Dividends as a key signal of stability in times of crisis

Kim Berrendorf
May 6, 2020
Companies that reliably distribute dividends to their shareholders symbolise security. Particularly in times of crisis, like the current coronavirus crisis, the distribution of planned dividends is a marker of security and a signpost to the post-crisis era.

Reasons for making dividend payments as planned

At Baloise, too, reliable dividend payments make a key contribution to ensuring that the company is perceived as a safe haven by a large number of investors. This perception not only has positive implications for Baloise, but is also very valuable in social terms as it highlights Baloise’s reliability in meeting its customers’ needs in the interests of the community of insureds.

Anker

Why invest in insurance companies?

Investors tend not to see insurance companies as growth stocks; nor are insurers suitable for speculative investments. The reason why most investors put their money into insurance companies is the reliable dividend policy. Many of these investors have a long-term investment horizon and value the security and reliability that insurance companies offer in particular. This explains why countless pension funds and funds focusing on provision for retirement – an area in which security is a particular priority – also invest in insurance companies like Baloise.

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Impact of dividend cancellations at insurance companies

Particularly in times of crisis, when market prices are on a rapid downward trajectory with high levels of volatility, dividend payments provide stable support. Pension funds, in particular, have a social responsibility to guarantee financial flexibility for people after retirement. A decision by insurers to scrap their dividends would have two negative implications:

First, the cancelled dividend payment would also result in less liquidity being injected back into the market. At the moment, however, the market needs the cash inflow much more urgently than insurers themselves do.

Second, a considerable amount of investor trust in the security and reliability of the insurance sector would be lost as a result. The more stringent the regulatory measures, the greater the long-term negative impact on the insurance sector. This is because investors see a scenario in which a company’s leeway is restricted as a negative one. This loss of security, trust and capacity to act would trigger a further wave of considerable downward movements in the price of insurance shares.

Ultimately, the invested pension funds and other long-term investors would also be faced with a situation in which a substantial proportion of these very investors would be confronted with the issue of underfunding anyway. Taking pension funds as an example, underfunding means that their obligations vis-à-vis their customers exceed their current assets. This happens when the return on their investments is lower than the minimum interest rate set by the Federal Council. In the worst-case scenario, the return on investment can actually be negative, creating potential for significant underfunding (<90%). This explains why moves to enforce a blanket dividend freeze can cause much greater social damage than the planned distributions would.

Entrepreneurial responsibility involves weighing up the pros and cons on a case-by-case basis

From a liberal perspective, each individual company should be able to make its own decision on whether to suspend or reduce its dividend depending on its individual situation – provided that it is not resorting to government funds to prop the company up.

In this respect, the insurance industry quite rightly stands for security and sustainability on the basis of its business model. It has weathered past financial crises better than banks, for example, and has never required state aid. What is more, the majority of insurers still have strong capital resources even in the current period – solvency ratios at the beginning of the year were often more than twice as high as required. This means that they are currently still in a comfortable position and are able to meet the requirements of all of their stakeholder groups, even in the prevailing situation.

Zeichen für Vertrauen

Taking value creation as a whole into account

The decision on whether to reduce a dividend payment or not should be made taking all stakeholder groups into account. If we take into account the impact on all resource groups in our value creation model, we can see that our actions result in interdependencies that require urgent consideration – just as the individual cash and capital situation of the company in question has to be taken into account. This is the only way to ensure that a decision can create sustainable value – also for the period after the crisis is over.

In light of its solid starting position and the company’s strong performance, and also giving due consideration to the turbulence on the capital markets and the gloomier economic conditions, Baloise’s Board of Directors has made a conscious decision to propose a dividend of CHF 6.40 to the Annual General Meeting, which equates to an increase of 40 centimes. This is our way of highlighting our stability in times of crisis. Baloise is currently supporting those parts of the economy that are directly affected by the impact of the crisis, and will continue to do so in the future. This support takes the form of claims payments made to our customers, continued salary payments made to our employees and dividend payments made to our shareholders. Baloise will continue to be a reliable partner and a safe haven for customers, employees and shareholders in the future, too.

umgefallenes Glas mit Münzen

Why joint stock companies pay dividends

Investors that hold shares provide the joint stock company concerned with capital. This capital can be used for growth or innovation and contributes to a higher profit. Since, however, investors are also exposed to a number of risks, like unsuccessful innovations or a general economic downturn – such as that sparked by the current outbreak of the coronavirus pandemic –, they have to be compensated for a potential slump in share price. This is why investors expect to receive compensation for this risk in the form of a dividend payment.

Political requirements regarding dividend payments

The current situation surrounding the coronavirus has resulted in governments and policymakers playing more of a role in shaping economic activity. As far as dividends are concerned, the European Insurance and Occupational Pensions Authority (EIOPA) urged European insurers to suspend their planned dividend payments in April 2020. The argument is that major cash outflows in the form of dividend payments can hardly be considered socially acceptable at a time when the community of taxpayers is coming to the rescue of companies and the economy as a whole. The Swiss Financial Market Supervisory Authority (FINMA) has also urged companies to adopt a prudent approach, although it makes more of a distinction in addressing financial institutions between banks and insurance companies. In many respects, and also from a social perspective, a differentiated approach that places greater emphasis on individual circumstances would appear to make sense.