Following Sagicor Real Estate X Fund's rights issue in August, Sagicor Group Jamaica Ltd (SJ) participated in that exercise and picked up 473.4 million additional shares in the X Fund.
This transaction was recorded in early September and represented a 21.1 per cent of the X Fund's capital. Consequently, Sagicor Jamaica's stake in that company rose to 29.3 per cent from 8.2 per cent previously.
Let us now further expand on these and other developments that impacted on Sagicor Group Jamaica's third quarter results.
Changes in financial positions
Total assets rose by 3.6 per cent to J$294.3 billion (about TT$15.7 billion) from last December's J$284.2 billion.
Financial investments, which accounted for almost 68 per cent of the total, increased to J$199.6 billion from last December's J$179.5 billion.
Net loans and leases fell marginally to J$38.1 billion from J$38.8 billion.
Also declining were pledged assets and securities purchased under resale agreements; the former moving down to J$3.2 billion from J$8.4 billion while the latter fell to J$1.1 billion from J$3.6 billion.
Other assets climbed to J$23 billion from J$13.7 billion previously.
Cash resources fell to J$15.7 billion from J$26.6 billion. This reduction reflected a number of transactions including the repayment of repurchase agreements and purchase of investment securities. In addition, there were new allocations to information technology and the upgrading of some bank branches. There was also the purchase of additional shares in the X Fund (J$3.32 billion) and payment of a dividend of J$1.52 billion in March.
Total liabilities climbed from J$238.2 billion to J$250.3 billion or by 5.1 per cent.
Policyholders' funds increased to J$77 billion from J$71.1 billion. The major component, insurance contract liabilities, advanced to J$61.4 billion from J$55.8 billion, reflecting an improvement of almost 10 per cent.
Securities sold under repurchase agreements declined to J$64.8 billion from J$76 billion.
On the other hand, customers deposits improved to J$63.3 billion from J$53.6 billion; this reflects an increase of 18 per cent.
Sums due to banks and other financial institutions rose from J$19.7 billion to J$23.7 billion or by 20.5 per cent. Meanwhile, other liabilities advanced to J$17.7 billion from J$14.7 billion.
Equity changes
Total shareholders' equity declined to J$44 billion from J$46 billion.
The major change was shown in equity reserves, which fell to a negative J$1.1 billion from last year-end's J$6.4 billion. This decline reflected unrealised losses on available-for-sale investments of J$5.9 billion, gains recycled and reported in profits of J$0.85 billion and adjustments between regulatory loan provisioning and IFRS of J$1.1 billion. The first item was influenced by declines in its international portfolio, which was triggered by global bond price volatility and weaker growth in China.
The retained earnings component advanced to J$35.9 billion from J$30.5 billion. The major movement reflected a positive contribution from comprehensive income of J$5.83 billion. This sum was reduced by a dividend payment of J$1.52 billion and then enhanced by the IFRS adjustment of J$1.1 billion.
With 3,905,634,918 shares outstanding each share has a book value of J$11.27 (December 2014: J$11.80).
Revenues and profit
Total revenues expanded by 16.1 per cent to J$39.7 billion from J$34.2 billion. Of this sum, net premium revenue improved marginally to J$22.4 billion from J$22.1 billion. The 2014 figure included significant annuity contracts, which was not the case in the current period.
Net investment income expanded by a robust 47.7 per cent to J$12.98 billion from J$8.8 billion in the 2014 period. This was helped by realised capital gains from securities trades.
In addition, boosted by substantial commercial banking activities, fees and other revenues grew by 34.4 per cent, moving from J$3.25 billion to J$4.37 billion.
Total benefits and expenses rose by 11.3 per cent to J$32.9 billion from J$29.5 billion.
The largest increase, in both dollar and percentage terms, was recorded under administrative expenses, which climbed by 27.5 per cent to J$9.6 billion from J$7.5 billion. Much of this increase reflected the inclusion of the RBC portfolio together with upgrading of the technology platform at that subsidiary.
