Renewed hope in insurance stocks as index hits 66.92% YtD: Nigeria

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AS against year 2022 when the Insurance Index emerged the worst performing on the trading floor of the Nigerian Exchange Limited (NGX) having lost 11.99 percent in the year, the index has reversed the trend to stand at 66.92 percent Year-to-Date (YtD) return.

According to data from NGX, the Insurance Index that tracks the performance of the insurance sector, composed of companies that are primarily engaged in the business of insurance and reinsurance in Nigeria, from the first day of trading, January 3 to November 10, 2023 has appreciated by 66.92 percent at 291.04 basis points.

Capital market analysts have attributed the improved sentiments in the sector to renewed hope in the insurance industry having battled to survive the low insurance culture in the country.

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The Insurance sector was not attractive to investors as the companies lack fundamentals to give returns on investments, despite the recapitalisation exercise proposed by the regulators, National Insurance Commission (NAICOM) in 2020.

In 2021, the NGX Insurance index closed at +4.50 percent to 174.36 basis points, while in 2020, it closed at +50.61percent,

Further findings revealed that the insurance index in 2019 dropped by -0.52 percent and in 2018, it was at -9.25 percent. In addition, the insurance index in 2017 closed at +10.36 percent; in 2016, -11.44 percent and in 2015, -4.70 percent.

According to Sola Oni, the Chief Executive Officer of Sofunix Investment and Communicatioms, there used to be trust deficit in the Insurance sector over the years in Nigeria as many insurance companies made payment of claims cumbersome. This, he noted was largely responsible for poor insurance culture.

However, amid the lingering macroeconomic headwinds and the impact on the insurance industry, increase in insurance premium was announced late last year and this took effect by the January, 2023. This, to a large extent, brought relief to the industry as financial results of insurance companies improved, buoying investors’ confidence.

“Insurance companies have an obligation to recapitalize and as a support towards their survival, premiums have been increased by the government. For instance, third party insurance which hitherto attracted N5,000 ia now N15,000 and the same applies to comprehensive insurance amongst others.”

“The development signals an opportunity for the companies to increase their top line and bottom lines, pay good dividend and possibly reward shareholders with bonus shares. Investors are looking for where they can minimize their risk and maximize returns.”

“There is renewed hope in the sector. Investors do not buy shares because of the current performance of a company, they buy into the future,” Oni said.

This renewed hope was reflected in the Half Year (H1) as the NGX Insurance Index showed steady growth during H1 2023, with a 49.5 percent increase by the end of June. The sector experienced new trajectory as it made monthly gains. In January, the Index appreciated by 5.36 percent. It dipped by 2.26 per cent and 1.14 per cent in February and March. However, in April, the NGX appreciated by 3.87 percent and 13.37 percent in May to peak at 32.55 percent in June.

According to David Adonrin, a capital market operator and Executive Vice Chairman of Highcap Securities Limited, the increase reflected investor’s confidence in the industry was a result of improved fundamentals of the insurance companies as some are now profitable, leading to the payment of dividend.

Adonrin also observed that demands for insurance stocks have increased as retail investors picked up the low priced insurance stocks as big cap stocks moved out of reach.

“In the recent past when all the big stocks started moving, they were priced betonfmd the reach of retail investors, that increased the attraction of to small capitalized stocks which are mainly in the insurance sector,” Adonrin said.

At 57.19 percent YtD return, the NGX Insurance sector, while not the best performing so far at the Nigerian bourse, is projected towards positive tragectory as the Insurance companies on the local bourse submit their third quarter (Q3) financial statements.

Out of 21 insurance companies listed on the local bourse, in the first half, seven made impressive financial results despite the nation’s weak macroeconomics.

NEM Insurance reported a profit after tax of N3.499 billion in H1 2023, a 38 percent increase from N2.534 billion recorded in 2022; Cornerstone Insurance Plc’s Profit after tax, however, rose to N11.251 billion a 2,567.6 percent increase resulting from net gains on financial assets when compared to N408 million in 2022; AIICO Insurance reported a profit after tax of N5.301 billion, a 0.13 percent increase from N5.294 billion in 2022.

However, Mutual Benefits Assurance Plc Profit came under pressure from growth in claims as the firm reported a 2.71 percent drop in net earnings to N3.442 billion from N3.538 billion recorded in 2022.

Sovereign Trust Custodian Insurance recorded a 10.39 percent increase in profit after tax to N427.330 million in 2023 as against N387.086 million posted in 2022; while AXA Mansard Plc, buoyed by net exchange gain reported a 582 percent growth in net earnings to N13.124 billion for 2023 from N1.923 billion recorded in 2022.

Custodian and Allied Investment Plc also recorded a 33.07 percent increase in profit after tax to N6.285 billion in 2023 as against N4.723 billion posted in 2022.

Meanwhile, as investors keep watch over the fiscal and monetary authorities to give direction of the government reforms and policies so far, analyst expect mixed sentiments as investors and bargain hunters continued to reposition their portfolios ahead of more Q3 earnings reports in the face of sector rotation.

Ambrose Omordion, Chief Research Offiver at Investdata Consulting Ltd noted that discerning investors have continued to target fundamentally sound companies and defensive stocks to protect their portfolios, adding that any pullback at this point may add more strength to upside potentials. “As such, investors should take advantage of price rally to take profit, while also looking at the trends and events across the globe and domestically,” he said.

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