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New contract rules shrink capital at insurance companies

New rules regarding insurance contracts that have been called the most radical in a decade have carved about $45 billion off the capital base of two of the largest insurance conglomerates that operate businesses in Jamaica.

Collectively, Sagicor Group Jamaica and Guardian Holdings Limited have lost about 18 per cent of their book value, with the implementation of IFRS 17.

The rule redefines how insurance contracts should be treated, in particular long-term contracts.

Accounting changes rarely pique the interest of those other than auditors and other accountants, but this time the changes were described by Guardian Holdings Chairman Patrick Hylton as the “single greatest transformational event to impact the insurance industry in decades”. As for Sagicor Group, its President and CEO Christopher Zacca held a sensitisation session on the new rules.

Guardian and Sagicor combined held about $241 billion in capital prior to the new rules, but shed $45 billion of that value after restating their accounts.

The rule took effect on January 1, 2023, but the companies have been restating their 2022 results to conform with the new format.

The argument by the London-based accounting body that issues the International Financial Reporting Standards was that different insurers treated these contracts differently within and across borders, which made comparisons difficult.

Essentially, the rule seeks to streamline the accounting of contract and remove inconsistencies to allow investors, analysts and others to meaningfully compare companies, contracts and industries, according to the body.

Essentially, the intent is for some 450 insurers across much of the globe to account for these contracts in a similar manner.

“IFRS 17 requires a company to recognise profits as it delivers insurance services, rather than when it receives premiums, and to provide information about insurance contract profits the company expects to recognise in the future,” said the fact sheet on the new IFRS 17 rule.

The impact, however, was not confined to the insurance groups alone.

For instance, the new rules effectively resulted in the reduction of capital at Sagicor Group Jamaica from $131 billion, as originally reported in its March 2022 financials, to the restated $99 billion. It also erased the $3.8 billion of shareholder profit made by Sagicor and pushed the company into a restated loss of $771 million instead.

Those results ended up derailing PanJam Investment Limited’s earnings for the same period.

Initially, in March 2022, the property and investment conglomerate, which owns 30 per cent of Sagicor Group, had reported quarterly profit of $1.06 billion, but with the restatement it swung to a $324-million loss instead. That outcome, PanJam said, was due to the fact that the restatement erased $1.4 billion of its returns from Sagicor in the January-March 2022 quarter.

Still, PanJam indicated it was in favour of the IFRS rule change, saying it would bring greater transparency and comparability in financial reporting throughout the insurance industry.

“We remain confident in the long-term prospects of Sagicor and its ability to create value for our shareholders …,” PanJam Chairman Stephen Facey said.

Sagicor Group’s Zacca and Chairman Peter Melhado have said that IFRS 17, which replaces IFRS4, does not affect the underlying fundamentals of the business, the strategy, or the group’s operations. The Sagicor board added that while its insurance arm was affected, its asset management, commercial and investment banking, cambio and remittance businesses were not.

“Despite these changes, the group’s key financial targets and metrics have remained largely intact, as does our philosophy regarding returns to our shareholders,” Sagicor said.

For Guardian Holdings, which is majority owned by NCB Financial Group, its capital dipped from TT$4.85 billion, as originally reported in March 2022, to the restated TT$4.25-billion figure. In Jamaican dollar terms, those values equate to about $110 billion and $96 billion, respectively.

Hylton said the new accounting standard materially changes the financial statements in terms of presentation, recognition and measurement of insurance contracts mainly in the life, health and pension segments.

“Implementation of IFRS 17 required considerable investment in new systems, process changes and valuation modelling. This has been a significant undertaking not only for our group, but for the insurance industry globally,” he said.

In the quarter, Guardian Holding’s profits were restated from TT$179 million to TT$128 million.

As to the profit performance of the two insurance groups in the March 2023 period, Guardian’s quarterly earnings were cut to just under TT$61 million, which it blamed on continuing adjustments to the new accounting rule; Sagicor Group Jamaica reported a profit of $2.2 billion, while noting that the impact of the rule was considerably muted relative to the year-prior period.

Sagicor closed the period with declining capital to $83 billion, while Guardian’s ticked up to TT$4.42 billion.

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