Good afternoon, ladies and gentlemen. My name is Sergio, and I will be your conference operator for today. At this time, I would like to welcome everyone to Sagicor Financial Company Investor Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and the instructions will be given at that time. This meeting is being recorded on August 25th, 2022. Mr. George Sipsis, SVP, Corporate Development and Capital Markets, you may begin your conference.
Great. Thank you, operator, and hello, everyone. Thank you for joining today's call. A copy of the presentation and a link to the live webcast is available on our website under the Investor Relations tab on our website at sagicor.com. I would like to begin by referring you to the cautionary language and disclaimers in our materials relating to this transaction, as well as the public filings regarding the use of forward-looking statements and the use of the non-IFRS financial measures and ratios, which may be mentioned as part of our remarks today. In today's remarks, there will be dollar references in both Canadian and U.S. dollars. Also, certain figures are presented on a year-end as at December 31st basis for comparability and pro forma purposes. Current and actual figures in the forecasts or statements may and will change in the future.
Joining me today is our Group President and CEO, Dodridge Miller, Andre Mousseau, our Group COO and CFO, and Anthony Chandler, our Chief Controller. We'll begin with remarks by Dodridge and Andre, followed by a Q&A session. With that, let me pass the call to our Group President and CEO, Dodridge Miller.
Thank you, George, and thank you to everyone for taking the time to join us today to discuss this exciting new stage of Sagicor's journey. Sagicor has reached an agreement to acquire ivari, a leading middle market life insurer in Canada. We would like to begin by extending a warm welcome to ivari's employees, management, distribution partners, and policyholders. We're thrilled to have you join the Sagicor family, and we look forward to sharing the next stage of our journey with you. Today, we have taken a new step in shaping Sagicor's future. The acquisition of ivari transforms Sagicor into a leading North American insurer, serving the middle market in addition to our market leadership in the Caribbean. We are excited about ivari's leading position in the Canadian market.
It is a scale business primed for growth with $13.9 billion in well-managed assets as of year-end 2021 and a dedicated and focused management team. Through this acquisition, Sagicor will double the size of its balance sheet and deliver its over 180 years of experience in individual life business to the Canadian market. We have gotten to know the ivari team well over the past few months, and we know they are focused on putting their customers front and center, strengthened by their deep relationships with their distribution partners. ivari's values fit well with both our vision and values. While Canada is a new market for us, the ties between the English-speaking Caribbean and Canada are very strong. Many of our executives and employees in the Caribbean started their careers or were educated in Canada.
We operate under similar regulatory frameworks, which in the Caribbean have tended to look to OSFI for guidance on best practices. We share actuary and accounting standards, and in fact, our appointed actuary is based in Toronto. There are many Caribbean citizens living in Canada who will understand the power of the Sagicor brand. Lastly, the transaction is financially attractive and delivers immediate value to our shareholders. With those brief remarks, I will pass the presentation over to our Group COO and CFO, Andre Mousseau. Thank you.
Thank you, Dodridge, and good afternoon, everybody. Today really is an exciting day for us at Sagicor. This acquisition provides us with another outlet for growth alongside our strong presence in the Caribbean and our expanding presence in the United States. I'm gonna speak to the first few pages of an investor presentation which we've posted on the investor relations page of our website. Starting on page three of that presentation, you can see a transaction summary. We are acquiring ivari for approximately CAD 325 million.
What this is mechanically is a purchase price of CAD 125 million, plus to the extent the transaction is likely to close in 2023, we're agreeing to pay back the seller for capital it needs to inject into the company to meet its targeted minimum equity target under IFRS 17 and LICAT 23. Because of these standards, the business is deemed to need additional capital under those standards, and that's what's driving the capital injection. Our current estimate of that is CAD 200 million. We may choose to inject further capital into the business to support higher capital levels for growth. Dodridge has talked a bit already about the strategic fit.
It provides us with a fourth major operating subsidiary in a new market with a lot in common with our operations in both the Caribbean and the U.S. Fundamentally, it positions a larger proportion of our balance sheet in investment-grade jurisdictions, which has positive implications for our capital structure and for our cost of capital. The transaction itself is very attractive. We're purchasing the company at a low multiple of historical profitability and a meaningful discount to book value. Using 2021 profitability, we would be buying the business at about 4.5x on a price-to-earnings basis and approximately $700 million discount to book value once you take into account change in control accounting.
