Value Opportunities Locally – Guardian Holdings Limited
The Quiet Magic Of Compounding Interest
March 31, 2022Staying The Course
May 6, 2022
Guardian Holdings Limited (GHL) is the parent company for an integrated financial services group with a focus on life, health, property and casualty insurance, pensions, and asset management. GHL serves markets in 21 countries across the English and Dutch Caribbean, including Trinidad & Tobago, Barbados, Jamaica, Curacao, Aruba, St. Maarten, and Bonaire.
In May 2019, GHL and NCB Financial Group Limited (NCBFG) and its wholly owned subsidiary, NCB Global Holdings Limited (NCBGH), successfully completed the acquisition of 74,230,750 shares in GHL. This resulted in NCB holding just around 62% of the shares of GHL. (Source: trinidad.myguardiangroup.com)
Overall, insurance companies are good long term investments as they have a unique financial model in that they are able to collect premiums upfront with the bulk of their costs hitting at the back end when claims are made. This collect-now, pay-later model enables the company to generate large sums of cash (knows as the “float”) which will be paid out in the future. In the interim, this cash is invested for the company’s benefit.
At year-end 2018, Guardian General Insurance Limited (GGIL) has the largest share of the market (just under 30%) based on gross written premiums. Also Guardian Life of the Caribbean (GLOC) held 19% of the Life and Pensions market, second only to Sagicor Life. (Source: attic.org.tt)
In 2019, Hurricane Dorian swept over The Bahamas leaving GHL to take a TT$86 million loss in its wake. EPS would increase by 29.67% from $2.30 to $2.98 mainly due to a large contribution in net fair value gains. Modest increases in all revenue lines is noteworthy.
In 2020, as a result of the COVID-19 pandemic markets initially plummeted and then recovered over the year. However, investors took note that the hit to the tourism industry in Jamaica would lead to a slower economic rebound thereby limiting the recovery in the Jamaican Stock Exchange. This caused a significant adverse effect on GHL’s performance. Additionally, reinsurers increased rates for the Caribbean region following heavy losses in prior years due to Hurricanes. Purchasing earthquake and hurricane reinsurance is one of GHL’s largest expense.
No catastrophic events throughout the year, a reduction in motor claims due to lockdown restrictions and the acquisition of the life and annuity portfolio of NCB Insurance Company Ltd led to strong growth rates in the insurance segment.
In 2021, insurance activities would be subdued due to policy lapses in Trinidad and increased mortality claims in Jamaica on account of low vaccination rates. Additionally, the company would suffer a US$10 million reinsurance hit relating to German floods.
Overall, GHL has maintained steady, healthy margins through turbulent times and were somewhat subdued in 2020, yet still strong. When we adjust for fair value changes and non-recurring items, as expected with financial companies, the outlook is positive. The stock is currently trading at a PE of 8.3x and offers a dividend yield of 2.50% at the price of $27.98. Moving forward we expect slow growth in net insurance activities with improvements on the investment side of the business. Policy lapses can be expected to decrease and the importance of insurance during economic turmoil presents opportunities for future growth.
Despite the NCB Financial Group awarding a contract for the provision of the group’s health insurance services to Sagicor Life Jamaica over GHL, we believe this will not have a major effect on the company’s financials.
- Strong growth in written premiums and EPS.
- Steady, healthy margins.
- Unique financial model.
- Recovery in the insurance sector is expected and possible organic growth opportunities in the near future.
- While reinsurance costs have been increasing, GHL is a seasoned insurer and would be adequately able to manage this risk. Also, reinsurance liabilities account for just 1.40% of total liabilities.
- We believe the overall risk-reward profile is attractive relative to other current opportunities on the market.
Contact a Wealth Manager at Maritime Capital Limited to see if this is a stock that should be added to your portfolio.
The information on this document is provided for information purpose only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movement in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. Users of this document should seek advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to on this document and should understand that statements regarding future prospects may not be realized. Opinion, Projections and estimates are subject to change without notice.
Written by Vincent Dipchan BSc, CFA. Reviewed by Shala Singh BSc, CFA.
