What is an insurance Dividend policy decision?
Generally, an insurance dividend policy decision entails how insurance companies or firms manage their generated income after the necessary expenses have been incurred such as income after profit and tax. A dividend policy shows how an insurance firm makes decisions relating to how it can share and allocate the generated dividend. However, The profit of a firm can be paid out as dividends or be re-invested.
There existed numerous reasons why most organizations should pay dividends at any point in time or not. Investors pay attention to dividends and therefore the dividend policy behavior is still an issue of concern in finance literature. Whereas some of the insurance companies have been performing well in terms of assets growth and profitability, there are other listed insurance companies whose return on assets has been dwindling over the years under study.
This was partly attributed to a poor dividend policy. The research aimed at filling the research gap by establishing the importance of effective dividend policy and the link existing between dividend policy and insurance companies’ financial performance. The goal guiding the study is; to determine the influence of dividend payout ratio, retained earnings, and dividend yield on the financial performance of insurance companies listed on the Nairobi Securities Exchange.
A descriptive design was adopted. Secondary data from4financial4statements of the Nairobi Securities Exchange-listed insurance companies4for4the period 2013-2018 was collected. Descriptive statistics and regression models using SPSS software version 2 were used for the data analysis. The study concluded that dividend payout does not affect the performance of insurance companies listed in the Nairobi securities exchange, retained earnings have a positive significant effect on the financial performance of insurance companies listed in the Nairobi securities exchange, and that dividend yield has a positive effect on1 the performance of insurance companies listed in Nairobi Securities Exchange in financial terms.
The study recommends that Insurance companies listed in the Nairobi securities exchange should ensure that they have a good and robust dividend policy in place that can enhance their level of profitability and also attract investments.
The study recommends that Insurance companies listed on Nairobi Securities Exchange should develop policies and laws governing dividend payments and should be strengthened and enforced to ensure more frequent dividend payments in order to increase their market values through share price increases. It is also recommended that an investment policy should be developed and implemented; this will ensure that the management is not left to decide on how to use the little surplus left but would rather be guided by the investment policy.
Taking into account the impact of the payment of dividends on the adequacy of the capital of the insurance company, the Board of Directors shall propose to the Counsel of Directors what part of the net profit is distributed in the form of dividends. This proposal is reviewed at the meeting of the Council of Directors dedicated to the distribution of profit of the Insurance Company according to the results of the financial year and submitted for approval to the General Meeting of Shareholders.
The objective of the Dividends Policy
An objective of the dividend distribution is to enhance reasonable and transparent equity between classes and generations of policyholders. The Company follows the Contribution Principle in the calculation of individual policy dividends for classes of its participating policy owners.
The Contribution Principle (Source of Earnings Method) is a generally accepted method of determining dividends in Canada. Under this principle, distributable earnings are to be distributed among policies over the long term in the same proportion as the policies are considered to have contributed to distributable earnings, subject to practical considerations and constraints.
In order to determine the contribution, policies are grouped into classes with common experience factors. Dividend classes are established at issue. These classifications would not be expected to change. The effect of policy loan utilization and the rates charged for such loans are reflected by the class of policyholders. Another objective of dividend policy is to build a transparent and resourceful firm that will stand out tomorrow devoid of bankruptcy or any form of financial misappropriation.
Kinds of Dividends Policy
There exist different kinds of dividends policies among which include
1. Optimal dividend policy: This is the kind of dividend policy that keeps share prices high. It measures the value of shares and share prices.
2. Cash dividend policy: This entails the payment of dividends with cash
3. Non-cash dividend policy: Here, the company decides to share dividends in form of shares rather than cash. e.g the payment of dividends with stock (stock dividend policy) which is the act of paying dividends with stock or shares.
4. Special cash dividend policy: Here, companies always give special dividend which comes once in a while.
5. regular cash dividend policy: This is the kind of cash dividend that is paid yearly or quarterly.
Dividend Policy Addresses Different types of Questions
a. The decision to payout or to retain profit or dividends.
b. How much to pay, should we retain more or should we pay more ( should the company pay much or less). It is very important to note that what you pay as a dividend will determine the class of investors you will attract.
Factors that Affect Dividend Policy
The following are the major factors that can affect dividend policy
a. Legal restriction
b. Liquidity consideration
c. Earning stability or certainty of earning
d. Ownership control
e. The restriction imposed by debt covenants
f. access to other sources of funds
h. Insolvency rule: This rule implies that an insolvent company is not allowed to pay dividends or taxes.
List of persons entitled to receive dividends
a. The list of persons entitled to receive dividends is determined on the basis of the register of shareholders of the insurance company. That register must be compiled or prepared less than 40 working days but no later than 20 days before the date of the General Meeting of Shareholders where the payment of dividends will be considered.
b. When determining the list of persons entitled to receive dividends, the nominal holders of shares must submit information on the shareholders who represent their interests to the Registrar of the Insurance Company at the date of drawing up the registry.
An insurance dividends policy decision looks at how an insurance firm manages its income after profit and tax. This is to enhance reasonable and transparent equity between classes and generations of policyholders.