Income Measures, Ownership, Capacity Ratios and the Dividend Decision of the Non-Life Insurance Industry: Some Empirical Evidence

Abstract

Dividend payout ratios and dividend yields for the non-life insurance industry are studied in detail. A dividend behavior model is developed for this industry. Income measures, ownership and capacity ratios are found to be important in determining insurers' dividend policy. The dividend policy of the firm is important for several reasons. An understanding of the factors influencing dividend payments contributes to the theory of corporate savings. Dividends may also influence the price per share of common stock; thus dividend behavior is of interest because it affects the maximization of shareholder wealth. In addition, dividend policy also plays a direct role in the firm's financing and investment decision. While the factors influencing the dividend policies of industrial firms have been studied in some detail by Lintner [ 12], Brittain [2], Fama and Babiak [5], Dhrymes and Kurz [4], and others, theories of dividend behavior have not been as extensively developed and explored for financial firms. The purpose of this research is to study the dividend behavior of one type of financial intermediary, the non-life insurer, to test whether existing dividend behavioral theories are applicable to non-life insurers. The financial management principles of financial institutions are not necessarily identical to those of industrial firms. Specifically, the non-life insurer deals with (1) different income measures, which affect reported earnings and retained earnings, (2) a unique borrowing-lending rate relationship, and (3) an asset portfolio comprised primarily of securities of industrial firms. In addition, most insurance stocks are traded over the counter instead of on the New Cheng-few Lee is a Professor of Finance at the University of Illinois at Urbana-Champaign. He earned his Ph.D. from the State University of New York at Buffalo. Dr. Lee taught at the University of Georgia before moving to Illinois and has been a visiting professor at SUNYBuffalo and Ohio State University. He is an Associate Editor of the Journal of Financial and Quantitative Analysis and a member of the Editorial Board of the Journal of Business Research. Stephen W. Forbes is Vice President of the Life Office Management Association. A Ph.D. from the University of Pennsylvania, he was on the faculty of the University of Illinois at Urbana-Champaign before joining LOMA. Both he and Dr. Lee have published articles in several professional journals. The authors gratefully acknowledge the financial support of the S. S. Heubner Foundation for Insurance Education of the University of Pennsylvania. We also acknowledge the assistance of Mr. Dongsae Cho, and the editorial comments of J. David Cummins.