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Insurance Firms And The Challenge Of Investment Returns To Shareholders

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Huge monetary fines and management expenses have continued to limit the capacity of insurance companies to pay meaningful dividend or bonus to their respective shareholders. But experts believe if insurance operators can address the challenges, they will be liquid enough to give investors good returns on investments. ZAKA KHALIQ writes.

In the last three years, most of the 58 registered insurance companies in the country have paid a cumulative of about N1.2 billion monetary fines to the the Nigerian Stock Exchange (NSE), Securities and Exchange Commission (SEC), the National Insurance Commission (NAICOM) and Financial Reporting Council of Nigeria (FRCN) for violating account submission deadlines, among other infractions, LEADERSHIP Sunday investigation revealed.

Of this, some of the 26 listed underwriting firms accrued about N800 million as fines for avoidable offenses, hence, depriving investors returns on investment in the process. This is huge when compared to a paltry N100 million paid as dividend to the investing public in the last three years, while majority of these insurers have failed to pay dividend or bonus to their respective shareholders within this period.

This, according to the President, Progressive Shareholders Association of Nigeria(PSAN), Boniface Okezie, was the main reasons why the value of insurance stocks is below par. Investigation revealed that after paying huge fines to the regulatory authorities, the players in the insurance industry are left with little or no profit, hence, accounting for why most of these underwriters were unable to declare meaningful dividend or even bonus to their shareholders in the last five years.

Market observers had linked the consistent payment of fines to different submission deadlines of the two regulators, the NSE and NAICOM, although that was not the only reason for abysmal performance of insurance stocks.

NSE had set 31st of March as the deadline date for listed entities to submit their financial statements of the previous year, while failure to comply attracts monetary fines until the affected firm is able to submit the account.

In the same vein, insurance companies are given till 30th of June by NAICOM to submit their accounts, failure to which attracts N5,000 each day after the deadline until the concerned firm submit the financial report to it for approval.

Moreover, following the capital market crash that occurred in the country in 2008, most underwriters who had invested heavily in equities have their accounts in negative, while the share value of insurance stocks, alongside other listed equites witnessed a sharp price drop.

LEADERSHIP Sunday learnt that this allows most underwriters to incur heavy losses and were made to make huge provisions for doubtful investment, leading the firms to have negative reserves. While most of the underwriters are making profits on a yearly basis, Leadership investigation revealed that insurers devoted most of these profits to clear their negative reserve, and until they extinguish the debts, shareholders might have to wait longer to get a good returns on their investments.

Regime Of Fines
No fewer than eight listed insurance companies have face the wrath of the Nigerian Stock Exchange(NSE) as they were made to cough out N142.9 million monetary fines for failure to submit their 2015, 2016 and quarterly audited financial results before the expiration of deadline given to companies to do so, LEADERSHIP Sunday exclusively learnt.

Most of the companies, investigation revealed, have been consistent in payment of fines to the regulatory authorities for the past five years, yet have failed to declare meaningful dividend or bonus to their respective shareholders within these periods.

African Alliance Insurance PLC lead the pack by paying a huge N46.1 million fines for failure to submit its audited 2015 and 2016 financial statements, while Great Nigeria Insurance(GNI) PLC followed with N30.1 million fines for defaulting in the submission of its Audited 2015, 2016 and Ist, 2nd and 3rd quarter, 2017 financial statements to the Exchange.

Guinea Insurance equally paid 22.3 million fines to NSE for failure to submit on time, its Audited 2015, 2016, and Ist, 2nd and 3rd quarter, 2016 financial statements, even as Sovereign Trust

Insurance(STI) PLC paid N10.2 million fines for late submission of its Audited 2016 and 1st quarter, 2017 accounts. Staco Insurance was fined to the tune of N7.5 million for the same offense to that of STI, while Standard Alliance paid N8.2 million monetary fines to NSE for late submission of its

Audited 2016 financial statement. Royal Exchange, on the other hand, paid N8.2 million to the regulatory authority for late submission of its 2016 account.

In a recent XCompliant Report of the Exchange dated 31st of August, 2017, it said the companies were fined in accordance with the law as they have violated the listing rules.

Last year, however, Sunday LEADERSHIP learnt that some insurers suffered heavy monetary sanctions from NSE and National Insurance Commission(NAICOM) for failure to meet 2014 and 2015 account submission deadline. Consequent upon this, they paid monetary fine running into several millions of naira to the two regulators, even as it impacted negatively on their balance sheet.

In 2014, 21 underwriting firms paid N60 million fines to NSE for failure to submit their 2013 financial accounts to the regulatory body on or before 31st March. In 2015 as well, about 21 insurance firms paid N39.9 million fines to NSE for late submission of their 2013 and 2014 accounts.

While three insurers defaulted in submission of their 2012 accounts, 16 firms were penalized for late submission of their 2013 accounts, while eight insurers, of which some of them also defaulted in submission of their 2013 accounts, committed the same offense in their 2014 financial year.