The result would be a meaningful accretion to both earnings per share and book value per share. Now, we have thought about this transaction through an economic lens, through the lens of projected cash flows and embedded value, and in particular, through the lens of IFRS 17 earnings as we expect this transaction to close right around the time that IFRS 17 comes into place. On an IFRS 17 basis, we would expect the business to have run rate profitability pretty similar to the CAD 74 million that we saw in 2021, which is a combination of slightly lower base profitability due to the change in accounting standard, offset by additional earnings from the additional assets backing capital from the capital injection.
We would still anticipate that we're paying a mid-single digit price to earnings multiple for run rate earnings under IFRS 17. Under the current accounting framework for 2021, the transaction would have been about 25% accretive to our earnings per share. Under IFRS 17, we expect that number to be at least that high. We will share further details of that when we finalize our own projections under IFRS 17 later this fall. We are also financing this transaction on an attractive basis, primarily through new issuance of debt. We have secured a commitment for a term loan from our partners at JP Morgan, RBC and National Bank for $320 million.
Because we are buying ivari at a meaningful discount to book value, we can draw down on this debt while leaving our debt to capital ratios approximately unchanged. As part of our capital management strategy, we may opt to replace or refinance this term loan with additional bonds issued in the debt capital markets or other financing sources, in whole or in part, if and when appropriate. From an MCCSR point of view, we would expect this transaction to be moderately accretive as well. The transaction is subject to regulatory approval, and we would target to close it in the next 6-12 months, so again, into 2023. The next page four, talks a little bit more about ivari itself.
Founded in 1927, ivari was formerly Transamerica Life Canada until it rebranded and changed hands a number of years ago. It has about $1 billion of gross premiums a year, about three-quarters of which is universal life. UL is ivari's niche, and they are number two in the market, which is about a quarter of the market in Canada. They're very relevant in the niche in which they operate. You see here, it's sold across Canada, roughly proportionate to population and over-indexing a bit in Alberta. In terms of their invested assets, because of the pass-through investment portfolios in UL policies, there's a fair amount of equities. Their invested assets were 29% equities at year-end 2021.
Of this, only about a quarter of that were backing policyholder liabilities where ivari held the risk, and that's no longer gonna be attractive under the conversion to IFRS 17. We expect that the equities exposure by the time we own it would be substantially all pass through. The rest of the portfolio are substantially all investment-grade bonds. On page five, you see here it diversifies and it increases our net income. It adds a very relevant insurer in a new market for us. It moves our proportion of investment-grade assets from 69% to 83% and results in meaningful EPS and book value accretion. On the point of investment-grade assets, we believe that this can remove the cap or the ceiling on our credit rating.
Our credit rating is currently capped by the weighted average sovereign credit on our consolidated balance sheet. For example, when you run our numbers through an S&P capital model, mechanically, we would come out in the range of A to A+ , but we get notched down because of our holdings in non-investment grade jurisdictions. We believe that this transaction should move the cap to the point where it will not be a constraint on our rating once the transaction closes. We see ourselves as having a clear path to investment grade ourselves.
Further, we believe there are significant additional synergies that we may be able to garner from the transaction, including, on the investment side, synergies, through the distribution partners, as well as our continuous investment in technology. There's more detail further in the presentation and, certainly there will be lots of transaction documents filed over the coming weeks. We're very enthusiastic about, re-engaging with the equity markets, to talk about this. We believe this creates an incredibly compelling opportunity when you look at our market position in the Caribbean, combined with the strong unit economics and growth we're currently able to drive in our U.S. business. Now this transaction, which adds to our growth trajectory, and that we think we're buying and financing on very attractive terms.
We're very excited for the prospects for our company and our investors, going forward. With that, I would hand it back to you, George.
Great. Thank you, Andre. With that, we are now ready for the Q&A session. Operator, may you please open the lines to the analyst for their questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your question will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Meny Grauman from Scotiabank. Please go ahead.
Hi, good afternoon. First question, just in terms of the purchase price, CAD 325 million, and then if I look on slide nine, it references CAD 365 million in total considerations. I'm just wondering what the difference is there related to.
Fees and expenses, which is a combination, excuse me, of due diligence fees and advisory fees, and then the capital raising fees on the debt.
Okay. Then in terms of how it's funded, 80% debt, 20% cash. I guess the first question on that is just, you've been running with quite a large amount of excess capital. I think we've been talking about $250 million. I don't know if that's changed materially since we last discussed it, but just wondering why you're not using more of that excess capital to fund this. Like, what's the consideration there in terms of that particular 80%-20% mix?
