Investors re-price insurance stocks as claims spike after protest

Investors are beginning to reduce their equity stake in some of Nigeria’s listed insurance companies following a record loss situations expected to arise from the #EndSARS protest hijacked by hoodlums across the country.

The Nigerian Stock Exchange (NSE) Insurance Index, which provides an investable benchmark to capture the performance of the insurance sector, was seen among other indexes as the sole negative in last week’s trading (-0.59 percent) and month-to-date (MtD) (-1.04 percent).

The Index comprises the most capitalised and liquid companies in insurance – AIICO, Consolidated Hallmark Insurance (CHI) Plc, Cornerstone, Lasaco, Law Union & Rock, Linkage Assurance, Regency Alliance Insurance, Sovereign Trust Insurance, Wapic, Sunu Assurance, Mansard, Mutual Benefit, NEM, Niger Insurance, and Prestige.

Before now, analysts “Buy” ratings placed on most of these insurance stocks, amid their recapitalisation efforts, attracted stock investors, making NSE Insurance the second most performing sector on the Bourse this year (+9.17 percent) after NSE industrial good (+14.47 percent) – both outperforming the NSE ASI (+6.91 percent).

While prices of other listed insurance stocks remained flat in early trading on the NSE on Monday, October 26, the shares of Consolidated Hallmark Insurance Plc lost 3kobo; Wapic Insurance was also down by 4kobo, but Lasaco gained 2kobo.

Lagos State, through its investment company, Ibile Holdings Limited, created to spur economic growth of the state economy, owns 27.65 percent stake in Lasaco Assurance Plc which also handles the majority of the state’s insurance businesses.

Other majority shareholders in the insurance company are Canon Properties & Investment Limited (12.70 percent) and Nigerian Citizens and Associations (59.65 percent).

Lagos State governor, Babajide Sanwo-Olu, said the state would need N1 trillion for reconstruction after the destruction caused by hoodlums who hijacked the #EndSARS protests.

Insurance sector operators said the losses, expected to be the highest in the history of insurance business in Nigeria, follow the wanton damage to properties of both government and private businesses during the protest.

Operators expect claims may be so huge and capable of swallowing the industry if the government fails to support in helping to meet claims obligations, expected to be in billions of naira, at a time the sector is embarking on a recapitalisation exercise.

Aside from the number of people that lost their lives or got injured who may claim from health insurance, public and government assets razed, shopping malls looted and vandalised, private businesses looted and vandalised, as well as private residences and businesses of politicians that were also affected, have claims to make from insurance.

The #EndSARS loss incident is covered in insurance under policies that extend to riot and civil commotion. So, fire and burglary or commercial property insurance, if extended, covers damage that results from vandalism, rioting, and civil commotion. These policies specifically include coverage for acts of looting in connection with a riot or civil commotion.

“Despite the heat in the socio-political landscape triggered by the degeneration of the #ENDSARS protests, we do not expect a material dent to investors’ appetite for stocks,” Cordros research analysts said.

“We reiterate that pent-up system liquidity and the hunt for alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market remain positive for stocks. However, we advise investors to trade in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings,” the analysts said.

Meanwhile, the Nigerian equities market had defied the uncertainty surrounding the ongoing civil unrest to deliver its fifth consecutive weekly gain.

“This week, we expect more earnings to come in and investors will continue to cherry-pick on stocks,” United Capital analysts said.

Vetiva Research analysts said with investors cherry-picking attractive counters across sectors, the All Share Index (ASI) maintained its positive performance while neutralising the effect of declines in the insurance sector, even as local institutional investors continue to take positions in the market.

“With a number of bellwether stocks expected to release their third-quarter (Q3) 2020 results into the market this week, we expect the market to be largely directed by the expected earnings results. We also believe the unattractive yield in the fixed income (FI) market will continue to redirect funds into the equities market. However, due to the persistent uncertainties in the global and domestic space, a cautious trading strategy is still recommended in the short term,” Vetiva analysts said.

Meristem research analysts said the unrest across the country seemed to dampen investors’ confidence at some point last week, adding, however, that the imposition of curfews across states which served as the hotbed of protests restored calm to the nation.

“The financial system remains robust with liquidity contributing to the continued uptick in the equities market. In addition, the low yield in the fixed income space and the dearth of attractive investment opportunities should stimulate buying interests in fundamentally sound stocks. Against this backdrop, we expect the market to close in the positive zone this week,” they said.

With more mixed Q3 earnings results expected this week, GTI Research analysts said they see the market “sustaining the current positive trend, albeit at a modest pace, owing mainly to the high system liquidity and low yield environment in the fixed income space”.