Equity investors can now buy insurance
Equity investors can protect themselves against price drops caused by alleged fraud by managers
Equity investors can now buy insurance to protect themselves against steep share-price falls caused by alleged management fraud, à la Steinhoff.
Investors in Steinhoff, Capitec and Resilient have suffered considerable losses in recent months following actual or alleged misconduct by company management.
InvestSure, the first of its kind in SA, would have paid out in these instances.
InvestSure wanted to protect "innocent shareholders blindsided by management behaving unethically", cofounder Mbulelo Mpofana said on Monday.
An actuarial science graduate, Mpofana, together with chartered accountant Shane Curran and IT expert Iggy Nkwinika, have been working on InvestSure since early 2017.
The product is available only to retail investors on Easy Equities, the low-cost share trading platform that pioneered fractional share ownership in SA.
It had 58,518 funded investment accounts at the end of February, according to parent Purple Group’s interim results.
While an asset manager who spoke to Business Day said a well-diversified portfolio was the best insurance against losses in any single share, EasyEquities CEO Charles Savage said InvestSure would help first-time investors get over the fear of "losing all their money".
The concept considerably "pushes the boundaries of what is insurable", admitted MD of Hannover Re Group Africa, Achim Klennert.
InvestSure had to meet the Germany-headquartered reinsurer’s new product approval processes at a global level, as local subsidiary Compass Insure underwrites the product.
While it does not insure against all market risk, as a hedge or put option might, management misconduct is impossible to predict and price for.
The annual cost of the policy is 0.56% of the value of an investor’s portfolio or holding in a given stock, at the time of purchasing the policy. The pricing was arrived at using a model that tested the effects of previous instances of alleged fraud on JSE-listed companies’ share prices, said Klennert. "As we gather more data we may have to come to differentiated pricing" for specific companies or sectors. Klennert listed the proliferation of short-selling hedge funds and algorithmic trading in recent years, which could have adverse effects on share prices not necessarily captured by the pricing model. Under an InvestSure policy, a payout is triggered if a share price falls more than 10% following allegations of management wrongdoing from at least two credible sources, which could include media reports or official statements.
The policy covers any drops of more than 10%, up to a limit of 70% of the closing share price the day before the bad news broke.
It pays out only if the policyholders realise the losses by selling their shares within 30 days of the decline.
For example, if a share falls from R100 to R90 and the investor sells the stock at R50, the InvestSure policy will automatically pay that investor R40.
"If [InvestSure] works here, there are much bigger capital markets to look at," said Klennert. Local management had positioned Hannover Re’s SA unit as an innovation hub to pilot new projects globally, he said.
Directors are excluded from coverage for the companies they work for.