GRI responds to Ceylinco Insurance’s 200% dividend

Global Rubber Industries (GRI), a significant shareholder in Ceylinco Insurance, said yesterday that the dividend announcement of Ceylinco Insurance is distorted and does not reflect the true value of return on equity to shareholders. The shareholder points out that in spite of being market leader for 11 consecutive years, Ceylinco Insurance has had the lowest dividend payout ratio in comparison to other leading insurers listed on the Colombo Stock Exchange.

It is also pertinent to point out that enumerating the dividend declared, as a percentage is no longer a valid statement; as under the new Companies Act of 2007, the concept of Par Value was withdrawn.

Therefore, Ceylinco Insurance Plc mentioning that Dividends Declared is ‘200% of the original share price’ is not only misleading and irrelevant but it is also a measure of performance that is obsolete in current day context.

What is most important to investors and shareholders is the concept of dividend payout i.e. how much of one’s earnings have been paid out as dividends. 

In the case of Ceylinco Insurance Plc, this ratio is at 21%, which incidentally numbers the lowest amongst other listed insurance companies. The dividend payment is also in stark contrast to the higher payments the directors have made to themselves. The other listed insurers’ dividend payout ranges from 34% to 69% for the year ended 2014.

GRI stated that the dividend yield of Ceylinco Insurance was 1.5% and was the lowest compared to that of other listed insurers. GRI has already instituted litigation against the insurance company for mismanagement.

In its litigation GRI argued, amongst other things, that while dividend payment is at the discretion of the management, any decrease in dividend due to mismanagement and/or unjust remuneration to directors is a violation of shareholder rights.

“The total dividend paid to the 3784 shareholders (2440 shareholders of voting ordinary shares and 1344 shareholders of non-voting ordinary shares) by Ceylinco Insurance is significantly and disproportionately lower than the remuneration of the 16 directors of the insurance company. The dividend paid by other leading listed insurance companies is significantly higher than the compensation paid to the key management personnel of such companies,” GRI stated.

GRI also placed on record that the compensation of Ceylinco Insurance had increased from Rs. 535 million in 2013 to Rs. 648 million in 2014, whereas the dividend amount in 2013 was Rs. 423 million whilst in 2014 it had increased to Rs. 528 million. They pointed out the pattern i.e. compensation has increased by Rs. 113 million whilst dividends paid had increased by only Rs. 106 million.  As such the dividend paid out by Ceylinco Insurance is lower by Rs. 120 million than the compensation, whereas other listed insurers have paid higher dividends than the compensation ranging from Rs. 94 million to Rs. 517 million.

Be that as it may, GRI further stated that notwithstanding the abovementioned distortion; as the largest shareholding group in the company, it is happy to note that Ceylinco Insurance has credited shareholder confidence in the company for its reported dividend declaration, and acknowledged that its participation as a shareholder can generate growth for the insurance company. GRI is however, gravely disappointed that the insurance company has to date failed and/or neglected to extend to shareholders, the opportunity to participate in deciding and implementing the segregation of the insurance company.

GRI argued that the insurance company is the only listed insurer that is insisting on not placing before its shareholders, in accordance with the Companies Act No. 07 of 2007, the model of segregation selected by the Board of Directors. GRI states that compliance with the requirements under the Companies Act is not merely procedural but is a necessary safeguard to ensure that a major transaction such as the transfer of insurance business according to the particular model selected by the Board of Directors is in the best interest of the company and will not unfairly prejudice the rights and investment of the shareholders.

GRI stated that it convened an Extraordinary General Meeting of shareholders to obtain information on the segregation, but the insurance company terminated the EGM on the basis that shareholder approval is not required for segregation. GRI added that it has now learnt that the insurance company had made representations as far back as February 2014 to the Insurance Board of Sri Lanka that shareholder approval should not be necessary to carry out the segregation and therefore seems to have never wanted to place before its shareholders the model of segregation, notwithstanding assurances to the contrary in the annual reports of the insurance company.

GRI also expresses disappointment at the fact that Ceylinco Insurance has consistently denied direct shareholder participation in the management of the company, and has to date, failed to extend Board representation to significant shareholders, including the Global Group, notwithstanding vacancies that have arisen in the constitution of the Board.

GRI together with its associate companies hold 29.9% of the total voting rights in Ceylinco Insurance and has sought representation on the Board since 2011. The company has alleged several acts of mismanagement against the directors and has sought, amongst other things, the appointment of independent directors and a forensic audit of the insurance company by court.