High-flying insurance stocks may put market in trouble
The stock price of almost all general insurance companies has more than doubled over the past year riding on speculation, putting the whole market at risk.
Besides, 26 general insurance companies, or 68 per cent of the sector, saw their share values more than triple during the same period.
Most of these companies logged higher profits amid the ongoing Covid-19 pandemic, but the sharp rise in the stock price is disproportionate to their profit growth.
So, these overvalued stocks are putting the whole market at risk, according to market analysts.
If these stocks face corrections, general investors will be the losers, which will dent their confidence, they added.
"The surge in the insurance stocks is not a good sign for the market," said Mirza Azizul Islam, a former chairman of the Bangladesh Securities and Exchange Commission (BSEC).
Investors are blindly rushing towards insurance stocks without conducting a proper analysis when they see the rise in values.
"The over-price of insurance stocks can not be sustainable," he added.
When low-performing companies rise abnormally, it spooks the confidence of other investors because it seems as though the market lacks monitoring.
There has not been any big news for the insurance sector that could have led to such a sharp spike in stock prices compared to profits.
"So, the country's bourses should emphasise improving their monitoring systems," Islam said.
Sharif Anwar Hossain, president of the DSE Brokers' Association, said there were some reasons for the rise of the insurance stocks. But the pace of the increase was abnormal.
"Since the government is saying that everyone will be brought under insurance coverage, it positively impacts the sector.
The decision to fix the commission for agents at 15 per cent also boosted insurers' profits," he said.
In 2012, the Insurance Development and Regulatory Authority banned insurers from paying more than 15 per cent of the premium as commission to their agents.
However, most insurers disregarded the directive, prompting the regulator to issue a notice in 2019 that ordered them to comply for the sake of the sector's wellbeing.
Subsequently, in a meeting with the Bangladesh Insurance Association the same year, insurance companies collectively agreed to follow the order.
Many companies previously offered as much as 60 per cent of the premium as commission to secure business, which hurt the insurers' profits.
However, the steps cannot justify the jump in the stock prices as their profits rose at a slower pace, Hossain said.
Twenty-five of 30 listed insurance companies saw higher profits rise in 2020 than a year ago, according to data from the Dhaka Stock Exchange (DSE).
The profits of three insurers grew more than 50 per cent last year, whereas the stocks of 12 companies surged more than 300 per cent, DSE data showed.
"There are companies that are already giving higher dividends although their prices are at a lower level," said Hossain.
But investors are more focused on insurance stocks as the price has risen over the past few months.
"If these stocks see corrections, the sector will drop, and the overall market will be impacted," added Hossain, also the managing director of Md Sahidullah Securities.
Insurance stocks had been undervalued for years, but investors did not invest in them back then. Now they are rushing to the sector even though the stocks have surged, said Sayedur Rahman, president of the Bangladesh Merchant Bankers' Association (BMBA).
"We have no right to bar them. But investors should be careful because insurance stocks have already risen a lot," he added.
However, insurance companies have potential because of the cut in commission payments and the efforts of the government and private firms to expand coverage.
Only 0.3 per cent of Bangladesh's population was covered by life insurance in 2019, when the average for emerging countries was 1.7 per cent, according to data from Swiss Re, a global reinsurer.
When it comes to non-life insurance, the coverage was 0.1 per cent in Bangladesh compared to 1.5 per cent in emerging nations.
The insurance penetration slipped below 0.5 per cent in 2019. It was 0.57 per cent in 2018 and 0.55 per cent the year before, data from Swiss Re showed.
"Many investors seek companies with higher profits and lower paid-up capital. But these risks could yield profit or loss, so they need to be cautious,'' Rahman said.
There are many companies that are selling at lower prices, but they provide good dividends.
"Investors could invest in these stocks. But people are not following the basics of the stock market, which has to be seen as an investment tool rather than a business place," he added.
Mohammad Rezaul Karim, a spokesperson of the BSEC, said that the market regulator was not concerned about any stock's upward or downward trend.
Instead, it monitors whether there have been any wrongdoings in trading, such as insider trading or price manipulation.
The DSE has already reported some irregularities, and the BSEC is working to address them.
"But the hearing process has been slow amid the pandemic, so it cannot take any steps against the people who are involved in the wrongdoings," he said.
"We have enhanced our surveillance, which includes monitoring social media pages that spread rumours," Karim added.