Net insurance benefits incurred rose by 10.4 per cent to J$14 billion from J$12.67 billion. This reflected increases in all types of claims and fund withdrawals.
Significantly, changes in insurance and annuity liabilities declined to J$4.86 billion from the previous period's J$5.8 billion. This reduction is related to the lower levels of large annuity business when compared to the previous year.
The result from its joint venture moved from a profit of J$12.9 million to a loss of J$14.1 million. This reflects an improvement from the half-year loss of J$27.1 million.
These changes allowed SJ to report pre-tax profit of J$6.8 billion, reflecting an improvement of 45.8 per cent over the J$4.7 billion recorded for the comparative 2014 period.
After allowing for taxes and minority interests, the profit attributable to shareholders' registered at J$5.83 billion; this was 42 per cent greater than the comparative 2014 result of J$4.1 billion. These results translated into EPS of J$1.49 versus J$1.06.
Divisional performance
Excluding employee benefits, all other segments registered top-line growth.
Notably, benefits and expenses for individual lines were higher precipitating a lower profit. In addition, despite lower benefits and expenses at the employee benefits segment, that division's profit was also lower.
Both banking segments registered top-line growth and pre-tax profit increases. This change was more robust in the commercial banking unit than in the investment banking segment. The major reason for this was that, in 2014, only three months of the acquired RBC bank was included, while in 2015, SJ enjoyed the benefit of the entire nine-month period.
Dividends and share price
SJ's share price ended at J$10.15 on December 31, 2014. By the end of the third quarter, it had reached J$13.03.
From this base, the price continued to appreciate, moving up to J$14.00 on October 15, 2015 and then to J$15.00 on October 28, 2015. The price then drifted down for a few days.
The release of this interim report on November 4 sparked renewed interest and the price resumed its upward momentum. It closed at a peak of J$16.55 on November 17, 2015, although some trades were executed at J$17.99. This suggests continuing strong demand.
The first dividend for the year of J$0.39 was paid on April 10, 2015 and, on November 13, shareholders received J$0.34, bringing the current year's total to J$0.73. This compares favourably with the 2014 payment of J$0.63.
When we relate the current dividend to the recent peak price of J$16.55, this would give investors a yield of 4.4 per cent. Investors who had shares last December would have enjoyed a yield of 7.2 per cent on their holding.
What is the plan for the X Fund?
In August, the Sagicor Real Estate X Fund had a rights issue totalling 747,668,375 new shares at J$6.95 each. Of this amount, SJ was able to acquire a disproportionate 473.4 million or 63.3 per cent of the total number of shares offered via the rights issue.
This means that Sagicor Pooled Pension Funds Ltd, which previously owned more than 67 per cent of the X Fund did not participate to the full extent of its entitlement to buy two new shares for every five shares then held. Consequently, that funds' shareholding declined to 52.3 per cent. The purpose of that rights issue was to help finance the purchase of The Double Tree Hilton in Orlando, Florida for US$75 million.
Now that SJ has acquired a 29.3 per cent stake in the X Fund, what are its plans for same?
Prospects
Starting this year, a new profit tax regime for the life insurance sector will be implemented. This will have a negative impact on the fourth quarter results. Previously, tax was based on gross premiums at a rate of three per cent and on net investment income at a rate of 15 per cent.
Now, those methods will be replaced by a single tax of 25 per cent on income. At the time of the presentation last March of the 2015 Budget, the Minister of Finance anticipated that this would lead to a higher level of taxation for life insurance companies.
This new measure is scheduled to take effect in the current quarter.
Despite this challenge and combined with the more competitive operating environment, SJ directors are forecasting good results for the final quarter of 2015.
Perhaps, one significant reason for this optimism may be the huge profit that will be made from the sale of Desnoes & Geddes shares to Heineken at a substantial premium over cost. It is very likely that many of its subsidiaries hold this share in their portfolio. In addition, the Sagicor Pooled Equity Fund owned 50,177,245 shares (1.79 per cent) of D&G.
(Note: In last week's article, the name of the company is Hardware & Lumber Ltd NOT "hardware, lumber").