Fe­lix Pereira

As at the end of March 2012, Guardian Hold­ings' share price was $14.00 and it closed on March 28, 2013, at $19.50.

This ap­pre­ci­a­tion of $5.50, com­bined with the div­i­dend pay­ment of $0.52, has giv­en new in­vestors an en­cour­ag­ing re­turn of 43 per cent over that one-year pe­ri­od.

Up to the end of its third quar­ter, Guardian Hold­ings Ltd (GHL) had de­liv­ered di­lut­ed earn­ings per share of $1.24 to its share­hold­ers. Now, with the re­lease of its full-year re­sults to De­cem­ber 2012, GHL re­port­ed di­lut­ed earn­ings per share of $1.42. This trans­lates in­to a dis­ap­point­ing EPS fig­ure of on­ly $0.18 for the last quar­ter of 2012. What was re­spon­si­ble for this con­trac­tion in earn­ings in the fi­nal quar­ter?

Q4 2012 changes

Let us look at the changes in seg­men­tal per­for­mance from the third quar­ter to the fi­nal quar­ter of 2012. Op­er­at­ing prof­it from the life, health and pen­sions seg­ment grew to $506 mil­lion from the ear­li­er pe­ri­od's $321 mil­lion, or by 57.6 per cent. Less gen­er­ous­ly, the prop­er­ty and ca­su­al­ty seg­ment saw an im­prove­ment of 15.4 per cent, mov­ing to $210.3 mil­lion from $182.3 mil­lion in the ear­li­er pe­ri­od. The as­set man­age­ment seg­ment im­proved its per­for­mance in the fi­nal quar­ter by a strong 38.7 per cent, as its op­er­at­ing prof­it grew to $58.5 mil­lion from $42.2 mil­lion as at the end of Sep­tem­ber 2012.

De­spite these pos­i­tive changes, the neg­a­tive ef­fects of both oth­er com­pa­nies and con­sol­i­dat­ed ad­just­ments dragged down prof­its for 2012.

In the case of oth­er com­pa­nies, we see the full im­pact of the write down of the Pointe Si­mone in­vest­ment of $149.52 mil­lion fig­ur­ing promi­nent­ly in that seg­ment's per­for­mance. Thus, de­spite a healthy im­prove­ment in in­come from in­vest­ing ac­tiv­i­ties, which in­creased from $265.3 mil­lion as at Sep­tem­ber 2012 to $528.5 mil­lion at year's end, the op­er­at­ing loss rose to $21.9 mil­lion from the $8.4 mil­lion re­port­ed as at the end of the third quar­ter.

In the case of con­sol­i­dat­ed ad­just­ments, the net loss ex­pand­ed from $166.7 mil­lion as at Sep­tem­ber 2012 to $360 mil­lion as at the end of De­cem­ber 2012. This pri­mar­i­ly re­flects the neg­a­tive ad­just­ments re­lat­ing to net in­come from in­vest­ing ac­tiv­i­ties.

Seg­men­tal per­for­mance (2012 vs 2011)

We will now com­pare 2012 seg­ment re­sults with those earned in 2011. Un­der the life,health and pen­sions head­ing, we saw the un­der­writ­ing prof­it move from a pen­cil-thin fig­ure of $6.2 mil­lion in 2011 to a more com­fort­able $187.2 mil­lion in 2012. This re­sult was helped by the 15.9 per cent high­er un­der­writ­ing rev­enue. In­come from in­vest­ing ac­tiv­i­ties fell from $810.3 mil­lion in 2011 to $785.6 mil­lion last year, or by 3.1 per cent. Over­all, due to the stronger un­der­writ­ing prof­it and mod­est (less than eight per cent) in­crease in op­er­at­ing ex­pens­es, the op­er­at­ing prof­it from this seg­ment rose to $506.2 mil­lion from 2011's 382.3 mil­lion or by 32.4 per cent.

