Sunday, February 18, 2018

A tale of two insurers

Today we at Bourse review the performance of the two insurance companies listed on the local stock exchange and which also fall under the non-banking finance sector: Guardian Holdings Limited (GHL) and Sagicor Financial Corporation (SFC).

Guardian Holdings Limited (GHL)

The Guardian Group continued to produce positive results from its core insurance operations. However, a persistent low interest rate environment coupled with major impairment write offs have adversely impacted the company’s investment income, weighing heavily on the Group’s earnings.

For the financial year ended December 31st, 2013, GHL’s EPS recorded a decline of 87.3 per cent to $0.18 from $1.42 in 2012. At current price of $13.14, GHL’s Market to Book ratio is currently 1.0x, below its 5-year average of 1.1x. GHL has been consistent in its dividend payments. A final dividend of $0.37 was declared so that total dividends per share for 2013 amounted to $0.52, payable on the 28 April 2014, providing an attractive trailing dividend yield of 3.96 per cent (See Exhibit 1).

Gross premiums written for 2013 showed an increase of 14.1 per cent to $4.97b from $4.35b in the prior year, driven by revenue growth in GHL’s Life, Health and Pensions segment which was up 11.5 per cent and its Property and Casualty business which appreciated by 17.9 per cent.

Net Income from investing activity, before the fair value adjustments on the Pointe Simon property investments (a waterfront property development based in Martinique), stood at $857.8m, representing a 7 per cent decline from the $922m in the previous year. The downturn was due to a number of factors, including a drop of 3.7 per cent in investing income from $838m to $807m.

Net Income from all activities, before fair value adjustments on Pointe Simon, for the year ended 2013, declined 1 per cent from $1.45b to $1.44b. Contributing factors included lower revenues from the Investment business line and substantial increases in Realised and Fair value losses on financial instruments. Operating Expenses also increased 16.17 per cent to $916m from $789m a year before. Also contributing to the lower Net income was the Finance charges from debt instruments tallying $126m, increasing 6.6 per cent from $119m.

Operating Profit from the combined Insurance and Investment activities, that is, pre-Pointe Simon fair value adjustment was $393.1m or 27.5 per cent lower when compared to 2012’s $542.8m result. Increased costs combined with declining investment income would have been the main contributors to reduced operating profit even before the major write off.

Sore Pointe

The Martinique property development investment, Pointe Simon, further impacted GHL’s performance with impairment charges of $457m in 2013 ($150 million in 2012). As per the company’s guidance, Pointe Simon is expected to begin generating cash by the end of 2014, contributing to the group’s cash flow.

Profit After Tax, accounting for Pointe Simon and the discontinued operations at Lloyd’s, was negative $129m. However, profit attributable to ordinary equity holders of the parent amounted $45.6 million. The discontinued operations at Lloyd’s contributed $24m to the bottom line due to the transfer of liabilities on Syndicates in order to eliminate future market exposure.



For the year ended December 31st, 2013, Sagicor Financial Corporation (SFC) reported diluted Earnings per Share (EPS) from continuing operations of USD12.2 cents, down from USD16.2 cents the previous year. When taking into account the discontinued operation of the disposal of the Sagicor Europe operating segment, SFC reported a fully diluted EPS (loss) of USD -12.6 cents, versus fully diluted earnings of USD3.1 cents a year earlier.

Though SFC reported a 34 per cent increase in Premium Revenue from USD757 million to USD1 billion, Total Revenue for the year dropped 2.3 per cent or USD24.8 million.

Total Expenses for the year increased by 7 per cent from USD325 million to USD348 million. For 2013, income from continuing operations improved by 5.7 per cent from USD75.3 million to USD79.6 million. When taking into account the net loss from discontinued operations, net income for the year contracted by 87.6 per cent from USD33.3 million to USD4.1 million.

The disposal of Sagicor Europe Limited (SEL) adversely affected SFC’s 2013 full year performance delivering a negative EPS. However, the sale of these assets may reduce Sagicor’s exposure to the volatility of income in the European space and thereby remove the drag on future earnings of the group.

At the current price of $7.05, SFC’s Market to Book ratio is currently 0.5x, close to its 5-year average of 0.6x and offers a good Dividend Yield of 3.6 per cent (See Exhibit 2).

GHL and SFC Investor Impact

The impact of a prolonged low interest rate environment and unsuccessful forays into European markets can be seen for both GHL and SFC in Exhibit 3. Compared to the broader market (Trinidad & Tobago Composite Index or TTCI), a $100 investment into GHL or SFC at the beginning of 2009 would now be worth $73 and $64 respectively, whilst a TTCI investment would be worth $139. (Note: dividend distributions excluded).

A Platform for Growth?

GHL and SFC continue to enjoy growth in their core Insurance business segment, facilitated by increases in underwriting revenue and, as in the case of GHL, acquisitions. With significant write-downs and unwanted risk exposures now apparently behind both companies, the Caribbean insurance giants may be poised for better performance.

Caveats to this outlook include the effects of the pending Insurance Bill 2013, currently under review. The Bill, as is stands, is expected to discourage riskier yet potentially higher return equity investments through its risk-based approach to calculating capital adequacy. Also, the weak Jamaica investment environment, in which both companies are significantly invested, may not have fully run its course. This is similarly the case for Barbados and the Eastern Caribbean.

Against this backdrop, BOURSE maintains a HOLD recommendation for GHL. We also maintain a HOLD for SFC. We continue to monitor their results and future strategic direction.