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Analysis: Insurance sector stocks poised to take center stage

With the almost four-fold jump in the sub-index of the group in a matter of a mere nine months, the insurance group also outperformed the other eight groups at Nepse, including the Commercial Banks Group, considered the usual heavyweight group at the secondary market.

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Among the sorted nine groups at the Nepal Stock Exchange (Nepse), the country’s only secondary stock market, the stocks of the Insurance Group, which represents 22 insurance companies, have been growing at astonishing rates in recent months.

The Insurance Group sub-index has shot up by whopping 2,530 points in just nine and a half months, closing at 3,471 points on Thursday. The sub-index opened at 941.56 points on July 16 -- the first trading day of the current fiscal year 2013/14.

With the almost four-fold jump in the sub-index of the group in a matter of a mere nine months, the insurance group also outperformed the other eight groups at Nepse, including the Commercial Banks Group, considered the usual heavyweight group at the secondary market.

SHIFTING INVESTMENT TRENDS
The fast growth of the Insurance Group’s sub-index is an indication of shift in investment toward shares of insurance companies away from commercial banks, which have long dominated the secondary market.However, stock analysts say the growth of the Insurance Group is not ‘normal’.

Bikram Chitrakar, a stock analyst with Jamb Technologies, told Republica that most of the investors pouring money in a highly speculative manner. “The growth of the Insurance Group is largely based on speculation, whims and rumors among investors rather than the market rationale,” he says.

However, Gunanidhi Bhusal, the proprietor of Aryatara Investment and Securities, thinks investors are taking a more logical step as they start to gain more experience about how the market should work. “Investors possess good investment judgment. While their priorities used to be mostly banking and financial institutions (BFIs), they have started understanding the importance of portfolio diversification. This means they want to invest in a diverse set of groups so as to ward off any big losses resulting from problems in a single company or group of companies. Insurance companies’ scripts have become their best choice,” he said.

BFI LIQUIDITY SURPLUS TRICKLES INTO INSURANCE COMPANIES

Rabindra Bhattarai, a stock analyst, attributes the growth to a rise in institutional investments in insurance companies. “Institutional investment by banks and financial institutions (BFIs) in insurance companies because of excessive cash in the banking system has propelled the growth of the Insurance Group in the secondary market,” Bhattarai says.

BFIs are currently grappling with a liquidity surplus problem. While the deposit in the 30 commercial banks reached Rs 1,131 billion in mid-Arpil, they were able to float loans amounting just Rs 858 billion.

“Since investments in the treasury bills yield below 1 percent interest, BFIs have found pouring money into insurance companies brings good returns,” he added.

According to Bhattarai, general investors were attracted to insurance companies in the secondary market only after institutional investors started holding more of their [insurance companies’] shares.

“The central regulatory bank -- Nepal Rastra Bank -- had directed BFIs to offload their cross-holdings of other BFIs. Those having cross-holdings divested their holdings of other BFIs and bought the shares of insurance companies. This sent prices of shares of insurance companies shooting,” he said, adding, “Once the share prices of insurance companies began climbing, the general investor naturally gravitated toward them.”

COMPANIES SCRAMBLING TO OFFER HIGH DIVIDENDS
The paid-up capital requirement for insurance companies set by the Insurance Board (IB), the regulatory body for insurance companies, has also played a key role in fuelling their share prices. According to IB, a life insurance company should hold a minimum of Rs 500 million in paid-up capital by the end of this fiscal year while and a non-life insurance should have at least Rs 250 million.

As insurance companies have been scrambling to announce bonus shares and rights issues to meet that requirement, the shares of insurance companies have become more lucrative for shareholders.

Nepal Life Insurance Company Ltd, National Life Insurance Company Ltd and Sagarmatha Insurance Company Ltd announced dividends of 98.5, 72.5 and 42.1 percent respectively in Fiscal Year 2012/13.

There has also been speculation that IB will soon direct life insurance companies and non-life insurance companies shore up their paid-up capital to Rs 2 billion and Rs 1 billion respectively. This has sent demand for insurance company shares soaring and with it their share prices.

‘CORNER A MARKET’
Some analysts, however, fear that some parties may be manipulating share prices of insurance companies. “The insurance sector is small and there are only around 60 million units of shares of insurance companies listed at Nepse. So a handful of big players might be manipulating share prices either by creating an artificial demand or by spreading rumors,” an investor, who asked not to be named, told Republica.

Bhusal, of Aryatara Investment and Securities, said manipulation cannot be totally ruled out. However, he was thinks the effects of such kind of attempt at manipulation would be very nominal. “I cannot say that there is no ‘cornering of market’. But this will not make that significant an impact in the overall benchmark index,” he argues. In the securities market, ‘Corner a market’ refers to the acquiring of enough shares of a particular security type to be able have a firm grip on a niche industry, or to hold a significant commodity position to be able to manipulate prices.

REGULATOR BEING PRO-ACTIVE
The high degree of activeness has also boosted the confidence of investors enough to start pouring money into insurance companies.

“There was weak monitoring and supervision oversight of insurance companies. Investors are wary of making investments in those companies that have less regulatory oversight. However, IB has starting being more active, like the central bank. This has boosted the confidence of the investors,” Bhusal says.

In recent months, IB has come down stronger against insurance companies that fail to abide by its directives. IB took over the operations of Everest Insurance Company last year after the latter flouted regulations while settling insurance claims. It has already handed over the company to the elected board. “The takeover sent a good message to investors that insurance companies have very good prospects,” he added.

HIGH RISK
However, with the insurance sector poised to outshine all other listed companies at Nepse, there are risks associated with soaring prices.“The rise in the Insurance Group is relatively high. The demand for shares of insurance companies is higher than the supply side, which has pushed up their share prices,” said Stock Brokers Association of Nepal (SBAN) President Narendra Raj Sijapati.

A total of 60,719,232 units of shares of 22 insurance companies are listed at Nepse for trading while the total listed shares of just two big banks -- Agricultural Development Bank Ltd and Nepal Investment Bank Ltd -- makes up 73,397,075 units.

Sijapati cautions investors to remain careful about possible risk of overvaluation of the shares of the insurance companies. “Since the prices of shares of insurance companies have already gone up, investors should be aware now about avoiding any future risk,” Sijapati added.State-owned insurance company Rastriya Beema Sansthan (RBS) stands in second position after Unilevel Nepal Ltd among all 238 listed companies in terms of share prices.The closing price for a unit of RBS share stood at Rs 5,700 as of Wednesday.

Similarly, most of the companies whose unit share prices were above Rs 5,000 are insurance companies.

source:republica,1 may 2014

2014-05-02

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