Fair Value losses hit GHL’s earnings
Today we at Bourse will be reviewing the six months 2013 (Q2 2013) performance and outlook for Guardian Holdings Ltd (GHL) Sagicor Financial Corporation (SFC).
Guardian Holdings Limited (GHL)
The increasing speculation surrounding the US market and the Fed’s ‘earlier than later’ tapering of its Quantitative Easing programme, has had a dampening effect on GHL’s investment activities. For the half year ended June 30th 2013, GHL reported a 48 per cent decrease in its diluted Earnings per Share (EPS) of $0.42 compared to $0.81 reported in HY 2012. An interim dividend of $0.15 was declared and will be paid on September 5th, 2013 to all shareholders on the Register of Members as at August 22, 2013.
Gross premiums written saw an increase of 15 per cent to $2.78B driven by growth in its Life, Health and Pensions segment up 17 per cent and its Property and Casualty business up 13 per cent.
The 4 per cent decrease in net income from all activities to $632M (Exhibit 1) was largely attributed to the 14 per cent fall in investment income while insurance underwriting activities generated income of $250M, 18 per cent higher than the prior year. GHL’s Net Income from Investing Activities fell to $382M from $444M in 2012 due to two significant losses. Firstly, there was a realised loss of $31M from the Group’s participation in the Jamaica’s National Debt Exchange (NDX) programme. Additionally, there was a fair value loss of $48M on GHL’s financial instruments with its overseas bond portfolio (primarily US holdings) losing $78M in value vs. a $19M gain in 2012.
Operating expenses increased by 17 per cent to $426M vs. $364M in 2012 inflated by acquisition costs and one-time related charges. Excluding these one-time charges, operating expenses would have increased by 5 per cent to $382M. Finance charges rose 8 per cent to $63M resulting in an overall drop in Profit before Taxes and Profit after Tax (PAT) by 37 per cent and 43 per cent respectively. Overall net profit for the period was down 46 per cent coming in at $106M vs. $196M in 2012
The revenue generated from the recent acquisitions of Globe Insurance and RSA Antilles contributed 5 per cent ($146M) to Gross Premiums Written. These acquisitions together with the most recently acquired company, the Dutch Insurance Broker Thoma, boosted net after tax profits by $15M. This $15M represents 13 per cent of the net after tax profit of $113M for half year 2013 which is 43 per cent less than the comparable period of 2012. Excluding this, the Group would have recorded net profit of $98M, 51 per cent less than 2012.
The Group remains confident in its ability to grow its premium income given its acquisition strategies and the large market share in the insurance industry held by GHL in the markets which the Group operates. The largest downside risk to the re-branded Group’s earnings lies with 36 per cent of its $8.7 bond portfolio ($3.1B) where any future fair value losses can negatively impact the income statement. This drag on earnings in the first six months of 2013 has resulted in a trailing EPS of $1.11 based on continuing operations compared to the $1.49 recorded in full-year 2012.
At a current price of $15.90, the trailing P/E from continuing operations is approximately 14 times. GHL has a fairly attractive Dividend Yield of 3.2 per cent. BOURSE has a HOLD on this stock.
Sagicor Financial Corporation
For the six months ended June 30th 2013, Sagicor Financial Corporation (SFC) reported diluted Earnings per Share (EPS) from continuing operations of US$6 cents (Exhibit 2) compared to US$3.7 cents in the previous year. Inclusive of the US$13.8 cents loss on discontinued operations, SFC suffered a loss per share of US$7.8 cents compared to EPS of US$3.6 cents in 2012. SFC’s results were negatively impacted by discontinued operations all related to the disposal of Sagicor Europe Limited (SEL) that include an operating loss from the sale, foreign exchange and finance costs and an impairment provision.
The Group’s Net premium revenue rose 4 per cent to US$314.7M while Net investment income increased by 5 per cent to US$184M. This Net investment income increase comes after a capital loss of US$11.8M (US$5.7M to shareholders) on the Group’s Jamaican debt securities from its participation in the National Debt Exchange programme in February 2013. Overall, Total revenue grew to US$499M from US$477M in 2012.
Total benefits were down 6 per cent in the second quarter compared to the same period of 2012 but recorded a marginal increase of 0.5 per cent year-on-year for the first half of 2013 to US$288M. Total expenses (including agents and brokers’ commissions) stood at US$174M vs. US$157M in the prior year bringing total benefits and expenses 4 per cent higher to US$462M.
Net income after taxes from continuing operations increased 16 per cent to US$28M from US$24M.
On July 26 2013, the Group entered an agreement to sell Sagicor Europe Limited (SEL) and its subsidiaries (including Sagicor at Lloyd’s Limited) for US$85M which marked a premium of US$23M over the net asset value of SEL. The sale of SEL and its subsidiaries recorded an Operating loss of US$23.6M. Including foreign exchange and finance costs of US$8M, and impairment charges for future losses of US$10.1M, the Net loss amounted to US$41.7M.
Overall, the Net income for the year inclusive of discontinued operations stood at a loss of US$13M versus net income of US$24M in 2012.
SFC’s assets closed at US$5.7B. Of this, US$5B is attributed to continuing operations whilst the remaining $0.7B is associated with the discontinued operations. Total liabilities stood at US$5B; with 13 per cent of liabilities associated with the discontinued operations. Total Shareholder’s equity decreased by 12 per cent to US$531M.
The Group’s sale of SEL and its subsidiaries in July 2013 comes after the rating agency Standard and Poor’s (S&P) placed its BB+ rating on the life insurance unit of Sagicor on credit watch with negative implications in June 2013.
The exposure to UK-based subsidiary Sagicor at Lloyd’s has been weakening the company’s results in the past five years. The Group’s credit rating, according to S&P, was at risk of a possible downgrade if the sale of the UK-based subsidiary did not transpire within the three months following June.
The sale of SEL bodes well for the Group but its continuing operations face a challenging external environment to generate growth. The Company holds a large exposure to Jamaica which poses downside risk on the credit rating outlook in light of the uncertainty surrounding the Jamaican market.
At a current price of $6.30, SFC is trading at a trailing P/E based on continuing operations of 5.2 with a relatively attractive dividend yield of 4.1 per cent. BOURSE maintains a HOLD on the short term with continued monitoring of SFC’s results and its strategy going forward.