Investing capital: Reforms are under way to improve the capital investment environment for insurers

There are not many attractive options for Ghanaian insurers when it comes to investing – capital markets in the country are small, inactive and provide few choices. However, they are expected to see an improved list of securities and other potential investments in the coming years. As of March 2012 there were 34 companies trading on the Ghana Stock Exchange (GSE), with 2011 seeing a record set for trading value, at GHS446m ($264.43m) – just below $1m a day on average.

But in the first quarter of 2012, with global investors nervous due to the eurocrisis, the cedi slumping and Ghanaian oil production below expectations, trading fell, with volume for the quarter at just GHS18.3m ($10.85m), slightly less than a third of what it was in the first quarter of 2011. The exchange’s bond market in the first quarter of 2012 offered a choice of mostly government offerings: 88 two-year securities, nine maturing in three years and three at five years. The combined value was just under GHS4bn ($2.37bn). The one private sector offering matured in March 2012.

REGULATORY CHANGES: Investment rules are relatively open for insurers: the list of admissible investments set by the National Insurance Commission (NIC), the sector regulator, includes listed equities and bonds, real estate, bank deposits and money market funds. There are no allocation guidelines or caps. However, investment accounting is set to become more complex as a new insurance law is expected to be passed in 2013. According to the NIC’s head of supervision, Michael Andoh, the draft law does not set caps on asset classes, but does institute risk-based solvency requirements, which could affect how capital and assets are valued.

According to Andoh, the use of mark-to-market accounting, in particular for real estate, is an issue. Valuing investment properties for annual financial reporting based on current market value, thanks to Ghana’s fast economic growth and surging demand for real estate, can cause big changes in company value. Ghanaian insurers are still in the capacity-building stage, and dealing with these changes in a more complex accounting and regulatory environment could be a challenge. It could also be an incentive to leave investment funds in the most liquid of options but perhaps not ones that offer the most long-term returns. The authorities recognise that insurers’ investment accounts are only one of several key reasons to foster a more dynamic capital market, and a series of reforms are under way that should help, such as an aggressive plan to boost listings. Insurers will benefit but are also expected to play a role in the development of the capital markets by becoming institutional investors in the GSE.

BIG BUYER: The main institutional investor in Ghana is the Social Security and National Insurance Trust (SSNIT), the country’s pension fund. As of 2009 it owned 5% of the GSE’s market capitalisation, and 40% of the free-float shares. With one investor owning so much, and given that it has little incentive to enhance its portfolio, the low supply of shares available for trade on the GSE has suppressed activity and interest from new participants. The SSNIT’s role as the main institutional investor has unintentionally suppressed liquidity.

INCREASING LIQUIDITY: With the implementation of the new pension plan under way, the hope is that more liquidity will result from directing a greater share of indigenous investment capital toward the GSE. Institutional investors in more mature markets typically take a buy-and-hold approach and are counted on to counter price volatility created by higher volume traders. But given that Ghana lacks such a group, the SSNIT will need to play that role for now. Insurers and other institutional investors cannot provide that function without more supply, however, and that too is part of the strategy. Ghana is making it clear to potential foreign partners working in its growing energy sector that they should establish a local listing, in hopes of providing a steady stream of initial public offerings that will grow the stock market. The first came in early 2012 when Tullow Oil, the leader of the consortium working the country’s first producing oil field, listed. The new shares more than doubled the GSE’s market capitalisation.