I think that we are seeing such excellent return on capital from the growth that we're seeing in the U.S. By borrowing and keeping our debt to capital ratio constant, we don't have to pick and choose between making this transaction, which we think is a good initial transaction and a fantastic long-term fit. We don't have to pick and choose between that and continuing to rapidly grow our U.S. business.
What would the pro forma excess capital number be?
I think it depends on where we come out with the ultimate capital injection. I think it would be a number that would be smaller than the one that you referenced, but still meaningful.
Okay. Just a few more from me. One is just in terms of you talked about the earnings that the 2021 earnings that ivari delivered, but I'm just wondering about the ROE. If I look at the regulatory filings, I get to around an ROE of in the 5% range. Just wondering if that matches what you have sort of historically or at least for 2021 for ivari, then the outlook for ROE. I know a big part of the U.S. strategy was to expand that ROE over time.
Mm-hmm.
Just wondering the outlook on ROE, what it is now for the existing business and where you expect to take it?
Right. When we run through the purchase accounting, we mark to market certain of the assets and especially the liabilities to a different level. Because of that, we're still buying at a discount to book value. The equity level would be about $400-$500 million less. Mechanically, the ROE goes up a bit.
I think that off the bat, this will be under IFRS 17. We'd be looking for this to be EPS accretive, book value accretive, and under IFRS 17 about ROE neutral, but on a higher base. We would be looking at a bunch of the initiatives, some of which that we have pulled in the U.S. to increase the return on equity in Canada and grow the business over time.
Are there any closed blocks of business that you're buying with this transaction?
Well, it has been around for a long time, and so we're buying all of the blocks of business. ivari has pared down its focus since it's changed hands. There are blocks of business where new business is not being written. We've had a chance to do pretty extensive diligence on the book. We've been working on this for a while.
Thanks a lot, Andre.
Ladies and gentlemen, just as a reminder, please press star for further inquiry. Your next question comes from the line of Mr. Darko Mihelic from RBC Capital Markets. Please go ahead.
Hi. Thank you. I have a number of questions. Maybe I'll just start with, you know, the mad scramble to get data. When I look at OSFI's website and I look at year-to-date net income, they've lost money. Maybe you can talk a little bit about their experience in 2022 and just describe kind of what it was that caused them to have a loss year to date.
Sure. It's all about the asset price and interest rate volatility that we've seen year to date. We've been able to, through the diligence work that we've done, kinda do some internal core earnings analysis to look through and see the run rate core earnings, which are consistent with the numbers that we've put forward. It's really about the market volatility.
Okay. I see fairly big basis changes as well in the results. Is there any color you can provide on that?
Uh
Changes to liability. I mean, it just, it's hard to read these things sometimes without having, you know, a source of earnings. But it does seem.
Right.
As though there were some changes in assumptions. Is there? Am I right in viewing it that way?
It's around the change of interest rates.
Okay.
I think to look at it on a, it's around the change of interest rates. It's hard to look at this and look at what's on OSFI on the year to date because it doesn't have the source of earnings on it.
Right.
We'll be providing that disclosure as we put together our pro formas.
Okay. Then when I look similarly, when I look at the OSFI website, and I look at the LICAT, there's a few questions I have around. First of all, I mean, just looking at the number generally at 122%, is that the level that they are targeting? Is that the level that you are targeting?
They have a target level lower. I think the dynamic is they have been injecting capital in anticipation of the change to IFRS 17 and LICAT 23. They have a target level that is below where the public companies would be. I think these metrics are at 108%. We're gonna take a look at that. You know, obviously the public companies run a little bit higher than that for their target ranges. That's going back to the comment I made during the prepared remarks that we may choose to capitalize the business higher than that.
The next question is related to, you know, like, what caused them to sell, right? Which is obvious it's an IFRS 17 switchover and there's a drop in shareholders' equity. Is the drop in shareholders' equity completely explained away by simply the establishment of the contractual service margin, or is there something else at play here, with respect to their balance sheet?
That is much of it but not all of it. There are certain liabilities that are being marked to market that don't go directly into CSM. I think more broadly in terms of why they're selling, I think that our sense is that ivari was a great business and a good investment for the current owners if you look at the history of dividends that they've been able to enjoy from the company during their ownership period, which goes to the profitability of the business. It's a bit of an unnatural fit in terms of their current owner is predominantly a consolidator of legacy blocks.
Doesn't have similar primary businesses, or it has one, but it's American and under different accounting standards. This is the only piece of their book that is going through the brain damage of IFRS 17, et cetera. It's our sense that it's just not a natural fit.
