Insurance stocks: Sponsors selling, investors still on a buying spree

While insurance stocks were skyrocketing riding on rumours in the last two months, their sponsors wasted no time in making a quick buck.

Eight sponsors and directors of seven listed insurers sold 23.73 lakh shares to general investors at prices which were prevailing at that time in the market, which had a cumulative value of around Tk 15 crore.

When sponsors and directors of the companies were selling shares and saying that there was no undisclosed reason for the unusual price hike, general investors were buying insurance stocks based on rumours, according to market insiders.

"The rumour is that gamblers are staying with the stocks, so these stocks would rise," they said.

The insurance sector topped the turnover list along with the top gainers' list in the last two months, data from the Dhaka Stock Exchange (DSE).

General investors should be much more educated on the matter and exhibit more common sense, said a top official of the Bangladesh Securities and Exchange Commission (BSEC).

He expressed frustration and bewilderment at investors going wild over owning these shares when the company sponsors themselves were selling their stakes.

"Investors should be cautious about their investment, otherwise their investment will fall into problems," the BSEC official said.

Sponsors can sell their shares while maintaining due process of declaration and there is nothing illegal about it but the problem lies in investors not realising that it might be risky for them to invest in overvalued insurance stocks, he added.

Almost all insurance stocks doubled during the last two months and the sponsors sold their shares when prices were at their peak.

This scenario was witnessed in the case of Central Insurance, Agrani Insurance, National Life Insurance, Pioneer Insurance, Reliance Insurance, Rupali Life Insurance and United Insurance.

Meanwhile, a stock broker said that insurance companies were going to witness higher profits due to lower commission payments to agents.

In 2012, the Insurance Development and Regulatory Authority (IDRA) issued a circular, barring insurers from paying more than 15 per cent of the premium as commission.

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 high as 60 per cent of the premium as commission to secure business which has hurt the industry, especially insurers with good performance records, industry insiders said.

However, in a positive development, insurance companies agreed in a meeting of the Bangladesh Insurance Association last year to follow the order in a bid to keep the sector alive.

The lower commission will increase insurers' profits, so investors are buying the stocks, the broker said, adding that the price has risen to an overvalued level which was not supportive with the lower commission logic.

A top official of a listed insurer, preferring anonymity, said that sponsors sold their shares conducting due diligence.

When they see a huge profit in shares, they go for sales and this is normal, he said, adding that the sponsors believe they can log higher profits by selling shares rather than retaining those despite the commission issue.

However, there were some sponsors of the listed insurers who bought shares from the general investors to meet the BSEC's directive.

The BSEC in an earlier directive said the directors of the listed companies would have to keep at least 2 per cent of their own company's shares.