Year-on-year earnings growth of the non-life insurance sector is over 14 percent now, which was around 10-11 percent even a few months ago
At a time when the DSEX has dropped by 12 percent since the national elections in 2018, shares of non-life insurance companies are securing returns over 31 percent.
Investors have lost money from most other sectors, including bank and non-banking financial institutions.
Twenty-six of the listed 35 non-life insurers have posted a growth in earnings per share (EPS) year-on-year, according to their third quarter reports.
So, are non-life insurance stocks a safe bet at DSE?
Analysts from a dozen top brokerage firms had anticipated that the insurance sector would be a comparatively safe bet in the stock market, especially after the beginning of the new fiscal year.
The manufacturing sector is facing difficulties due to increased utility bills and higher interest expenses. The banking and non-banking financial institutions have been dragged down by high non-performing assets and a liquidity crisis.
A few weeks ago, the BRAC EPL Stock Brokerage Limited, one of the top brokerage firms in the country, recommended some selective non-life insurance stocks to their clients in private notes, along with a wider overview of the sector.
Mehedee Hasan, an assistant director and the senior portfolio strategist at the firm, told The Business Standard, "We have taken an overall strategic call to remain invested in the well-governed non-life insurance companies running with efficiency and compliance.
"Insurance companies benefit from high interest regimes as they can earn more from the surplus cash assets deposited in banks or non-banking financial institutions."
In Bangladesh, all non-life insurance businesses also enjoy a handsome handout from the state-owned Sadharan Bima Corporation as a trade-off against its sole right to underwrite state properties.
Sectoral scenario and outlook
The non-life insurance sector in the capital market has one-tenth of the market capital compared to banks. But this year, it is contributing almost equally to market turnover at the Dhaka Stock Exchange – 9 to 10 percent of the total trade volume.
The percentage of free-float shares is also at the same level – around 56-57 percent – for the sector.
According to the BRAC EPL research, the average price to book value ratio at the DSE is 1.53 now. That means stocks are priced 1.53 times higher than their underlying net asset value or book value.
Investors' deteriorated confidence pushed the banking stocks to a price level as low as 83 percent of the book value, while the ratio is 1.11 times to the net assets in the non-life insurance sector.
Non-life insurance stocks are trading at an average Price to Earnings (PE) ratio of 15.8. This means if earnings are the same for the next 16 years, the EPS alone will be enough to pay the investors' input back. DSE's average market PE ratio is 13.2 now.
The non-life insurance sector is paying around 40 percent of their annual profit as cash dividend, which is lower than the current market average of 53, but way higher than the banking sector's 19 percent pay-out ratio.
"We picked some non-life insurance stocks because of the higher dividend pay-out ratio that helps investors get back the invested money sooner," said Mehedee.
More importantly, the year-on-year earnings growth of the non-life insurance sector is over 14 percent now, which was around 10-11 percent even a few months ago.
There is a huge scope for growth in general insurance business if government initiatives are successfully enforced to strengthen the culture of insurance.
Recent policy improvements may be a boon to shareholders
Insurance companies, as they are poorly regulated, have long been assumed as less compliant and less committed issuers in the stock market.
But government initiatives along with commitment from the industry association itself is increasing investors' optimism.
The Insurance Development and Regulatory Authority (IDRA) in the middle of this year has come up with some tighter practices that would impose more transparent operations. Now insurers have to maintain a maximum of three bank accounts for premium collections and it is much easier for regulators and auditors to check if a company is doing and disclosing things right.
Insurance is a product with negative demand in Bangladesh. Insurance companies are also not interested to pay a premium if it is not mandatory. The government in recent days has responded to experts' prescription for bringing more economic activities and assets under mandatory insurance coverage.
According to the PwC, insurance penetration in Bangladesh is one of the lowest in the developing world. Here, a combined penetration of both life and non-life insurance sector is 0.55 percent, which is 1.15 percent in Sri Lanka, 2.42 percent in Vietnam and 3.7 percent in India.
A recent research paper by the EBL Securities Ltd reveals that even if Bangladeshi insurance industry intends to catch up with Sri Lanka within 2021, the industry has to grow at a 52 percent rate.
Finance Minister AHM Mustafa Kamal has expressed his willingness to make comprehensive motor insurance mandatory instead of cheap third-party insurance policies that apparently have no role to play.
Industry players under the banner of Bangladesh Insurance Association this year have pledged to minimise companies' agent commission expenditure and bring it within the regulatory limit of 15 percent, which has been way higher in many companies.
The EBL Securities report said if the agency commission can be reduced by 5 percent, non-life insurance sector's annual net profit will increase by 21 percent and if it is reduced by 15 percent, profit will grow by 62 percent.
"We have recommended insurance stocks to our clients considering this context, but you have to remember that all the insurance stocks do not have the same value. Some are overvalued compared to their potential, while some are fairly priced. We informed our clients of such details," said Khairul Alam, an insurance analyst at the EBL Securities Limited.
"Now, like always, we need to check where insurance companies are parking their surplus funds," said BRAC EPL Stock Brokerage's Mehedee Hasan. "If there is a risk in terms of getting the money back on time, that may turn into a bigger disaster for a company and its shareholders."
He added, "We also check whether a company is compliant in its operational activities, is transparent and financially prudent, and ensures re-insurance coverage."
The government recently took a long overdue move to enlist non-listed insurance companies. Eighteen life and nine non-life insurers are scheduled to submit their roadmaps for stock market listing within this month.