At the end of March, we saw that Sagicor Group Jamaica (SJ), in which Pan-Jamaican Investment Trust Ltd holds a 31.56 per cent stake, accounted for a large part of that trust's profits. That arrangement seems to work well for a Jamaican-based entity.
When we focussed on Sagicor Financial Corporation last week, we learnt that the Jamaican operations of Sagicor continue to account for a large slice of SFC's pre-tax income.
One recurring problem for SFC, the 49.11 per cent majority shareholder, is that a large portion of this positive result is eroded by translation losses, triggered by the persistent devaluation of the Jamaican dollar. This has the effect of significantly reducing SFC's comprehensive income. To some extent, the dividends that SFC receives from SJ compensates for the negative adjustment to its comprehensive income.
I will comment further on these points later.
As usual, we start by reviewing Sagicor Group Jamaica's annual performance for the year ended December 31, 2014.
Changes in financial position
Total assets increased from J$198.3 billion to J$284.2 billion. This change was largely influenced by the RBC Royal Bank Jamaica acquisition and, to a lesser extent, the purchase of the minority shares in Sagicor Investments Jamaica Ltd.
The major component, financial investments, rose from J$161.8 billion to J$183.1 billion. Within this category, the available for sale assets increased to J$119.6 billion from the previous year's J$99.1 billion. Here, the largest component, Government of Jamaica securities climbed from J$49.7 billion to last year's J$62.1 billion. In addition, the corporate bonds component expanded to J$40.3 billion from the previous level of J$34 billion.
Not surprisingly, net loans and leases soared to J$38.8 billion from J$10.8 billion; we recall that, in 2013, only the original and smaller Sagicor Bank was in operation. Further, the purchase of the RBC Royal Bank Jamaica triggered an almost ten-fold increase in provisions for credit losses, which jumped to J$2.31 billion from J$236.6 million in 2013.
Also boosting assets was the rise in cash balances, which escalated to J$21.1 billion from the 2013 level of J$4.1 billion. The major component, demand balances with other banks, rose to J$18.3 billion from the previous amount of J$3.9 billion.
Other assets rose to J$10.3 billion from J$4.3 billion. Included in the 2014 balance is a legal claim of J$3.9 billion, which is matched by a corresponding liability of the same value. This relates to the pre-acquisition matter concerning the former RBC Royal Bank of Jamaica. Also, unpaid premiums due of J$1.8 billion showed an increase from the 2013 level of J$1.7 billion. When placed in the context of a marginal decline in net insurance premiums, this item may require further explanation.
Total liabilities rose to J$238.2 billion from the previous year's J$160.7 billion.
The major component, deposit and security liabilities rose by 76 per cent to J$151.6 billion from J$86.1 billion. Within this grouping, securities sold under re-purchase agreements moved to J$76 billion from the earlier balance of J$55.6 billion. Also exhibiting robust growth was customer deposits and other accounts, which closed 2014 at J$53.6 billion; this was 451 per cent greater than the 2013 level of J$11.9 billion.
Policyholders' funds rose to J$71.1 billion from J$64.5 billion. Within this category, investment contract liabilities fell to J$12.3 billion from J$13.3 billion. This mainly reflected a decline in policyholders' saving plan to J$2.1 billion from J$3.6 billion. Also, insurance contract liabilities increased to J$55.8 billion from J$48.6 billion. This improvement of J$7.2 billion was less robust that the J$9.3 billion recorded over the 2012 to 2013 period, when a very large single premium annuity was sold.
Equity improvements
Total equity increased to J$46 billion from J$37.6 billion.
Included in the 2013 figure was J$1.7 billion relating to non-controlling interests in Sagicor Investments Jamaica Limited (SIJL). In May 2014, SJ acquired the remaining 14.55 per cent of SIJL by issuing additional shares. This change largely explains the increase in share capital from J$7.85 billion to last year's J$9.16 billion.
Retained earnings rose from J$22.7 billion to J$30.5 billion. Comprehensive income of J$9.52 billion together with J$0.5 billion relating to the SIJL purchase increased the brought forward balance while dividends of J$2.41 billion reduced this figure.
With 3,905,634,920 shares outstanding, each share has a book value of J$11.79 (2013: J$9.55).
