Hotel losses haunt Sagicor profit rally

Insurance behemoth Sagicor Group Jamaica is celebrating a big third-quarter profit rally which has tempered two previous quarters of sizeable profit declines linked to the COVID-19 economic fallout, which threatens the financial conglomerate’s 20-year unbroken streak of annual profit growth.

Core business improvements and lower loan provisioning at its commercial banking arm in the quarter, are credited for the 138 per cent profit surge over the June quarter and a 34 per cent gain over last year’s September numbers.

Still, Sagicor Group continues to experience significant negative financial headwinds from the underperformance of its 15 per cent stake in big hotel chain Playa Hotels and Resorts, which accounts for the bulk of a $2.8-billion write-down during the September reporting period in its X Fund investments, where a portion of the Playa shares are held. Overall, the group’s hotel-related investments and earnings are challenged.

“The year 2020 is a one-in-a-thousand negative years, which nobody could have anticipated, that is particularly brutal on financial services companies,” says Sagicor Group President and CEO Christopher Zacca, who is, however, buoyed by the latest results.

“The third quarter has brought us back to comparable results to pre-COVID 2019. It’s a credit to the team and we are very proud of what they have done,” he told the Financial Gleaner on Wednesday after the release of the company’s results.

Zacca was particularly referencing the profit climb back for the nine months to $10.33 billion, just shy of the $10.86 billion it posted in the same period last year ahead of the COVID-19 impact. Against the backdrop of a 30 per cent fall-off in profits in Q1 and a 32 per cent decline in its net profits in the second quarter compared to the same period last year, Zacca is describing the Q3 comeback, which is still down five per cent over 2019, as “remarkable”.

He points to good performance in the insurance segment; says banking is starting to recover and is showing profitability, though reduced and impacted by non-cash impairment; while wealth manager Sagicor Investments Jamaica Limited is profitable.

As a reflection of strong core business, net premium income for the nine months is at $12 billion, tracking just shy of the $12.7 billion in the 2019 comparative period. The company wrote individual life policies totalling $20.65 billion year to date in the pandemic, above the $19.42 billion recorded in the comparative period. It also did more employee benefits business in the nine months this year at $14.58 billion, up from $14.39 billion. And net investment income is also on par with 2019 at $4.3 billion.

Commercial banking

In its commercial banking subsidiary, which remains challenged by the macroeconomic situation, non-performing loans are said to be 2.3 per cent of total loans, hovering north of the 2.1 per cent to 2.2 per cent figure programmed before the pandemic.

“In the quarter, we didn’t take any significant additional impairments on our loans at the bank on our tourism assets and investment assets. That was a reversal of what happened in the first two quarters as we recover from COVID. In addition, our insurance business had a very strong performance. The business is performing better than we had projected,” Zacca said.

He is optimistic that the uptick is sustainable for the October-December fourth quarter.

“The business will continue to be strong. We will see what happens with our loans, our investments, our tourism numbers. A lot depends on how the economy performs in terms of any new lockdowns, unemployment, etc,” he said.

However, it is not coming up all roses for Sagicor. Total nine-month revenue, at $60.25 billion, continues to trail the prior year’s $67.5 billion; while earnings are running at $2.65 per share, below the $2.79 per share at September 2019.

The fallout from Sagicor’s hotel investments appears to be among the biggest drag on earnings and profits. Two years ago, the conglomerate combined its hotel assets with Playa for US$100 million in cash and 15 per cent equity in the hotel chain at US$10.77 per share through an arrangement involving its Sagicor Real Estate X Fund Limited and Jamziv Montego Bay Portfolio Limited. Playa shares were trading around US$4.44 this week on the Nasdaq exchange.

The company’s financials show a $1.5-billion “share of loss from associate” for the third quarter and a cumulative loss of $3.4 billion year to date, referencing the Sagicor Real Estate X Fund holdings. The value of the investments in associated companies declined from $26.65 billion last year to $20.5 billion this year.

A $2.8-billion write-down in goodwill and the value of X Fund investments is primarily attributable to Playa, Zacca confirmed. According to the Sagicor CEO, the revenue picture is better when Sagicor X Fund is stripped out, as the real estate fund is consolidated in the group earnings. Sagicor Group holds 21 per cent of X Fund, and controls another eight per cent through segregated funds.

“It is of great concern,” Zacca said, when asked about the Playa losses. However, he sees greater value in the hotel company’s equity than the share price reflects. He and Sagicor Group Chairman Peter Melhado both sit on the hotel company’s board.

“We think there is greater underlying value in there other than the over US$4 on the stock exchange. We did independent valuations of Playa using Ernst & Young. That is the number we carry on our balance sheet. It’s higher than that share price,” said Zacca. “They (Playa) have US$250 million cash in the bank,” he added, referencing a recent US$204-million debt raise and US$20-million share sale by the resort group.

Sagicor’s other hotel revenues from ownership of the DoubleTree Orlando Hotel in Florida and its management of the property through Fund Properties LLC are down to $1.8 billion year to date, from $3.9 billion for the same period last year. The third quarter realised only $356 million in revenues from that segment compared to $1 billion in the comparable three months last year.

Playa losses notwithstanding, Sagicor remains cash-rich, building up cash at hand and in reserve at the central bank, from $25 billion in December 2019 to $33 billion at September this year. While noting that the cash position reflects prudence in a period of global economic uncertainty, Zacca says Sagicor is still on the hunt for acquisition deals rather than premium buys at this time.

Costs are also being contained, with the group skimping on property maintenance, stationery and overtime, without staff cuts, the CEO says, even as Sagicor boosts technology spend to 25 per cent of its capital budget this year, with plans to double the outlay next year.

business@gleanerjm.com