April 4, 2012/ARM Research

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• Guaranty Trust Assurance Plc reported a 33% YoY growth in gross premiums for FY 2011 to N10.00 billion, 11% below our forecast of N11.11 billion. Premiums rose 21% QoQ, slower than the 35% and 40% pace in Q3 and Q2 2011 respectively, but maintaining the ~20% contribution to FY gross premiums achieved in 2010. While detailed results are as yet unavailable, we believe growth was still driven largely by its key business lines, motor and life, which together have accounted for 45% on average of FY gross premiums over the preceding three years.
 

• The company reported a 24% YoY rise in PBT to N1.25 billion in Q4 11, a 26% QoQ advance. PAT grew 44% YoY to N931 million, ~20% behind our N1.11 billion FY estimate. Also, 15% QoQ PAT growth was much slower than the 42% recorded in Q3 2011. We had expected higher PAT growth in Q4 largely on the back of the higher yield environment, even as we expected a strong performance in its core business. Net margin of 9.3% for FY 2011 is a 90bps improvement from FY 2010, but falls 50bps short of Q3 2011 levels. The variance in PAT from our forecasts is largely due to slower top-line growth than anticipated, and a tax rate of 26% which exceeds our 20% estimate, a steady decline to 19%through Q3 2011notwithstanding.
 

Underwriting profit remains strong 

• Underwriting profit grew 24% YoY, and 45% QoQ to N1.97 billion, extending the robust performance of GTA’s core business. At 20%, underwriting profit margin was in line with the 3 year average--and our forecast--but 300bps ahead of Q3 2011. GTA’s ability to contain costs (reinsurance, claims incurred, underwriting expenses, management expenses and allowance for bad debt) as a percentage of gross premiums (2011: 67%, 2010: 66%), has helped the company boost margins over the last couple of years. 
 

Investment income improves but net margin growth still under pressure 

• Investment income margin declined 100bps YoY to 8%, but was 100bps ahead of Q3 2011 reading. This is however still below the 26% recorded for FY 2009, and the 3 year average of 14%. This is despite investment income growing 19% YoY and 33% QoQ to N762 million. We had earlier highlighted the dismal performance of the equity markets in Q3 2011 as a potential strain on investment income for insurers, but also hinted at possible respite from fixed income yields following the jump in yields inQ4 2011. Management’s decision to trim its equity exposure and increase its fixed income exposure following its Q2 2011 results evidently paid off, in the light of relatively elevated yeilds. While detailed financials are as yet unavailable, we are inclined to believe that much of the 17% rise in investments to N4.96 billion being largely in fixed income instruments in line with management’s guidance. 

Going forward 

• The results fall somewhat short of our expectations but we remain positive on outlook for premium growth, our tempered growth assumptions notwithstanding. We believe the company’s retail strategy will continue to underpin revenue growth, with continued strong performance its motor, life and oil & gas segments. Furthermore, we foresee robust contribution for investment income in coming quarters as capital market outlook improves.

We revise our valuations 

• We revise our gross premium forecast 8% lower to N11.80 billion for FY 2012, incorporating slower–than-anticipated in Q4 2011 in our estimates, and tempering the impact of the strong growth in the first 9months of 2011 on the same. We have also adjusted our tax rate higher, arriving at a FY 2012 PAT forecast of N1.23 billion, which is 30% lower than our previous N1.61 billion forecasts. Current results translate to an EPS of N0.09, and thus its proposed dividend of N0.08 implies a payout ratio of 89%, lower than the 140% payout in 2010. The stock currently trades at a current P/E of 13.6x and P/B of 0.93x, compared to 6.4x and 0.55x respectively for stocks under our coverage.
 

• Our revised target price of N1.33 is 9.7% lower than the previous N1.46, implying a potential upside of 5% from current price of N1.27, the stock having shed 7% since our last report and thus maintain our NEUTRAL rating on the stock. 
 

ARM ratings and recommendations

ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:

Reference:  GT Assurance Plc rewards investors with 8k dividend in '11 Audited result.

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