X

Why most insurance stocks trade at 50 kobo

NSE Facilitates N11tn Securities Investment in 10 Years

Equities listed on the insurance sector of the Nigerian Stock Exchange (NSE) have continued to experience low patronage from investors turning most of them into penny stocks trading at par value.

For instance, as at the time of filling this report last week, except for Continental Reinsurance, AIICO, Goldlink Insurance and N.E.M Insurance that traded at 96 kobo, 63 kobo, 53 kobo and 83 kobo respectively, all other stocks on this sub-sector traded at 50 kobo each.

Investigation revealed that the poor performance of insurance stocks on the floor of the NSE arises from low returns that accrue to investors from their investment in the companies.

There are many ways shareholders can benefit from their investment in stock market. For instance, through dividend, right issue and price appreciation but investors who invest in insurance stocks in Nigeria find it difficult to earn good or reasonable return on their investment.

Some capital market experts said that business in the sub-sector is not lucrative hence investors are not enthusiastic to venture into it adding to their belief that insurance activities in Nigeria are not transparent enough for people to participate.

The Chief Executive Officer, Pac Securities Limited, Mr. Eugene Ezenwa, said that investors neglect insurance stocks because the companies in the sub-sector have been unable to reward those who invested in them well enough. He said that they have not been able to meet investors’ expectation and that is why many are saying no to them.

“Since 1999 I started operating in this market, it has been the same story every year, no dividend, no right issue. How do you expect someone to invest in a moribund sector? The capital market is all return on investment.

So, if you invest and did not get anything in return, you will not want to stake your money again especially now, we are in recession” he said.

Ezenwa argued that one thing that is critical to investors before making investment decisions is the management of whichever company they want to invest in and if they are not satisfied with what they see, it will be difficult to invest in such companies. He therefore called for serious reforms in insurance sector if investors’ apathy towards the sector will change anytime soon.

Another reason identified for the poor performance of the sub-sector is over-regulation of insurance industry in Nigeria.

For instance, shareholders under the aegis of Progressive Shareholders Association of Nigeria (PSAN) called on NAICOM to desist from over-regulating the sector, but rather focus on implementing aggressive expansionary policies that would increase the sector’s penetration.

In a document titled: “Shareholders Concerns on Growth and Insurance Penetration and its Regulation by NAICOM” signed by the association’s president, Mr. Boniface Okezie, they pointed out that the amended Companies Income Tax Act 2007 is punitive to insurance companies, saying that provision for unexpired risks (Section14 8 and 9) ‘and provision for other reserves, claims and outgoings, section 14(8)(b) are restricted.

Okezie said: “While we agree that sanity is required, it shall not be at the expense of growth. The reality is that growth comes at a risk. The key objective in regulation is to understand these risks and manage them. It also means developing policies to allow insurers meet the needs of various customer groups.

We believe in effective enforcement policies; policies to stop rate-cutting, policies to allow various payment frequencies like monthly premium payment, stricter enforcement of the law on Premium No Cover for brokers. NAICOM should stop the levying long term business and look for other ways to generate healthy income.”

Declaring that the shareholders require return-on-investment and performance, Okezie charged NAICOM to change some ridiculous rules that are not friendly to the shareholders in the industry. Citing examples of some of the rules, he said: “Despite the insignificance of profit before tax (PBT) of insurance companies in comparison to the banks, the minimum tax payable by both is comparable. In reality, it shows lack of understanding of insurance business.

“The company income tax (CIT) limits unearned premium reserve. Claims paid are management expenses, all of which are reasonably incurred in the insurance ordinary course of business. Therefore, insurance companies are penalised when paying claims. Ordinarily, these expenses should be considered as cost of sales and treated as allowable expenses.”

It would be recalled that insurance companies in Nigeria rounded off their recapitalisation programme in December 2007. It is important to note that the recapitalisation exercise in the insurance sector greatly brightened the outlook of the industry in Nigeria but the industry has not fully utilised the recapitalization exercise.

Categories: LATEST NEWS
Haruna Magaji: Haruna Magaji is a journalist, foreign policy expert and closet musician. He is a graduate of ABU Zaria and a member of the Nigerian union of journalists. JSA, as he is fondly called, resides in Suleja, Abuja. email him at - harunamagaji@financialwatchngr.com
X

Headline

You can control the ways in which we improve and personalize your experience. Please choose whether you wish to allow the following:

Privacy Settings