Revenues and profits
Net premium income declined marginally to J$29.17 billion from J$29.22 billion in 2013. All categories of group and individual insurances exhibited increases. However, as indicated earlier, bulk annuities contracted to J$2.2 billion from the 2013 figure of J$4.8 billion.
Premiums generated in the Cayman Islands of J$1.88 billion now account for 6.45 per cent of the total; in 2013, premiums of J$1.56 billion from that source contributed 5.33 per cent of SJ's total net premiums.
Net investment income advanced to J$12.55 billion from J$8.78 billion. The main component, interest income on available-for-sale assets, increased to J$7 billion from J$5.7 billion in 2013. Loan interest jumped to J$2.9 billion from the previous year's J$1.1 billion. Net realised gains on investment securities moved from J$1.4 billion in 2013 to J$2.4 billion. In addition, net foreign exchange gains increased from J$0.44 billion to J$1.06 billion.
Fees and other income declined to J$3.91 billion from J$4.35 billion. Banking fees rose strongly to J$591.2 million from J$74.8 million. On the other hand, both foreign exchange gains and other operating income posted declines. The former fell to J$488.6 million from the previous year's J$1.04 billion. In the case of the latter, the 2014 figure of J$901 million was almost 43 per cent lower than the J$1.57 billion recorded for 2013.
These changes allowed SJ to post 2014 revenues of J$45.6 billion versus J$42.4 billion in 2013. Total benefits and expenses increased from 2013's J$35.3 billion to J$40 billion last year.
One notable decline was recorded under changes in insurance and annuity liabilities, which fell to J$5.5 billion from J$7.5 billion previously.
Net insurance benefits incurred rose to J$17.3 billion from J$15.8 billion. Here, the largest payment, health claims, increased to J$6.39 billion from J$6.14 billion. Segregated funds withdrawals were at J$3.79 billion from J$3.18 billion a year earlier. Finally, annuity payments increased to J$2.93 billion from J$2.52 billion in 2013.
Administrative expenses rose by almost 58 per cent to J$11.96 billion from J$7.59 billion. SJ's 50 per cent interest in its Costa Rican operations improved from a loss of J$10 thousand to a profit of J$6.3k.
Also, negative goodwill relative to the RBC Royal Bank Jamaica acquisition brought in J$3.2 billion. These changes saw pre-tax profit for 2014 register at J$8.86 billion (2013: J$6.30 billion).
Corporation and investment tax fell to J$298.5 million when compared to J$561.8 million in 2013. The lower tax bite was largely due to higher levels of investment income not subject to tax; this type of income increased to J$3.1 billion from J$2 billion in 2013.
These changes allowed SJ to report after-tax income of J$8.56 billion versus J$6.45 billion previously. Of this figure, J$8.51 billion related to stockholders of the parent company (2013: J$6.30 billion).
Using the year-end stock units outstanding, EPS for 2014 was J$2.18 versus J$1.67 for 2013.
Segment performance
The results of the most profitable segment, employee benefits, were driven by both new business and realised capital gains.
The RBC Royal Bank Jamaica acquisition boosted revenues for the commercial banking division. On the down side, the one-time re-branding and rationalising costs of this acquisition pulled down profits for this segment.
Individual lines recorded a 14.8 per cent increase in revenues although the profit improvement was less robust.
Share price, dividends and prospects
Over the past year or so, SJ shares have trended positively, moving from J$8.76 on May 27, 2014 to J$10.55 on April 22, 2015.
This variability impacts on both SFC and Pan-Jam Trust's income streams; ideally, both main shareholders should have a preference for receiving steadily increasing dividend flows from this major investment.
On April 10, 2015, SJ paid a dividend of J$0.39. This is higher than the J$0.35 paid around the same time in 2014, suggesting that dividends for the calendar year 2015 could be greater than for 2014.
Relating the 2014 calendar dividend to the recent share price of J$10.55, we derive a yield of 5.97 per cent. Also, at the recent market price of J$10.55 and EPS of J$2.18, the P/E multiple is only 4.84.
We have seen how one-off items, including negative goodwill and the ticklish matter of tax management, have boosted 2014 earnings. If its earnings can be underpinned in a more predictable manner to its core businesses, then SJ should command both a higher price and P/E multiple.