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You can now insure your equities against management dishonesty

Payouts have been made on nine events in the past year, including those related to MTN, Tongaat and EOH.

InvestSure was started a year ago by two entrepreneurs, Shane Curran and Mbulelo Mpofana, to provide insurance cover to shareholders against allegations of management fraud or dishonesty.

Curran is a chartered accountant, and Mpofana has a degree in actuarial science. They were introduced to each other by reinsurance company Hannover Re, which has thrown its financial and technical might behind the company.

Given what has been happening just this year in terms of corporate scandals, this looks like a gold mine. There are other hedging products that protect against a decline in share price, but none that specifically protect against claims of fraud and dishonesty.

The investment fraud insurance product is a world first and will soon be offered to the international market.

The insurance pays out on allegations of fraud or dishonesty. Bear in mind that it often takes years for actual fraud or dishonesty to be proven. It offers insurance on 123 Johannesburg Stock Exchange (JSE) stocks, and the timing of InvestSure’s launch could not have been more fortuitous, with multiple corporate scandals fanning shareholder fears of more to come.

To date, 6 500 shareholders have bought insurance and the company has paid out on nine events, including MTN’s well-documented troubles in Nigeria, Tongaat’s announcement that it will have to restate its financial results, and allegations of corrupt public sector contracts at EOH.

The cost of the insurance is 0.6% of the share value and is valid for a year. A payout requires a minimum 10% move in share price over two days. The company itself flags claimable events on its website, and payouts are made within a minute or so of a valid claim being made, says Mpofana.

The product is offered on the Easy Equities share trading platform, but will soon be available on other platforms.

What shares are currently hot for the insurance fraud product?

Capitec, Discovery, Naspers and Dis-Chem, says Curran. MTN was a big hit several months ago, and remains a favourite for those looking for insurance protection.

“I think there is a general nervousness about the potential for fraud and dishonesty in the market because of the number of corporate scandals we have read about over the last few years,” says Mpofana. “People are taking out insurance on some very respectable companies as an additional layer of protection.”

The product does not cover losses due to macro or micro economic factors, political risks or any general business risk such as failure to execute a business plan or meet estimates or market expectations. Directors and their immediate family who hold shares in the company in which they are directors do not qualify for the cover.

Buyers of the insurance can keep an eye on the InvestSure newsboard to see what events are being flagged and whether there has been a payout.

It is important to note that a payout for allegations of misconduct is not proof of misconduct, says Mpofana.

“Once we notify clients of a claimable event, they have to sell the shares within 30 days in order to get a payout. This is paid immediately into their investment accounts.”

A sampling of the payout history

Share

Event

Payout

EOH

EOH says corruption probe found ‘suspicious transactions’ worth R1.2bn

Yes

OMU

Old Mutual fires CEO Moyo citing a conflict of interest with an investment firm he founded

No

TON

Tongaat warns of potential hit to 2018 results following a review of its accounting practices

Yes

GLN

Swiss open criminal probe after Glencore complaint by NGO

No

TON

South Africa’s Tongaat to restate prior results after accounting review

Yes

VOD

Tanzania charges Vodacom Tanzania MD with economic crimes

No

NRP

Nepi Rockcastle shares slump on Viceroy report over profits

Yes

MTN

Nigeria seeks to charge MTN 15% interest on $8bn claim

Yes

MTN

MTN slides on Nigeria’s $2bn claim for unpaid taxes

Yes

SBK

Central Bank of Nigeria investigation regarding illegal client remittances relating to MTN Nigeria

No

MTN

Central Bank of Nigeria claims illegal dividend payments of $8.1bn

Yes

CPI

SA Reserve Bank calls for Capitec fee probe

No

GLN

Glencore subpoened by the US department of justice Foreign Corrupt Practices Act

Yes

CPI

Capitec accused of misleading shareholders, practicing unsustainable business practices and accounting irregularities by activist short sellers Viceroy Research

No

NRP

Resilient group of real estate investment trusts (including Nepi Rockcastle) accused of market manipulation

Yes

The two entrepreneurs are looking at other risks that can be isolated and insured, but for the moment have their hands full with this one.

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COMMENTS   9

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Simplest and most cost effective way of having peace of mind is to not invest on the JSE.

You have the whole world at your feet.

You don’t need insurance against dodgy managers if you give whistleblowers more power. It’s high time whistleblowers in corporations were given a platform to report any wrongdoing within any corporation. The Independent Regulatory Board for Auditors should be providing this platform as well as protection for whistleblowers against victimization. This is the only way to stop accounting shenanigans, corruption or fraud.

I presume they hedge their exposure with put options? It would be interesting to see how 0.6% compares to the pricing of put options at 90% of ruling as the volatility pricing would be very different for different shares? If they are hedging and there is a general downturn that is not a corruption event, they could make a LOT of money as they keep the option gain and have no payout.

Put options will set you back way more than 0.6% of nominal.

Captain: yes for sure. If you take a very blue chip like Apple that is say 210 now, a 12 month put with strike 190 will cost about 4.5% and be worthless if Apple even just stays where it is in 12 months.

There must be angle with the insurer where they work on probability of a 10% plus drop due to fraud. Hedging some of it would help the return especially if many stocks drop for some other reason and the options spike in value. One would have to pick the insurable companies very carefully!

Maybe some boards should buy this on their treasury stock :/

How much does it cost, the insurance rates to acquire this insurance? Example please.

That is surely uncalled for?

Jooste is not BEE and he is the worst of the lot, worse than the rest combined…

Check you racism mate

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