Analysts pessimistic on increased dividend pay-out by insurance companies

Insurance companies will not increase the proportion of dividend payment from profit, as firms are unable to grow revenue at a faster pace to cover rising claims and expenses in a volatile and harsh and unpredictable environment.

It is unsurprising that owners of these firms receive an abysmally return on investment compared to their peers in the banking industry since they are lack the capacity to take on more risk.

Insurance industry’s average paid out dividend ratio in 2018 stood at 38.4 percent, 18.73 percent higher than dividend pay-out in 2017, according to data compiled from the Bloomberg terminals.

In the last four years, the Nigerian insurance sector has struggled to pay-out at least 40 percent of their earnings as dividend. This signifies that there could be regulatory cap on amount to be distributed from retained earnings since a lot of them have a weak capital base.

According to Bola Onadele, CEO/ MD FMDQ OTC securities exchange “The basic fundamental of dividend per share of insurance firms is driven by their revenue. If their revenue doesn’t grow, their dividend per share will not improve”.

“Low revenue of insurance firms is tagged to the fact most Nigerians do not have insurance policies. There is low patronage for insurance policies in Nigeria. Growing dividends lies in boosting revenue and their revenue can grow, if people patronize their policies better” Onadele concluded.

Insurance industry contribution to the economy is less than 1 percent, one of the lowest in Sub Saharan African.

Businessday analysis revealed on the average dividend pay-out ratio of insurance firms in the last four years has only grown by approximately 2 percent. In 2016, average pay-out ratio declined significantly to 12.37 percent from 35.85 percent before an uptick to current levels at 38.4 percent in 2018.

This point to the fact that insurance firms are more aggressive in payments of dividends compared to DMBS.

The insurance sector’s aggregate dividend payment in 2017 rose by 13 percent to N3.99 billion from N3.52 billion in 2016, but none have paid dividend of N2 per share.

Also, some analysts opine that the unfavourable regulatory climate, late budget passing and election outcomes are major factors that may inhibit growth in dividend payment by insurance company in 2019.

Speaking with Businessday, Ola Gam-ikom, Insurance consultant and founder, Third party media explained “Dividend pay- out is not going to be better than last year. The environment is expected to be harsher for insurance firm as the election budget might not be implemented on time and in the regulatory environment we should expect to see NAICOM come hard on operators unfortunately’’.

Explaining the reason for low dividend in the insurance sector of the economy, analyst explains lack of shareholder’s focus unlike the banking sector.

“The structure of insurance is very different from that of banking because insurance is of a longer term, thus there shouldn’t be any comparison between dividend payouts in both industries as insurance requires that value is built on a long term basis before profitability is achieved’’ Gbolahan Ologuno, Analyst, CSL Stockbrokers.

‘’ The insurance company in Nigeria are run in a way that shareholders aren’t in focus like banking. If banks want to hit a target in the year, it is dependent on shareholders dividend expectation unlike insurance companies that write gross premium without thinking of shareholders expectations’’ Gbolahan concluded.