Investors are scared of investing in the insurance sector due to the consistent low returns on investment by some operators in spite of the opportunities offered by the recapitalisation exercise for new investors to buy into insurance companies
Disclosing this while speaking to Vanguard, Ada Ufomadu, Senior Financial Institutions Analyst at Agusto & Co, said that the inability of some insurers to create value on their investments is a reflection of their lack of investment skills.
Ufomadu said that these set of players must learn and display the skill to channel their resources into sound investment outlets and show improved performance if they wish to scale the September 2021 recapitalisation deadline.
Ufomadu said: “The insurance industry over the years has been destroying the value of an investment, and that is why investors are not interested in the sector. However, the reason for the low returns on their investments is the lack of skill.
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“They are not investing in the right assets. Some of them have long term assets for instance in real estate investment. They have investments in bare lands and the lands are just there sitting in their books and they are not doing anything with these investments. They keep revaluing them and getting revaluation amounts that cannot be actualized.
“You tell me that this land is worth N1 billion and if I go to the market and say I want to sell this land for N1 billion, people will say it is N500 million that they will pay. So sadly, insurance companies are not sweating those assets to give returns. So, we see a huge portfolio of real estate investments that are not yielding much.
“Another problem is their investment inequities. They invested in stocks of companies when there was a boom in the capital market. After the burst happened, most of them didn’t check out of the exposure, they just stayed there assuming that things will go back up. So, stocks that were bought at N50 have gone down to 20kobo and they are still in their books and they are not doing anything about it.
“So, the value has been lost and that is another investment that has gone bad. So, the allocation of their investments is a problem. They need to decide where they can get the highest yield and get out of low yielding position and invest in. So, going forward, they need to be strategic in their allocation of assets.”
While stating that huge claims payment need not affect profitability as claims payment by some insurance companies have been on the increase in recent times, Ufomadu noted that insurers can still record profits if they make a good investment.
She said: “Although claims payment has improved in the recent time, insurance companies can still be profitable when they pay claims if they do well on the investment management aspect.”
Ufomadu stated that investors are also wary of the sector because the industry is not open, stating: “The insurance industry is like a black box because they don’t do ratings. They don’t want to open up their books because there is a lot that is hidden.
She said: “Some companies have been acquired by foreign players. However, one thing we hear them say is ‘the figures we saw when we were about to come in were completely different from what we saw when we finally got in. Before we got in, you told us that you were owing claims of about N5 million. Then we came in and discovered that there are outstanding claims of N500 million and that doesn’t show on the books. But the people who need their claims are coming to the company and asking for their claims.’
“That is why the rating is good for these companies because when a company is rated, it opens up its books and gets independent opinion about its operations so investors know better about the company.”