Insurance stocks a double-edged sword for investors | The Daily Star
12:00 AM, April 30, 2021 / LAST MODIFIED: 06:09 AM, April 30, 2021

Insurance stocks a double-edged sword for investors

Stocks of almost all non-life insurance companies have more than doubled over the past year while the benchmark index of the Dhaka Stock Exchange (DSE) rose 38 per cent.

At least two insurance companies saw their stock prices grow over five times the original value while it was three to four times for 17 others, shows the DSE data.

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However, this rise in value is not supported by an increase in earnings.

For example, Provati Insurance surged eight times from its original value but declared only 17 per cent stock dividend for 2020. The company's earnings per share rose 85 per cent to Tk 1.26 in the first quarter of 2021.

The same scenario prevailed for almost all other non-life insurers.

"The insurance stocks are rising abnormally but I don't find any valid reason for such a rise," said stock market analyst Prof Abu Ahmed.

Even though banks provide higher dividends than the insurance sector, their stock price hovers at around face value while insurance stocks are jumping.

"This is insane. The investors who bought these stocks will have to face the reality though when the gamblers complete their sell-offs," he said, adding that a stock cannot be overvalued for long without maintaining the fundamentals.

Bangladesh's stock market is gambler-driven, so investors are rushing towards such stocks.

The alarming thing is that people are taking margin loans to invest in these stocks.

"Most of our investors' behaviour contradicts what we read in textbooks," said Ahmed, also a former chairman of the economics department at the University of Dhaka.

Lower commission for agents is one reason behind the surge in insurance stocks but this alone is not enough, as proven by their recent earnings, according to market analysts.

Insurance companies saw their earnings rise by around 30 to 40 per cent in the first quarter of the year.

In 2012, the Insurance Development & Regulatory Authority (IDRA) issued a circular barring insurance companies from paying more than 15 per cent of premiums as commission to their agents.

However, most insurers disregarded the directive, prompting the regulator to issue a notice in late 2019, urging compliance for the sake of the sector's well-being.

Many companies offered as much as 60 per cent of the premium as commission to secure business, hurting the industry in the process. This was especially the case for firms with good performance records, said industry insiders.

But in a meeting with Bangladesh Insurance Association in 2019, insurance companies collectively agreed to follow the order in a bid to keep the sector alive.

Sharif Anwar Hossain, president of DSE Brokers Association, agreed with Prof Ahmed, saying that the insurance stocks were rising peculiarly at a higher pace than that of higher dividend-paying companies.

"What has suddenly happened to these companies that during the pandemic period their share price rose by three to four times?" he questioned.

The DSE and BSEC should properly investigate the matter as the price hike is creating risks for the entire market.

"When general investors incur losses by investing in these stocks, then they leave the market, which ultimately leaves a dent," he added.

The DSE Brokers Association president went on to say that they cannot stop general investors from buying the stocks even though it would have a "boomerang effect".

"This is not good as gambling is not a sustainable way to survive in the stock market," said Hossain, also managing director of Sahidullah Securities.

An interesting thing is that while all non-life insurance stocks of low performance at least doubled in the last year, one of the top performing firms -- Green Delta Insurance -- rose only 25 per cent.

A merchant banker preferring anonymity said gamblers started toying with insurance stocks at least seven or eight months ago.

"But they could not complete their sales and exit properly, so now they have started to gamble again to allure general investors," he said.

"If general investors do not take up these stocks, the gamblers will be profoundly struck but still investors are taking on these risky scripts every day," he added. 

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