Okay. When I think of trying to model, you can imagine how difficult this is. I don't even know how IFRS 17 is gonna affect your company. I certainly can't figure it out for ivari. You know, we're gonna make a lot of guesses here. A bit of a shot in the dark, I suppose. I guess one of the, you know, one of the things you've guided towards is sort of the 75-ish CAD or 74-ish CAD million of earnings. You know, when I think of it that way, is it predominantly, I mean, all like. Is it all. Like, it sounds like there's a lot of contractual service margin. Like, it's got a fairly.
It'll have a fairly big one, and so you sound fairly confident in that. Is there any extra costs that you need to build in, now that you're buying this for oversight or anything else? Like, it's just surprising that it would come in with no extra cost. I just kinda, I wanna understand the backbone of what it is you're buying here, that somehow doesn't require some spending on your part.
Right. In terms of the modeling, you should look at that earnings number that you referenced and then net it against taking on, drawing down on
Again. Right.
Some meaningful proportion of that debt. You'll see the financing documents when they get filed. You know, if you use approximately 8%, you would be in the right zip code. In terms of incremental costs, I think we're talking de minimis in terms of you know we may add a couple of head office extra bodies to for oversight and for transition. I'm not sure it'd be anything that would hit materiality in your models.
ivari, the business that we're buying is a standalone entity, you know, again, in terms of the fit with the current owner, because they were unique, both in terms of where they were geographically, but also being a primary operating business. They have, you know, the earnings numbers that we have include full-blown technology costs and all the SG&A. I think our initial posture would be that the SG&A is gonna look quite similar to what it does today.
We are, we anticipate retaining all ivari employees and executives, and then get to work in terms of whether there are best practices that we can share, or you know, cost synergies on the purchasing side, on the technology side, where we can leverage the scale.
Okay. Okay, thank you for that. I guess my next question is more of a strategic one. Maybe it's for Dodridge. You know, in thinking of coverage of your company, I'd always assumed that the real strategic push was the U.S. organic growth there and potentially some roll-ups in the Caribbean. Now, this is obviously opportunistic, this acquisition. I'm pretty sure you never dreamed of buying a Canadian life co when you first came to the listing in the TSX, but you know, it's working out. Looks like it's very accretive. Does this now maybe potentially slow other parts of the strategy? Does it perhaps maybe cause you to slow down any roll-up activity or any other possible deals in the Caribbean?
I'm pretty sure it shouldn't, and won't crimp the U.S., but the first thing that comes to mind is it might accelerate some reinsurance agreements in the U.S. or something. Can you talk about capital allocation now that this is about to occur?
Darko, thank you. I would broadly touch on some of the questions you raised. We have grown significantly by acquisitions for a number of years. I think when we first met, we shared that part of our strategy with you. We view North America as a wide market. It includes the U.S. and Canada. At the time, we had an operation in the U.S. which we thought that we would grow to scale, and that is an ongoing process for us. The Caribbean itself is still a core market for us. We also mentioned that we wanted to increase the proportion of our balance sheet. That's an investment grade asset, and that is certainly looking at North American opportunity. We think this is a unique opportunity that's fitting very well with our strategy.
We think that it will advance our strategy as we move forward. In terms of the capital allocation, I think Andre touched on that. In the earnings call we had earlier this month, we mentioned aspects of reinsurance transactions that we're also looking at to fit with our capital structure.
Okay.
I hope that helps.
Yeah, it does. You know, the question is, are you stealing a little bit of earnings from the U.S. All jokes aside, you know, it does.
Darko, you keep seeming to be asking us that question. From the first day we met, you wanted me to prove that we can do what we're doing. I think we keep showing you that, and you keep moving the question. At some point, you're gonna have to jump on board, Darko. I suggest now is the time.
Oh, I hear you. No, it's been fluid, so I appreciate that. I guess just the last question with respect to all of this is when I look at the pro forma in terms of the. Sorry, I just missed the slide here. I want to point you to slide. Yeah. When I look at the pro forma investment portfolio and sort of the debt securities, 100% investment grade in Canadian and U.S. bond portfolio. Now, when I think of that move, does that. Again, this is an IFRS 17 sort of question.
Does that, Andre, does that kinda make it so that I guess where I'm going with this is the discount rate that you'll be using under IFRS 17 for the liability side, and the discount rate on the asset side. What I think I'm sensing here is that you still will have potentially volatile earnings because you still have a significant part of non-investment grade. And this book will certainly or should move more than the discount rate on the liability side. Am I thinking about that correctly? Or is that something that you would be signaling to us or is there something else at play that I'm missing?
