Why insurance stocks are the toast of the capital market
In recent months, insurance stocks have driven stock activities and led equities traded daily on the floor of the Nigerian Stock Exchange. This development has come as a surprise to many traders, watchers and investors. Given that the business and public sphere have often been described as places where insurance awareness is still very low, this development has generated interest. While the jury is still out on the factors responsible for the renewed interest in the insurance sector, operators agree that the recapitalisation of the sector, which was concluded in February 2007, must have played a huge role.
The recapitalisation exercise, the operators argue, has not only seen to the steady growth of the industry, it has also attracted increased investments in its stocks. For instance, the number of insurance equities traded on the floor of the NSE rose by 63 per cent, from 16 equities on April 4, 2007 to 26 equities as at April 3 2008. The sector also traded 444.458million shares, worth N1.984bn in 4,776 transactions, at the close of market on Thursday. These indices have been rightly described as remarkable by market watchers.
Experts agree that the sector, previously known for its underperformance and low capacity, benefited hugely from the 18-month recapitalisation exercise because of the opportunity given to nearly all the quoted insurance companies to raise funds from the NSE. They say that the exercise has helped to reposition insurance companies in Nigeria to become dominant players in the African market where South African companies hold sway. Unlike in the past, a number of Nigerian insurance companies now have offshore branches in other African countries and beyond. Others have also made huge offshore investment through alliances with peer companies within the region. Through the recapitalisation exercise, operators were also able to shore up their capital base to N2bn, for life insurance and N3bn for general insurance businesses.
The process, which saw the emergence of 49 bigger insurance companies, is believed to have transformed and strengthened the industry‘s financial capacity. Prior to the recapitalisation, only about 20 insurance companies‘ equities were traded at the stock exchange, and these were mostly regarded as ”penny stocks,” with low dividend yields. But now stocks of companies like Intercontinental Wapic Insurance Plc and Prestige Assurance Company Plc trade for as high as N12.76 and N11.50 respectively, as they did on Thursday.
Experts say the increase in the share prices of insurance stocks and the heightened activities in the equity trading are the reasons why they are now regarded as ”stocks for the future”.
The Managing Director/Chief Executive Officer, Mutual Benefits Assurance Plc, Mr. Akin Ogunbiyi, attributed the feat recorded by the sector in the stock market to favourable economic policies. According to him, government‘s deregulation of most sectors of the nation‘s economy has encouraged more private investment.
Ogunbiyi explained, ”The main focus of the policy was to have a private sector that can propel growth in the economy. One that would empower the private sector because they are more efficient, more profit-oriented and more service oriented than the public sector. So, through privatisation and consolidation, they opened up the economy with a lot of activities.
”The Central Bank of Nigeria‘s record says between $75bn and $80bn came into the country as direct investment in telecoms, oil and gas. I can equally confirm to you that over $600m has come into insurance as direct investment through the Nigerian Stock Exchange.
”Accordingly, investors have now realised that the sector is an emerging market. The NSE has recorded steady growth in the past five years and has been rated as the best in terms of returns on investment. It has averaged between 50 per cent and 60 per cent in the last six years because virtually every sector of the Nigerian economy that were held down, operating between less than 30 per cent and 40 per cent capacity, now have the financial muscle to grow. These are the fundamentals that have been driving insurance stocks on the NSE.”
Some stockbrokers who spoke on the development attributed the interests to ‘investors‘ euphoria‘.
The Managing Director, Dependable Securities Limited, Mr. Chinenye Anyanwu, said investors were investing in the sector with the hopes that the sector, which has been revitalised by the recapitalisation, held a great deal of promise. ”The belief is that the insurance sector can well perform their functions and have funds. That is what has been propelling the price appreciation of the period. The next thing now is to look at the performance of the respective companies, to know what next can move up that sector,” Anyanwu added.
But the Managing Director, Quantum Securities Limited, Mr. Oladele Odusanya, predicted that the sector would have to contend with the banking sector in the second quarter of the year, adding that anticipated impressive results from banks were likely to drive the sector to the top of the activity chart. But he added that interest in insurance stocks was not likely to abate because the ongoing sectoral reforms had opened up the economy and induced a lot of activities that required insurance services.
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