Sagicor hit by expected credit losses in Q2 but maintains profitability

Sagicor Group’s second quarterly financials were hit hard by unrealised capital losses as well as expected credit losses amounting to millions of dollars, due mainly to the downturn in the economy caused by COVID-19.

In spite of this, the financial group was able to generate net profit attributable to stockholders of $2.47 billion, which is a significant improvement when compared to the $1.88 billion net profit attributable to stockholders at the end of the first quarter of 2020.

For the six-month period, January to June 2020, profits were $4.36 billion, which was a very creditable performance, especially with the second quarter being the height of the COVID-19 lockdown in the countries in which Sagicor operates.

The unrealised capital losses of $5 billion were driven by the broad decline in bond and equity prices. In recent months, the local markets have rebounded somewhat and the impact of this has been reduced on a year-to-date basis. These unrealised capital losses stemmed mainly from the insurance segment, where there were large capital losses related mainly to Sagicor’s Segregated Funds.

There were significant unrealised expected credit losses (ECL) on loan portfolios and investment securities. The ECL, as defined by International Financial Reporting System 9, was mostly confined to Sagicor’s commercial banking arm Sagicor Bank, which was severely impacted by higher ECL on loans, as a result of the impact of COVID-19 on tourism, entertainment, and energy sector loans and the slower-than-expected recovery of the economy.

However, speaking at a Zoom press briefing on the second-quarter financials on Wednesday, Sagicor President Chris Zacca made the point that the ECL doesn’t represent actual losses, but is a forward-looking model of what is expected to come. He explained that the unrealised capital losses were due mainly to the decline in the valuation of Sagicor’s assets in the tourism sector.

“Hotel revenue has been deeply impacted since the worldwide collapse of the tourism market, resulting in declines in the valuations of our hotel businesses, Zacca asserted.

A significant share of loss and impairment charge came from Sagicor’s investment in associate company Playa Hotels & Resorts.

Sagicor’s parent company, Sagicor Financial, acquired nearly US$5 million worth of shares in Playa, bringing Sagicor Jamaica’s shareholdings to 16 per cent of Playa shares, as the acquisition was done mostly through Sagicor Group Jamaica and its managed funds.

The 1.5 million Playa shares were purchased mid-June at US$3.75 to US$4 per unit, bringing the shares held by Sagicor Financial and Sagicor Jamaica Group to 21.5 million units, according to market filings to the US Securities and Exchange Commission.

Sagicor Chief Financial Officer Andre Ho Lung, who also spoke at the Zoom press briefing, pointed out that the outturn for both the ECL and unrealised capital losses were much better than expected. He disclosed that Sagicor Bank has seen a slight increase in its non-performing loans, which moved from two per cent to 2.4 per cent of the total loan portfolio of $9 billion in the just-ended quarter.

Zacca emphasised that despite these adverse effects, Sagicor’s operating cash flow increased by $2.48 billion with the finance group continuing to maintain strong liquidity by improving its cash position by $6.63 billion.

“As the market leaders in the life and health insurance space, the group’s insurance businesses have continued to show strong performance, most notably with net premium income being 20 per cent higher than the prior year,” the Sagicor boss stated.

Zacca pointed out that Sagicor has seen healthy new business sales and portfolio growth which continue to drive core results. He added that the key metrics of its commercial and investment banking businesses have also remained strong and are expected to improve as the economy begins to show greater activity.