In con­trast to the pre­vi­ous seg­ment, Prop­er­ty and Ca­su­al­ty busi­ness pro­duced a low­er un­der­writ­ing prof­it in 2012 when com­pared to 2011. In this case, the 2011 fig­ure was $354 mil­lion while the 2012 fig­ure was $341.8 mil­lion. High­er claims re­lat­ing to floods in Trinidad and claims re­lat­ing to Hur­ri­cane Sandy in Ja­maica were the chief cul­prits that dam­aged seg­men­tal per­for­mance last year. In ad­di­tion, in an en­vi­ron­ment of de­clin­ing in­ter­est rates, net in­come from in­vest­ing con­tract­ed by more than 38 per cent or, from $182.7 mil­lion in 2011 to a more mod­est $112.4 mil­lion last year. Seg­men­tal op­er­at­ing ex­pens­es rose by more than 12 per cent to $223.8 mil­lion. These changes pro­duced a 2012 op­er­at­ing prof­it of $210.3 mil­lion; this fig­ure was $107.4 mil­lion or 34 per cent low­er than the 2011 fig­ure of $317.8 mil­lion.

The as­set man­age­ment seg­ment saw a healthy 40 per cent in­crease in net in­come from in­vest­ing ac­tiv­i­ties, which rose to $91.7 mil­lion from 2011's $64.5 mil­lion. Cou­pled with this, there were de­clines in both op­er­at­ing ex­pens­es and fi­nance charges. Op­er­at­ing ex­pens­es fell from $34.9 mil­lion in 2011 to $32.2 mil­lion last year. Mean­while, fi­nance charges con­tract­ed to $1 mil­lion from $3 mil­lion in 2011. These changes re­sult­ed in an op­er­at­ing prof­it of $58.5 mil­lion in 2012; this was 112.8 per cent greater than the $27.5 mil­lion re­port­ed for 2011.

Items af­fect­ing prof­itabil­i­ty in 2012

We saw ear­li­er that the write-off of $149.8 mil­lion in re­la­tion to the Pointe Si­mone in­vest­ment low­ered 2012's prof­itabil­i­ty. How­ev­er, all fu­ture ben­e­fits from the com­mer­cial­i­sa­tion of this project in Mar­tinique would flow di­rect­ly to the com­pa­ny, thus in­creas­ing its in­vest­ment flex­i­bil­i­ty. In ad­di­tion, sev­er­al oth­er items im­pact­ed the cur­rent year's re­sults.

In a pos­i­tive vein, the share of prof­it of as­so­ci­at­ed com­pa­nies im­proved from a loss of $25 mil­lion in 2011 to a prof­it of $21.27 mil­lion last year. This helped in­creased the prof­it be­fore tax.

On the oth­er hand, tax­a­tion in­creased from $87.15 mil­lion in 2011 to $113.5 mil­lion last year, even though the prof­it be­fore tax was low­er. This meant that the ef­fec­tive tax rate in­creased from 15.8 per cent in 2011 to 27.4 per cent in 2012.

An­oth­er pos­i­tive fac­tor was the low­er net loss from dis­con­tin­ued op­er­a­tions; this fig­ure fell from $209.9 mil­lion in 2011 to $17.9 mil­lion last year. This helped boost prof­it for last year to $272.9 mil­lion from $246.1 mil­lion in 2011. This item re­lates to the group's 39.217 per cent hold­ings in Ap­ple­claim In­sur­ance Hold­ings Lim­it­ed, which is in the process of dis­pos­ing of in­sur­ance treaties writ­ten by Guardian Re (SAC) Ltd.

Fi­nal­ly, adding back the loss at­trib­ut­able to non-con­trol­ling share­hold­ers of $79.66 mil­lion boost­ed the last year's prof­it at­trib­ut­able to eq­ui­ty hold­ers of the par­ent up to $352.5 mil­lion; in 2011, this fig­ure was less than $15 mil­lion and helped pro­duce a prof­it of $261.1 mil­lion.