These doesn’t include the fines, running into several millions of Naira, paid to NAICOM, SEC and FRCN as well.

Reasons For Continuous Payment Of Fines
Speaking on behalf of insurance firms’ shareholders, Okezie said: “Some of the erring companies have corporate governance issues. We commend NAICOM because it will not approve any account unless it is thorough, kudos to the commission for safe guarding the interest of the investors as well as customers.”

Insurance stocks, he said, are unhealthy for shareholders for some years now as they were unable to give good returns on investment, noting that this was the reason why their prices have remained at par value. He said shareholders react to the results a company releases, its dividend payout, its future prospect, saying insurance companies have failed in all these.

“So, where do you expect the price to go? The price would remain as it is. It is the dividend pay-out that throws up the prices, and so long as you don’t pay a commensurate dividend to the shareholders, that is what you get,” he said.

He believes Insurance Firms are the architect of their misfortune, saying, the money they use to pay fines on a yearly basis can comfortably give meaningful dividend to shareholders.
He called on underwriters to give adequate information on their operations to the public, and try as much to impress the existing shareholders to ensure that insurance stocks witness price appreciation.

Why Insurers Are Not Declaring Dividends
Speaking on this development, the Director, Finance and Account, NAICOM, Mr. Nicholas Opara, disclosed that, by regulation, the companies are not allowed to pay dividend until they clear their negative reserves. “The commission will always ask them to extinguish the negative reserves before they pay dividend. Hopefully, most of them are making profit and if it continues, they should be able to declare dividend in the near future,” he pointed out.

Moreover, information has it that the huge management expenses of some firms could be partly responsible for why shareholders are not getting good returns on investment as most times, the accounts are in negative, after management expenses and fines are deducted from the profit.
NAICOM had, on several occasions, criticised underwriters for spending so much on management expenses, urging them to cut it down to make them profitable enough, to declare dividends to shareholders. But the Coordinator, Independent Shareholders Association of Nigeria (ISAN), Sir Sunny Nwosu, felt otherwise, believing that the huge expenses are duly incurred in a bid to get good hands.

According to him, any company that wishes to attract best hands and retain them, should be ready to pay. He noted that the acclaimed huge management expenses, is often incurred in a bid to engage capable personnel to drive affairs of organisations , stressing that good services are not cheap anywhere in the world and that organisations that want to be at the top should be ready to pay for the services of professionals.

“If you want the best you have to pay for it, if any regulator is coming to take up an executive job, in some of these companies, you need to know how much such person would earn and the salary becomes personal to that person. The regulator can not just be in their cosy offices and say management expenses is high. Go and ask for the regulators audited accounts, you would see certain things that you would not believe,” he said.

The Way Out
Managing Director, Nigeria Reinsurance Corporation, Lady Isioma Chukwuma, urged firms to start the preparation of their accounts on time to avoid fines. “What I can suggest to avoid delays in approval and resultant payment of penalties is that companies should commence the audit of their accounts early enough. It also helps if interim audits are carried out as they facilitate the audit of the Year End Account,” she advised.

Asked whether the commission is considering reviewing the account submission deadline, NAICOM’s Spokesperson, Mr. Rasaaq Salami, said the June financial account submission deadline is as prescribed in insurance regulation, adding that the status quo still remains the same. “What does the law says. The law stipulates that insurance firms should submit their financial account on or before June 30, while failure to do attracts sanction. So, NAICOM cannot change that,” he added.

Speaking on this development, former Director-General, Nigerian Insurers Association(NIA), Mr. Sunday Thomas, who is now the Deputy Commissioner for Insurance, noted that the operators and the commission are working on a way to ensure that the listed insurers meet the NSE deadline to avoid being sanctioned.

According to him, “That is already being sorted out. If you are a public quoted company which means you are under dual regulations, so, you know you have a responsibility to submit your account on time to the commission to approve so that you can meet the March deadline of the Exchange.”

The Director General, NSE, Oscar Onyeama, charged insurers to emulate the banks who are now prompt in submission of their accounts. He said the Exchange will not change the account submission date to suit insurers, urging them to start the preparation of their accounts on time to avoid penalties.

Lack of information from insurance firms and inability to pay dividend or bonus, he said, are affecting the prices of insurance stocks. “Stockbrokers and shareholders rely on information to drive the price. We have companies who have never paid dividend for years. All these have a ripple effect on the value of a stock,” he pointed out.

Meanwhile, the Commissioner For Insurance, Alhaji Mohammed Kari, promised NSE that NAICOM will persuade insurers and give them the necessary support to ensure they meet the prescribed deadline. He added that companies must be aware that they need to meet deadlines, irrespective of their circumstances, to avoid sanctions.

Market observers believe if underwriting firms can avoid monetary fines, and cut down their huge management expenses, then, the companies would be profitable enough to reward shareholders who have stood by the companies in both good and bad times, but are yet to get good returns on their investments.



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