What to consider in selecting best bargains from insurance stocks

More than 90 per cent of insurance stocks have experienced a significant decline in value in the last one year but their popularity as manipulative stocks makes it tricky for investors to select the best bargains.

The stock market has long been on a downward spiral since the bleak economic outlook dented investors' confidence. So, insurance stocks have endured price erosion along with most other stocks.

Of the 58 insurance companies listed on the Dhaka Stock Exchange (DSE), 53 plummeted by 5 per cent to 55 per cent in the year through December 11 this year.

Most of these securities are currently trading near their "fair value" on the bourses, said Md Moniruzzaman, managing director of Prime Bank Securities.

However, historical records show insurance stocks had repeatedly witnessed big swings without any reason. Most of them reached their peaks in 2021 after abnormal rallies driven by manipulation.

Last year, insurance stocks were subject to another abnormal price surge, while most other stocks remained stagnant on the floor on the bourses.

"The recent correction in insurance stocks was inevitable, as their prices had been artificially inflated," said Mohammad A Hafiz, former president of the Merchant Bankers Association.

No fundamental changes took place, which could push the stocks up on the bourses in any of the rallies mentioned above.

Experts suggest that small-cap insurance stocks are highly susceptible to artificial rallies. Manipulators dumped their holdings, causing the stocks to plummet.

Scope of investment

About 70 per cent of the 58 listed insurance companies pay cash and stock dividends on a regular basis while 40 percent of them have demonstrated a consistent growth in both revenue and profit.

As per research of Amarstock, the insurance sector's current price-to-earnings (P/E) ratio is 12.87, lower than the overall market P/E of 14.26, indicating undervaluation.

If the sector's business performance is taken into consideration, Bangladesh has one of the lowest claim settlement ratios in Asia.

In the life insurance sector, the claim settlement ratio improved from 67 per cent in 2022 to 72 per cent in 2023, while the non-life insurance sector saw an increase from 35 per cent in 2022 to 41 per cent in 2023.

"The insurance sector holds significant potential because of the growth of the middle class and the expanding economy," said S. M. Ziaul Hoque, chief executive officer (CEO) of Chartered Life Insurance.

The current business environment is challenging for insurance companies, as banks are struggling to pay back. Hence, insurance companies are facing difficulties in settling their obligations.

Mr Hoque expressed optimism that the matters of concern will be resolved in the near future. "Short-term investors might incur some losses but long-term investments in the sector are likely to yield substantial returns."

With only a few exceptions, most insurance stocks are currently at fair value, Mr Hoque added.

Insurance stock manipulations penalized

The newly-formed securities regulator after the fall of the Sheikh Hasina-led regime imposed a hefty fine on several stock manipulators, who had allegedly been found to have inflated stock prices of insurance companies, including Paramount Insurance, Karnaphuli Insurance, Delta Life Insurance and Janata Insurance.

The Bangladesh Securities and Exchange Commission (BSEC) last month fined cricketer Shakib Al Hasan Tk 5 million for manipulating the stock price of Paramount Insurance in 2023.

Between August 17 and September 19 last year, the share price of Paramount Insurance soared about 84 per cent to Tk 76 per share, according to a BSEC investigation. Shakib was accused of breaking securities rules by getting involved in a serial trading of Paramount Insurance.

The stock has fallen gradually to Tk 41.4 per share on the DSE by Sunday.

In December 2023, the share price of Karnaphuli Insurance was Tk 33.6 each. By February this year, it surged to Tk 60.6 per share, without any material news or justification for the rise.

The stock closed at Tk 30.10 per share on Sunday on the prime bourse.

The BSEC imposed a fine of Tk 2 million last month on investor M Loutful Goni Titu and his associates for alleged irregularities in the share trading of Karnaphuli Insurance.

Last week, Md Abul Khayer and his associates were slammed with fines worth more than Tk 1.35 billion in connection with share price

manipulations of four listed companies, including Delta Life Insurance.

Share manipulation, according to the BSEC, of Delta Life Insurance occurred between September 9, 2021 and October 26, 2021. The share price of the company jumped from Tk 139 each to Tk 226 each during the period.

On Sunday, the stock closed at Tk 81.4 per share on the DSE.

Although insurance stocks have fallen to a lucrative level, investors are shying away from investing in the stocks.

Mr Hafiz said that most low-cap stocks rise without any reason and general investors always look for stocks that are backed up by big players.

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