Bal­ance sheet changes

Helped large­ly by an in­crease in re­tained earn­ings of $136 mil­lion, share­hold­ers' funds have risen to $3.24 bil­lion from $3.15 bil­lion. Mean­while, GHL's re­serves have de­clined by more than $80 mil­lion to a neg­a­tive $344.6 mil­lion from 2011's $264.4 mil­lion; this item large­ly re­flects the neg­a­tive ef­fects of the ex­change dif­fer­ences on the group's hold­ings in for­eign sub­sidiaries. This amount is par­tial­ly mit­i­gat­ed by pos­i­tive bal­ances in prop­er­ty reval­u­a­tion re­serves and statu­to­ry re­serves.

An­oth­er sig­nif­i­cant item is the in­crease in pen­sion plan li­a­bil­i­ties, which rose to $110.75 mil­lion from the 2011 fig­ure of $34.8 mil­lion. Low­er in­ter­est rates have prob­a­bly been the ma­jor fac­tor that caused this in­crease.

Al­so re­lat­ed to the Ap­ple­claim in­vest­ment is the re­duc­tion in li­a­bil­i­ties re­lat­ed to as­sets held for sale. This bal­ance de­clined to $685.8 mil­lion from the 2011 fig­ure of $1 bil­lion. This, to­geth­er with the low­er loss fig­ure re­ferred to above, sug­gests that sig­nif­i­cant progress is be­ing made in that un­wind­ing ex­er­cise.

Ef­fects of NDX

Like oth­er com­pa­nies with a sig­nif­i­cant Ja­maican pres­ence, GHL will have to deal with the neg­a­tive ef­fects of the re­cent na­tion­al debt ex­change pro­gramme. Un­der this arrange­ment, GHL ex­changed bonds with a face val­ue of J$31 bil­lion (US$328 mil­lion).

The com­pa­ny has es­ti­mat­ed that, in the first quar­ter of 2013, it ex­pects to take a re­alised loss re­lat­ing to this NDX of TT$35 mil­lion. It has­tens to add that they have iden­ti­fied mit­i­gat­ing strate­gies that would low­er the over­all im­pact by some TT$25 mil­lion. Thus, for the whole of 2013, the net ad­verse im­pact is pro­ject­ed to be in the vicin­i­ty of TT$10 mil­lion.

New in­vest­ments and the fu­ture

To­wards the end of 2012 GHL made three new in­vest­ments in its two most im­por­tant ex­ter­nal mar­kets. In No­vem­ber, the group paid US$38 mil­lion for Globe In­sur­ance Com­pa­ny in Ja­maica. On De­cem­ber 19, 2012, its sub­sidiary, Fa­tum Hold­ings NV in Cu­ra�ao signed an agree­ment to buy 100 per cent of Roy­al & Sun Al­liance In­sur­ance (An­tilles) NV from RSA Group and Maduro and Curiel's Bank. Al­so, in the last week of De­cem­ber, it fi­nalised the ac­qui­si­tion of an in­sur­ance bro­ker that is based in the Nether­lands. As yet, no price tag has been dis­closed for the last two pur­chas­es. Where is the ac­count­abil­i­ty?

GHL has demon­strat­ed its abil­i­ty to re­duce costs at its as­set man­age­ment di­vi­sion. Can they al­so ap­ply this dis­ci­pline to their gen­er­al in­sur­ance (prop­er­ty and ca­su­al­ty) op­er­a­tions?

In­vestors look for­ward to see­ing GHL's plans and strate­gies un­fold as the year pro­gress­es. No doubt, they will con­tin­ue to demon­strate their con­fi­dence, or lack there­of, based to a large ex­tent on the lev­el of use­ful and time­ly com­mu­ni­ca­tion they re­ceive from the com­pa­ny. This will then be large­ly re­flect­ed in the move­ments of its share price.