Well, there's another factor to that, which is that our local currency non-investment-grade sovereign bonds are predominantly not mark-to-market.
Mm-hmm.
The volatility question is actually a very complicated one, and we're still going through that analysis and, you know, we're in the process right now of running this year's Q2 under IFRS 17 to come out with real worked answers to questions like that in a period that was very volatile.
You know, I think that what we're trying to show on this slide is less about quarter-to-quarter accounting volatility and more about fundamental credit in terms of the stability and resilience of the balance sheet, as well as, you know, pointing to an improved cost of capital when we ourselves can get to investment grade and raise our debt at better rates.
Okay. I think, yeah, I understand that. Just real quickly, last question. 6-12 months for closing, what would cause it to take a full 12 months?
It would be the OSFI and Ministry of Finance approvals processes.
Okay.
We will be, you know, we file the business plan, and then we engage with OSFI, and then there's a chain of command to go all the way up to the top for a regulated institution like this. Everyone's incented to close quickly, but we're just trying to be realistic with the guidance.
Okay. In the interim, will they be drawing on your capital or how does that work? Will they be able to sell policies? Like, I'm just curious how does that work, if on the switchover to IFRS 17 if the deal hasn't closed, and they haven't injected more capital, are they in a position where they continue to sell or?
Yeah. ivari will very much continue to be a going concern. The current owner has agreed to inject the capital.
Okay.
If we haven't closed by the time that injection needs to go in, the mechanic in the purchase agreement is they pay it in, and then we pay it to them.
I see. I get it. Okay. That totally makes sense. Yeah. Great. Thanks very much.
Thank you.
Yeah.
Thank you. Your next question comes from Meny Grauman from Scotiabank. Please go ahead.
Hi there. Thanks for taking a second round. Just one question that I was wondering about was the benefit to your credit rating, you know, sounds significant. I'm just wondering if you could somehow quantify that value, how to think about it, in terms of what does that give you and over what timeframe?
The timeframe would be after closing, and we would push it to be as soon after closing as possible. But the rating agencies, you know, take their time and see balance sheets settle. The quantity or the quantum of the benefit could be quite significant. If you look at, you know, there's a cost of capital in terms of just bonds at any given point in time will have less yield on it. Being investment grade also opens up doors to other financing structures that are tougher to access for non-investment grade companies.
You know, order of magnitude, if you looked at our balance sheet having $550 million of debt right now, and then, you know, pro forma this transaction, something in the $800 million to $850 range. You know, if you applied 200 basis points improvement to that just to pick a number, you know, you're talking about incrementally double-digit millions that flows directly to the bottom line.
Because, you know, if you look at where we've raised capital, the last couple of times, we still got meaningful improvement last time we refinanced the bonds and brought them down from 8.875% down to 5.3%. Even at 5.3%, it's a very different world. A year ago, we were still at a spread to what a North American double B issuer would have paid.
You know, the opportunity for the improved cost of capital could be in that range of up into the 200 basis points, if we can transition to an investor base that's on the debt side that's not only investment grade, but also looks at us as a company that's predominantly North American, and we don't get an international discount.
Then maybe just to if I can sneak one more in, just in terms of, I think Darko touched on it, but just, you know, this idea that, you know, you're going into another geography with another regulator, like the capacity of the company to manage, you know, across all these geographies and all these regulators, like what's the pushback on that concern that this is just additional complication here, and sort of takes the focus off, you know, sort of what has been the kind of the core business here?
Well, it won't take the focus off at any of the three operating entities. You know, the way we work, we have full management teams and regulatory interfaces at each of Jamaica, Sagicor Life.
Mm-hmm.
At the U.S., really what we're talking about is some additional capacity and horsepower up at the top company level. I do expect that, as we bring this through integration and to closing, we'll probably add a couple more people. I'm just saying in the context of the overall size of our income statement, it's not gonna be material.
Got it.
Andre, we could possibly add that the Canadian regulatory environment is more aligned with what we've been implementing in the Caribbean for a number of years. It's not that different for us.
Good. That's a good point. Appreciate the time. Thank you.
Thank you. Ladies and gentlemen, there are no further questions at this time. Please proceed, gentlemen.
Great. Thank you, operator. Thank you for everyone joining today's call. It's a very exciting day for us here at Sagicor, and we're happy to share the news with you all. A replay of this event and call will be available for one month on our website, and a transcript will be posted as soon as available. If you have any additional questions, please don't hesitate to reach out to any one of us. With that, thanks again for your participation and interest today. Have a great day. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect lines.