When investors buy shares of companies, they expect to be rewarded for taking such risk in the form of a dividend payment.
Little wonder in most cases share price appreciates immediately after dividend declarations are made and market participants have confidence that a firm with steady policy is financially healthy and has great prospects.
In short, the success of a publicly quoted company lies in its ability to generate earnings that are strong enough to meet such obligations.
However, the insurance industry has negated the aforementioned principles as some companies will definitely not be paying dividends to their owners because they are reeling from widening underwriting loss, receding revenue, and spiraling claims that resulted in accumulated losses.
Sovereign Trust Insurance Plc, Linkage Assurance Plc, African Alliance, Guinea Insurance Plc, Veritas Insurance Plc, Universal Insurance Plc, Niger Insurance, and Royal Exchange Plc have a combined N56.72 billion in negative retained earnings that indicates they have been making operating losses than profit for the most part of their existence.
The law prohibits companies from paying dividends from distributable profit so as to protect their capital against macroeconomic headwinds.
In 2018, the central bank stopped the payment of dividends to shareholders by Deposit Money Banks and discount houses with huge bad loans and low capital base.
This is due to the rising non-performing loans and the need to stop further erosion of the capital base of the banks and discount houses.
However, some non-financial firms pay all of their earnings as dividend and they scoop from retained earnings to make up for the short falls. Of course, they can tap the capital market to raise capital either through debt or equity to fund business operations or expansion plans.
Niger Insurance is walking a tight robe as it is paying out more in management and claims expenses than premium it earns or writes, little wonder the insurer has been recording recurring losses that resulted in technical insolvency.
It has negative retained earnings in its balance sheet of N11.17 billion and it posted a net l0ss of N2.65 billion.
African Alliance has accumulated losses of N33.57 billion as at December 2021 while it posted a net loss of N1.22 billion.
Royal Exchange earned no premium from its Life Business (a significant revenue stream), and little wonder negative retained earnings widened to N5.83 billion, albeit it is not technically insolvent.
Guinea Insurance has accumulated losses of N2.05 billion in its balance sheet while Linkage Assurance’s negative retained earnings hit N1.89 billion.
A weak balance sheet position and deteriorating income are enhancing investors’ appetite towards the shares of insurance companies who do not have robust earnings capacity like their cousins, banks.
They also have poor valuations as they underperformed the NGXASI All Share Index while the return on average equity continues to be in a negative territory.
Analysts say it is practically difficult for Nigeria to compete with their peers in Europe, U.S., Asia, and Sub Saharan African with too many weak companies filling the space.
Of course, the country lags its peers across Africa in penetration due to a myriad of challenges such as poor regulations, lack of trust for the claims process, and unpredictable macroeconomic environment.
The country’s penetration stood at 0.5%, and that compared with South Africa (12.9%), Kenya (2.8%), Angola (0.8%) and Egypt (0.6%) while density at $6.2 also remains weak compared to South Africa ($762.5), Kenya ($40.5), Angola ($30.5) and Egypt ($22.8).
There is light at the end of the tunnel as the regulator had mandated sector players to jerk up their capital bases.
However, there are concerns that NAICOM is a toothless bulldog since it has been shifting the goal post by continually postponing the deadline for recapitalization, capitulating to the tumultuous uproar from stakeholders.