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Recapitalisation : Insurance stocks dormant despite deadline extension

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Weak earnings, low returns also fuel inactivity – Operators

By Nkiruka Nnorom

Insurance
The floor of Stock exchange

THE shift in the deadline for insurance firms to beef up their capital in compliance with the new minimum capital requirement of the National Insurance Commission, NAICOM, has worsened the woes of the companies quoted on the Nigerian Stock Exchange (NSE), as investors have continued to keep safe distance from shares of the companies.

Financial Vanguard’s analysis of trading in the shares of insurance firms, quoted on NSE since the beginning of the year showed that more than half of the stocks have so far recorded zero returns to investors, with the sector as a whole recording +2 percent, Year-to-date (YtD) returns. This is in sharp contrast to Year-to-date (YtD) returns of +4.6 percent recorded by the NSE at the close of trading on Friday, February 7.

Market operators believe that return-on-investment in the sector should have been more if the recapitalisation had been concluded and there is trading activity in the shares of all the insurance companies quoted on the Exchange.

Besides the delay in concluding the recapitalisation exercise, operators also pointed to weak earning reports and history of non-dividend payment in the sector as factors also aggravating investors’ apathy and hence the weak ytd performance of the sector.

Insurance companies now have till the end of 2020 to meet the deadline as against June 2020 earlier set by the apex insurance regulator – NAICOM. This was after two previous extensions. The recapitalisation plan compels the companies to raise new capital in order to meet up with the new share capital requirement.

Under the new capital base structure, life insurance companies are required to raise their capital base to N8 billion from N2 billion, general companies to N10 billion from N3 billion, while the minimum capital base for composite insurance companies was raised to N18 billion from N5 billion.

As at September 2019, NAICOM reported that only one insurance company had fully met all the necessary requirements for recapitalisation while the recapitalisation plans of 26 firms have been approved by the regulator. The others, according to NAICOM, still have one form of review or another to do in order to fully satisfy the requirement for the recapitalisation exercise.

Financial Vanguard’s inquest into the activity in the sector showed that of the 26 companies quoted in the sector, 15 of them recorded zero returns, thereby dulling activity in the sector. These include African Alliance Insurance Plc, Goldlink Insurance Plc, Guinea Insurance Plc, International Energy Insurance Plc, Mutual Benefit Assurance Plc, Niger Insurance Plc, Regency Assurance Plc, Staco Assurance Plc,

Others are Standard Alliance Insurance Plc, Sunu Insurance, Unic Diversified Holding Plc, Universal Insurance, Veritas Kapital Assurance, Custodian Investment Plc and Royal Exchange Plc.

How other insurance stocks fared

Further analysis showed that of the remaining 11 companies, four of them – Consolidated Hallmark Insurance Plc, NEM Insurance Plc, Prestige Assurance and Wapic Insurance Plc – recorded negative returns of 7.7 percent, 0.8 percent, 1.8 percent and three percent, respectively.

However, Cornerstone Insurance Plc, which rose by 31.1 percent, Law Union and Rock Insurance (40%), Aiico Insurance (13.9%), Linkage Assurance (7.5%), Sovereign Trust Insurance (5%), Lasaco Assurance (4%) and Axamansard Insurance (1%) were the only seven that posted positive returns.

Operators’ position
Operators who spoke to Financial Vanguard, agreed that conclusion of the recapitalisation exercise, payment of dividend, strong earnings announcement and enforcement of compulsory life insurance are few of the things needed to inject life into the sector.

According to Victor Chiazor, Managing Director, FSL Securities, the sector has continued to suffer from weak corporate earnings from the players in that space as well as lack of dividend return “all of which have significantly reduced the interest and liquidity in that sector”.

He stated: “The extension of the recapitalization deadline date has also slowed down activities in that sector as investors will continue to watch on the sidelines and invest in any of the insurance companies they expect to scale the recapitalization exercise as well as benefit from the new injected capital to increase the company’s return on investment in the years ahead.

“The sector is expected to report a much improved outing post recapitalization exercise, as we believe we should have a much bigger and stronger insurance sector with players that can efficiently drive the business of insurance. This will in turn drive interest in their stocks for those listed on the stock exchange.”

Chiazor, however, added that the sector has not done badly, especially when compared to other sectors, “though trading activities on most of the players in that sector is almost non-existent as a result of their historical earnings performance”.

For the year 2019, he noted: “The insurance sector was one of the best performers as it only lost -0.52 percent for the year compared to other sectors which lost significantly. The sector has also reported a year to date return of 4.91 percent as at January 31, 2020 despite NAICOM’s circular further extending the recapitalization deadline for the insurance sector from June 2020 to December 2020.”

Ayodeji Ebo, Managing Director/CEO, Afrinvest Securities, said: “The insurance sector is still struggling and historically, very few companies in the sector are paying dividend. In fact, only two companies have been consistent in terms of dividend payment.

“Again, in terms of liquidity, it’s only few of them that have liquidity. So, it is only the companies that have liquidity and have demonstrated good performance as well as dividend payment that investors have been showing interest in.

“Unless we have compulsory life insurance scheme, I don’t think we will expect much to happen in that sector. You know that the comprehensive insurance is not compulsory, even life insurance is not compulsory. We are only expecting that the National Pension Commission (PenCom) will go ahead with implementation of the rule that all the companies that pay pension should also do compulsory life insurance for their staff. This may spur activity within that space.”

David Adonri, Managing Director, Highcap Securities, believes that the ostentatious lifestyle by directors of the companies is a clog in the wheel of progress for the companies.

He argued that while the companies declare bad financial results, the directors live flamboyant lifestyle to the distaste of investors.

He said: “The inactivity in many of the companies shows investors lack confidence in the insurance sector and their apprehension is well justified in the sense that most of the companies in that sector are not paying dividend. So, there is no appropriate return for investors. Return-on-investment is almost absent and that is why investors are avoiding insurance sector.

“The major reason for loss of confidence in the sector is the ostentatious lifestyle of directors of those insurance companies. They continue to declare losses every year whereas the directors and even the staff are using luxurious cars. Their lifestyle is highly ostentatious, which shows that managers of that industry may not be reporting activities in that industry correctly to shareholders. So, this is one of the major factors for the loss of confidence.
“The market is aware of what is happening in that sector,  that the information coming out may not be factual; it may be deceptive and that has affected the perception of investors that make them to avoid companies in the sector.

“I think the managers in the insurance sector should endeavour to ensure that the results are encouraging and they should start paying competitive dividend and that would attract investors to that sector.”

On recapitalisation, he said: “There is a limit to which recapitalisation can assist a business that is not well structured. A company can be small in size and yet still be efficient, cost-effective and profitable. The insurance companies can come up with higher capitalisation but that may not be the solution. The solution is to improve the perception of the public through declaration of good results and payment of dividend.”

He explained that what damaged the balance sheet of most of the companies was adventure  into the stock market during the boom period. “They over-exposed themselves to the equities market and that damaged the balance sheet of most of them and they have not been able to recover from the damage,” he said.

Charles Fakrogha, another dealing member of the stock exchange, said: “For the insurance sector to do well, the Nigerian public must believe in insurance and once we have a lot of people believing in insurance and partake in insurance for their own benefit, that sector will begin to do well.
“Then, the regulator must regulate properly; they must ensure that there are no quacks in the industry, ensure that capital base of the insurers is up to standard (which is what they are trying to do now).

“The insurance practitioners should also try to entrench high standard of professionalism and ethics. They should eschew cutting of corners as is the practice in the sector today.”

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