From time to time, investors end up focusing on the wrong thing. Truthfully, it’s easy to see why this happens.
You are here
New CEO sees blue skies at GHL
For a new CEO discussing an 87 per cent decline in net profit after tax, Guardian Holdings (GHL) boss Ravi Tewari exudes remarkable confidence. At 44, Tewari is one of the youngest chief executives of a local, listed company and he is also the most recently appointed, having taken over from retired GHL CEO Jeffrey Mack at the beginning of this year.
Before being appointed to occupy the corner office at the GHL headquarters in Westmoorings, he served as Guardian Life of the Caribbean’s actuary, then as president of the company, which is a 100-per cent-owned subsidiary of GHL and most recently as GHL’s group president of Life, Health & Pension Last year, GHL’s after-tax profit was $46 million, a sharp decline from the $353 million the group reported in 2012.
GHL’s performance in 2013 was still substantially better than the staggering loss of $821 million that the GHL group suffered in 2009, when it absorbed trading losses of $355 million and non-cash accounting losses of $592 million related to Zenith Insurance Group, the failed United Kingdom motor insurance business.
The decline in profitability last year was largely due to a $457 million writedown that GHL took on a Martinique property development named Pointe Simon. Last year’s writedown followed a $150 million non-cash provision that the group took in 2012.
The adjustments on the Pointe Simon project—which comprises a 22-storey office tower, a seven-storey condominium unit and a eight-storey, mixed-used boutique hotel—are due to the “longer expected absorption period and lower than anticipated future revenue than we originally forecasted,” according to GHL’s 2012 annual report.
Canadian-owned RBC Caribbean, which was GHL’s partner in the project when it started construction in 2007, exited Pointe Simon in 2010. At the time, both T&T-based companies had about 40 per cent of the equity in the project, which was partially funded by a loan from RBC. As part of the terms of their exit, RBC agreed to accept a lower amount than what was contractually due in full settlement, according to a GHL spokesman last week.
Tewari said GHL could have withdrawn from the project as RBC did, but that the board of the company took a business decision to complete the project as it felt that there would have been reputational risk from withdrawing. Speaking in an interview last week, Tewari disclosed that the project was delayed but not significantly over budget and that much of the delay resulted from GHL taking about a year to decide whether to complete the project.
GHL put $1 billion of shareholders’ money into the Martinique project, which now has a carrying value of about $600 million and a running yield of between 3 and 4 per cent. Tewari stressed that no policyholders’ funds was used in the Pointe Simon project. Tewari concedes that Pointe Simon has been a drain of GHL’s cash and management focus, but he is confident that there are no more skeletons in the group’s closet with regard to the Martinique project.
Asked about the long-suffering GHL shareholders, whose share price has declined from $18 five years ago to $13.25 this week, Tewari said: “I think that like all shareholders, the GHL shareholder is looking for the best return on their investment. He said: “The Guardian share has underperformed in the recent past, but what I can see going forward— having dealt with our non-core issues and being left with a core portfolio of very strong companies—I think that augurs very well for future increases in shareholder value.”
Having bitten the bullet in the UK and Martinique in 2012 and 2013, GHL can now focus on its “very strong portfolio of insurance companies spanning the whole Caribbean.”
Strong organic growth
He said the group has the number one life insurance company and property and casualty provider in T&T and “a company that shares a duopoly in the Dutch Caribbean, which is Fatum.” In Jamaica, GHL has the number one property and casualty provider and the second largest life insurance firm. Tewari said: “What’s interesting is that we control the Trinidadian insurance industry, which is the strongest market and the only investment grade economy in the region.
“From 2014, we have the opportunity to focus on our core businesses, which, if you look back at the history, have grown by leaps and bounds in profitability over the years.” The insurance executive said that GHL believes there is room for organic growth in its core insurance business.
“Last year, we grew new business sales in life insurance in the Trinidad market by 50 per cent and in 2014 we are trending ahead of 2013,” said Tewari, explaining that Guardian Life of the Caribbean, the group’s life insurance subsidiary concentrates on the sale of protection and long-term pension products.
Interested in Clico
In an obvious jab at Clico, the insurance company that collapsed in 2009, Tewari said: “We have never been a company that has dabbled in those short-term, one-year products. So when you buy a Guardian product, it is until you are 65.”
On the issue of the possibility of GHL acquiring Clico’s traditional insurance portfolio, Tewari said: “We see our core business as insurance and we see our core market as T&T. So naturally, acquiring the Clico portfolio, sanitised properly, is something that would always have appeal to us.”
Speaking of inorganic growth, he also referred to acquisitions made by the group in December 2012. GHL acquired three companies for about US$68 million: a brokerage business in Holland and two Caribbean property and casualty companies. The acquired companies were Holland’s Thoma Exploitatie BV, Globe Insurance Company of Jamaica, Royal & Sun Alliance, which when combined with Fatum General, made GHL the largest general insurance operation in the Dutch Caribbean.
Of the Dutch brokerage firm, the GHL chief executive said the group “wants to increase our exposure to risk-free income. As an insurance company, most of our business is risk related, but the nice thing about the brokerage business is that it is just fees. There is no risk associated with it.” Last year, he said that the three companies acquired at the end of 2012, we successfully integrated into GHL’s operations “and despite integrations costs, they generated a profit in 2013.”
As a result of the acquisitions and the continuing growth in the T&T market, Tewari said the group is “comfortable” that it will generate both organic and inorganic growth in 2014 and going forward.
Value from synergies
The other significant focus for GHL in 2014 is in deepening the synergies between and among the insurance companies in the group. Tewari explained: “There is a great deal to be gained from synergising our operations, which is happening at GHL and needs to happen on a scale across the economy.” He said that this meant eradicating duplicate systems, standardizing processes, doing activities in the jurisdiction in which the group has competitive advantages and outsourcing some activities while insourcing others.
“There is a tremendous amount of opportunity, given our scale and diversity, to generate tremendous shareholder value from synergies,” he said, adding: “The beauty about extracting shareholder value from synergies is that it is entirely under our control.” He made the point that organic growth depends on the customer making a decision to buy, while inorganic growth depends on the opportunities that may arise to acquire other companies.
“But with growth through synergies, all it takes is the will and the execution.” He said 50 per cent of the group’s revenue comes from property and casualty and 50 per cent from life, health and pensions. More than 50 per cent of the group’s revenue comes from T&T.
Asked about the impact of low interest rates on the company’s operations, Tewari said that from a consumer perspective, a low interest environment is not helpful for someone saving for their retirement. From a shareholder perspective, the low interest rate environment is not good either, he said, because part of the group’s profits is derived from the spread between what the group takes in and what it pays out.
Tewari said: “But, we have positioned ourselves to benefit as interest rates rise as we would be able to deploy our cash at higher rates. We have a considerable cash component in our investment portfolio. This is partly tactically because we think that interest rates will rise and we don’t want to lock in too much at low interest rates. “But, part of the reason for the amount of cash we are carrying is out of necessity. We are interested in long-dated issues and if we tried to use up all of our cash on long-dated issues, we cannot find it.
“Because of the scarcity of long-dated assets, our assets are shorter term than our liabilities. That means that when interest rates rise, the impact on our liabilities will be more pronounced than on our assets. So our asset value will increase relative to that of our liabilities.”