BY OLUSHOLA BELLO |
The NSE Insurance Index, which tracks insurance stocks, recorded the highest gain of 29.77 per cent in January, 2021. This is even as insurers rallied on the back of suspension of insurance industry recapitalisation exercise, LEADERSHIP can now reveal.
Federal government had in December 2020, through the National Insurance Commission (NAICOM), suspended the insurance industry recapitalisation exercise following court order mandating the regulatory body to do so.
However, Insurance stock capitalisation on the NSE, which comprise of insurance carriers, brokers and services gained N39.997 billion from N188.120 billion in December 31, 2020 to N148.123 billion as at January 29, 2021.
For the month under review, the insurance sector was the best performing in the domestic equities market with the NSE Insurance index gaining a total of 29.77 per cent to close at 245.91 basis points, driven by expected merger and acquisition of smaller insurance companies by big names in the sector and banks currently seeking approvals to adopt the holding company structure that may acquire operators in the underwriting industry.
Out of the 23 stocks listed in the index, 15 have posted gains during the period. Linkage Assurance posted a month gain of 73.08 per cent. Mutual Benefits Assurance, Regency Alliance Insurance, Royal Exchange, Consolidated Hallmark Insurance, NEM Insurance, Wapic Insurance among others rose by 59.26 per cent, 54.55 per cent, 53.85 per cent, 37.50 per cent, 35.20 per cent and 35 per cent, respectively.
Apart from being the best performing index on the exchange, it is arguably the best asset class to invest in Nigeria now. At 29.77 per cent, the index beat the inflation rate which topped 15 per cent in December and higher than 5.32 per cent NSE All-Share Index posted at the end of the first trading month of the year.
Capital market analysts said that the driver is likely the recent recapitalisation efforts that have dominated the sector since 2019. NAICOM, had, earlier stipulated 31st of December, 2020 as the deadline for underwriters to have raised 50 per cent of the new capital while the remaining 50 per cent would be expected by September, 2021.
The recapitalisation rules require life insurance firms to meet a minimum paid-up capital of N8 billion, up from N2 billion previously.
In the same vein, general insurance companies are required to raise their minimum paid-up capital to N10 billion from N3 billion previously.
The regulatory capital for composite insurance firm was raised to N18 billion from N5 billion previously while reinsurance businesses are now required to have a minimum capital of N20 billion from a previous N10 billion.
However, the ravaging COVID-19 pandemic forced the regulator to move the deadline to September 20202 but insurance firms were required to meet half the recapitalisation requirement by the end of December 2020.
Meanwhile, as insurance firms battled to raise capital, some took the regulator to court and obtained a court order suspending the recapitalisation requirement.
According to reports, Justice C. J. Aneke of the Federal High Court issued an order suspending the recapitalization on the back of an ex parte application applied for by the Incorporated Trustees of the Pragmatic Shareholders’ Association of Nigeria.
In late 2020, the House of Representatives also passed a resolution demanding a suspension of the recapitalization efforts. Despite the suspensions and postponements, Insurance firms have till June to at least meet 50 per cent of the recapitalisation goals and the final deadline to fully recapitalise is September 2021.
Also, analysts expected a flurry of public offers, acquisitions, divestments to dominate the insurance sector in 2021, saying “As charter around potential deals dominates the rumour mills of the market, insurance stocks will increase in demand. As usual, investors are advised to pick choose wisely.”
They 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.
The CEO, Sofunix Investment and Communications, Mr Sola Oni said that “Investors have always shunned Insurance stocks because of their poor dividend payout. Investors’ apathy is revealing in most of the quoted insurance companies whose shares trade below par values.”
Oni, however, said the move by the government to initiate recapitalisation programme for the sector may have rekindled investors’ interest as there is hope that the companies are likely going to come out better, saying that it is therefore possible that many investors are currently taking position on the stocks to buy low with the expectation of better returns on investment.
The managing director, FSL Securities, Victor Chiazor, said 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 the sector.
He stated, “the extension of the recapitalisation 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 recapitalisation 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 recapitalisation 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.”
On recapitalisation, managing director, Highcap Securities, David Adonri, 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, saying, “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.”