By Patience Saghana
Following the global financial crisis particularly the crash of the capital market, Insurance companies are making waves in the bond market as more insurers are gearing up to have a grasp of the bond market.
A bond is basically a loan an investor makes to the bondsâ€™ issuer. The investor generally receives regular interest payments on the loan until the bond matures or is called, at which point the bond issuer repays the investorâ€™s principal. All bonds have special provisions and components (Face value, coupon rate, and maturity date).
Underwriters are into bonds now because they believe they are safer than stocks bearing in mind that bonds are not entirely free of risks and in most cases are less liquid than stocks.
Mr Wole Onaolapo, Managing Director of Sovereign Trust Insurance Plc at the company annual general meeting in Lagos recent stated that insurance companies are taking adequate advantage of the bond market, adding that his company hopes to join soon.
According to him, â€œThese bonds are beginning to look like the fashionable investments for Nigerian investors. Most of these investors believe that bonds are by and large safe investments. To be precise, some of these investors consider bonds safer than equities in light of the capital losses experienced by NSE investors in the past 15 monthsâ€
Sovereign Trust Insurance recorded a gross premium written of N3.81 billion in 2008 as against N2.49 billion achieved in 2007, representing 53.01 per cent growth. The company within the same period recorded a net premium income valued at N3.18 billion as against N2.02 billion recorded during the previous year, a 57.43 per cent improvement.
Profit before taxation was N415.66 million in 2008, a 1.91 percent increase over the N407.87 million recorded the previous year. Its profit after tax also rose marginally by 0.84 percent, moving up from N357.79 million in the previous year to N360.80 million last year. The company raked in N324.09 million from its investments and other sources, translating to 67.71 rise against the N193.25 million recorded in 2007.
However, insurance companies however believed that the Lagos State government bonds are potentially safe.
Besides, a lot of state governments in Nigeria have been flocking to the Nigerian Stock Exchange (NSE) to raise funds through the sale of bonds. Late 2009, Lagos State issued a N50 billion bond which was oversubscribed. Imo State is currently in the process of issuing N18.5 billion worth of 7-year bonds with a 15.5 percent coupon to finance water and critical road projects as well as the construction of a new conference centre and financing governmentâ€™s equity investment in Imo Wonder Lake.
Federal government bonds are issued bonds to pay for government projects. The yields are usually the lowest among bonds, but considered low in risk if held until maturity. Bonds are exempt from state and local taxes whilst Municipal bonds are issued by states, cities, counties, and towns issue to finance or pay for public projects (roads, water projects, etc.). Interest payments from majority of municipal bonds are usually exempt from federal, state, and local taxes.
Corporate bonds, o the other hand, are issued by corporations to finance expansion activities or cover expenses. These are usually less expensive financing options for most corporations. The yields and risk are generally higher than government and municipals. These are riskier than government and municipal bonds and they are fully taxable.
Onaolapo advised, â€œif you are buying municipal bond establish that the issuing state can generate sufficient revenue internally from other sources to fulfill their interest payment commitments without relying on the federal government to bail them out. To illustrate, Lagos State has proven that they can survive and do exceptionally well without support from the Federal governmentâ€ .