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Tuesday, June 6, 2023

Loss Making Royal Exchange Won’t Pay Shareholders Dividend

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Royal Exchange has been recording recurring loses, which means shareholders will not be paid dividend because the such payment is usually made out of distributable profit.

For year ended December 2019, Royal Exchange recorded a loss after tax of N1.31 billion from 2018’s loss of N159.86 million.

The loss was largely caused by a marked reduction in premium income and rising underwriting expenses. Recurring losses in the books of the insurer is validated by negative retained earnings of N3.24 billion as at December 2019.

Analysts that spoke with MoneyCentral said Royal Exchange lacks the liquidity required to invest in financial assets that would have compensated for the deteriorating underwriting conditions.

Because claims expenses eat the chunk of windfall from top line (revenue growth), insurance companies with strong balance park their money in bonds and stocks when interest rates are favorable; also, they invest their money in real estate to earn returns.

Royal Exchange is struggling to be efficient as combined ratio has hit all-time high of 120.64 as at December 2019, which compares with 2018’s 115.64 percent. The combined ratio is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations.

A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims than it is receiving from premiums.

The insurer’s underwriting profit dipped by 75.15 percent to N913 million as at December 2019, while it recorded a negative real underwriting result of N1.70 billion in the period under review.

Analysts have warned that the coronavirus pandemic could result in mounting obligation because there was a surge in health, travel and business interruptions, supply chain and event cancellation claims.

“This raises the possibility of regulators asking for extraordinary solvency tests to ensure insurers can withstand the immediate and knock-on impacts,” said analysts at PricewaterhouseCoopers.

Royal Exchange’s claims expenses were flat at N3.17 billion as at December 2019, while loss ratio increased to 38.53 percent in the period under review from 34.38 percent the previous year.

A higher loss ratio means the insurer is spending more on claims expenses in generating premium income. The insurer’s net premium income fell by 10.19 percent to N8.24 billion as at December 2019, from N9.18 billion the previous year.

Premium and profit of Insurers will be pressured due to the Covid-19 induced risk and a low yield environment. The precipitous drop in T-Bill yields has endangered future investment income that helps compensate for weak underwriting profit.

Only an irrational investor would continue to buy stocks that do not pay dividend, worst still is if the future is bleak for the entity and the industry it operates in.

Royal Exchange’s stock price was stuck at N0.50 since 2015 to the end of 2018, but it began a steep fall after the Nigerian Stock Exchange (NSE) lifted a limit low of N0.50 for NSE traded stocks to touch down at N0.24 as of August 24 2020.

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