Mysterious rise in insurance share prices

Even though the insurance business continues to reel from pandemic shocks, prices of insurance stocks have been increasing sharply, alluring general investors to pour their money on small-cap companies putting them into a gambling trap. 

The share prices of general insurance companies soared by 75% since the market reopened in June following the Covid-19 pandemic-induced shutdown. During this time, the overall market indices gained around 38%, according to the Dhaka Stock Exchange (DSE). 

The insurance sector saw the abnormal growth in share prices despite the fact that most insurance companies experienced negative growth in earnings in the first six months of the current year. 

Some insurance companies saw an unusual price growth of more than 200% in the June-September period, while fundamentally strong stocks could not gain more than 20%. 

Banking share prices, one of the most fundamentally strong sectors in the stock market, gained 22% since June, according to the DSE. 

As there is no reason for the unusual surge in share prices of the insurance sector, it is very much likely that gambling has acted as the short-term catalyst behind the sectors' growth, said an analysis of a securities house. 

Insurance companies have low paid-up capital, and a small number of shares remains free-float, which makes it easy for gamblers to manipulate the price, said the analysis. 

A free float refers to the number of a company's outstanding shares owned by public investors, excluding locked-in shares held by company managers and officers, controlling-interest investors, governments, and other private parties.

For instance, the share price of Agrani Insurance went up by 109% between the reopening of the market on May 31 and September 23. However, the company's earnings per share (EPS) declined by 36% in the first six months of the current year. 

The price of each share of the company jumped to Tk36 in September from Tk17 three months ago. 

The company's free float is 1.98 crore shares. 

Meanwhile, the shares of Paramount insurance gained 216% since June to climb to above Tk120 each, although the company experienced a 63% decline in its EPS in the first half of the current year.

The free float of the company is 1.74 crore shares. 

Even though prices of insurance shares have been increasing abnormally, the Bangladesh Securities and Exchange Commission (BSEC) is yet to take any step to find out the reasons behind the price surge that could alert retail investors. 

Admitting that the growth in insurance stocks prices is abnormal, Mohammad Rezaul Karim, director and spokesperson of the BSEC, said share prices of small-cap companies have increased aggressively which has come to the notice of the securities regulator. 

"We are keeping a close watch on the shares of small-cap companies, including those in the insurance sector, to see if there is any insider trading or mal-intent in any big individual investors which is causing the price manipulation," he said. 

Insurance business started to rebound with the reopening of the economy, which can have a positive impact on share prices, said Kaiser Rahman, deputy managing director of Pragati Insurance. 

He said, "There has been about 140% increase insurance share price month-on-month in September this year, which we think is quite normal considering the fact that the insurance development and regulatory authority made a decision to stringently regulate insurance companies' agent commission to 15% as opposed to 60-70% in some cases. 

"Furthermore, there are also regulations in not making any premium rate cuts away from the prescribed tariffed rates." 

All of these have brought in a significant positivity in the insurance sector, he added. 

The insurance sector saw the sharp price gain at the time when a majority of non-compliant directors, who have lost their directorship, belong to insurance companies. 

The securities regulator had issued a directive for holding a minimum of 2.0% shares by each director, other than independent ones, of the listed companies in 2011. But many sponsors chose to ignore the order, prompting the BSEC to direct all listed companies in early July this year to ensure compliance within 45 days. 

Later in September, the securities regulator issued an order cancelling their directorships. It also declared 17 director posts in nine separate listed companies vacant, as they failed to hold the mandatory minimum of 2.0% shares each despite getting time. 

That a majority of the non-compliant directors belong to insurance companies reflects their poor commitment to the business, said the securities company analysis.

In a recent development, the securities regulator has exempted 26 insurance companies from the securities rule to enable them to get listed on the stock market under the fixed price method.

Under the new facility, the insurance companies can apply to the securities regulator for initial public offerings (IPOs) to raise less than Tk30 crore.

The lowest bar for raising capital through IPOs is now Tk15 crore for the insurance companies.

Non-life insurance companies have been witnessing an uptrend among their shares in 2019 also posted a staggering return of 35% due to the Insurance Development and Regulatory Authority's (IDRA) move to limit commission payments to agents. 

In 2012, the IDRA issued a circular barring insurance companies from paying more than 15% of the premium as commission to their agents. However, most insurers disregarded the directive offering as high as 60% of the premium as commission to secure business which prompted the regulator to issue a notice in 2019 urging compliance for the sake of the sector's well-being. 

So, maintaining lower commission rates positively impacted the sector's revenue.