long-term insurance category includes annuities, traditional life and universal life, while the short-term segment contains group life, health and property and casualty insurance which operate on an annual renewal cycle. The group’s asset management, commercial and investment banking, and cambio and remittance businesses are unaffected by IFRS 17.
The group’s first quarter profit attributable to shareholders was $2.18 billion, or almost treble the previous year’s restated first quarter profit of $0.77 billion. Last year’s first quarter was impacted by significant unrealised losses on securities which were now instead recorded directly in profit and loss (fair value) verses OCI (other comprehensive income) under the previous standard.
Insurance revenues were up 14 per cent to $10.98 billion, while net insurance results (after service expenses) were $1.23 billion and $0.05 billion for longterm and short-term insurance, respectively.
For the period ending March 31, 2023, the long-term insurance segment reported net profits of $2.37 billion, a significant increase over the prior year’s first quarter restated loss of $1.26 billion. This loss had been restated to reflect the large unrealised investment loss of $7 billion, which was only partially offset by an associated $3.15billion reduction in insurance liabilities. This compares with the impact of the same two items in the first quarter of only a negative $0.56 billion reflecting much improved market conditions.
The long-term insurance is now measured using the General Measurement Model (GMM) and the Variable Fee Approach (VFA) under IFRS 17, both of which require that the net present value of the future policy cash flows in this segment be taken to the balance sheet in the liability account known as the contractual service margin (CSM), and then released to the profit and loss statement as they are earned over time. The expected net present value of these “positive” contracts are therefore deferred at inception and amortised to future income. However, for contracts whose CSM is deemed negative at inception, now classified as “onerous” contracts, these are instead recognised immediately in the income statement, similar to IFRS 4.
The CSM thus largely reflects a risk buffer or margin to compensate for the group bearing the uncertainty of the amount and timing of the cash flows for non-financial risk, or formally the unearned profit in the group of contracts, recognising the profit from a group of insurance contracts over the period the entity provides insurance contract services, and as the entity is released from the risk. It can be loosely regarded as a form of piggy bank against the risk of worse than expected performance, following the accounting principle of prudence, as one withdraws from the account as the risk inherent from the time exposure of the insurance contract expires.
Critically, the new presentation separates insurance revenue (excluding receipt of any investment component), insurance service expenses (excluding the repayment of any investment components) and insurance finance income or expenses.
The segments liabilities now include CSM of $37.7 billion compared to $31.95 billion in 2022, while Sagicor advises that the CSM on transition, computed using retrospective and fair value approaches, totalled $30.52 billion. This has been transferred from equity in the balance sheet, and is the main cause of its decrease of $29.33 billion, but is still included in regulatory capital. Consequent on that inclusion, Sagicor Life Jamaica Limited minimum continuing capital and surplus ratio (MCCSR) at the end of March has actually increased to 247.5 per cent (from 164.2 per cent a year ago), well above the 150 per cent regulatory minimum.
The short-term insurance segment (less than one year) is measured using the simpler premium allocation approach (PAA), and reported profits of $122.07 million compared with the prior period loss of $105.5 million, driven by increased rates and improving loss ratios.
Moving to their non-insurance business, Sagicor earned $2.57 billion in net interest income and $4.16 billion in fee and other income. In September 2022, the group sold its shares in X-fund, so the $1.76 billion of hotel revenue and the associated hotel expenses of $1.19 billion are not in the current year’s results.
The sharp reduction in net investment income for their investment banking segment, from $891 million to $395 million, contrasts with the improvement in net investment income for the commercial banking division to $2.37 billion from $2.15 billion for the first quarter against one year ago. This investment banking decline resulted in an overall net loss of $70.36 million, compared with a positive $308.22 million a year ago.
The commercial banking segment, however, produced a 28 per cent higher net profit of $496.87 million compared with the prior year, on the back of a 17 per cent increase in total revenues, mainly from credit card and point-of-sale, combined with a 22.7 per cent growth in the loan portfolio (new loans written over the period totalled $8.25 billion), while the bank improved its efficiency ratio from 71.06 per cent to 65.35 per cent. Probably reflecting this growth, the bank saw a slight decline in regulatory risk weighted capital to 12.9 per cent, from 13.7 per cent, still well above the mandated 10 per cent.
Cash and cash equivalents at the end of March 2023 increased to $47.48 billion from $32.96 billion one year ago, reflecting improved cash flow and new funding from customer deposits and securities liabilities of $4.23 billion.