Aviva, RSA, Direct Line and Hiscox suspend dividend payments amid Covid-19

Insurers have suspended their dividend payments following pressure from the Prudential Regulation Authority (PRA), an arm of the Bank of England,

Aviva has withdrawn its recommendations to pay its 2019 dividend payments to ordinary shareholders in June 2020 due to Covid-19.

The board of directors at Aviva agreed with its regulators that it is “prudent to suspend dividend payments at this time”.

And following prompting from the regulator both RSA and Direct Line Group have also suspended their dividend payments.

Meanwhile Hiscox announced yesterday in a statement that it was also suspending its dividend payments.

All remain well capitalised, but the decision could cost its investors £1.3bn. 

Saga had already cancelled its dividends. 

The European Insurance and Occupational Pensions Authority (EIOPA) also urged primary insurers and reinsurers to suspend all discretionary dividend payments and share buybacks, as well as variable executive remuneration from 2 April.

According to a recent report on dividend constraints from Moody’s, suspending dividend payments would soften the Solvency II impact of market movements related to the pandemic.

Moody’s predicts an overall reduction in insurers’ total distributions to shareholders on a temporary basis despite regulators’ regulations varying significantly. This move would support insurers’ capitalisation, partially moderating the decline in Solvency II ratios as a result of financial market vitality in the first quarter of the 2020.

Unprecedented challenges 

William Ryder, equity analyst at Hargreaves Lansdown said: “The regulator is clearly very keen for insurers to retain capital going into the next few months and given the number of dividend cuts this morning we suspect some last-minute pressure was applied to bring the industry to heel.”

In Aviva’s case, by retaining the final dividend, the estimated group capital ratio will increase by around 7% to approximately 182% as of 13 March, the previously disclosed date.

The decision was agreed by the board of directors, which said it recognises the importance of cash dividends to all its ordinary shareholders and expects to reconsider any distributions to ordinary shareholders in the fourth quarter of 2020.

The board said that the “unprecedented challenges” of Covid-19, as it continues to affect businesses, households and customers, as well as impacting the economy, influenced its decision.

Regulatory authorities including EIPOA, the PRA and supervisors of other Aviva subsidiaries have responded by publicly urging restraint on dividend payment by insurers to shareholders.

But it remains too early to quantify the impact of Covid-19 on claims expenses on its general insurance businesses. As well as the potential effect of capital markets and economic trends on its results.

Given the change in the economic outlook it is reviewing all material discretionary and project expenditure.

Aviva will provide an operational update for investors in the second half of May.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “Along with a large number of smaller general insurers, Aviva has bowed to regulatory pressure and agreed to scrap any dividend before the end of the year. At least in principle, whether a company pays out a dividend or not doesn’t affect total shareholder wealth. The cash hasn’t been lost, it’s just retained within the company. Nonetheless, given dividend cuts in other sectors have already knocked a sizeable chunk off the market yield, this will be very unwelcome for income investors. Choosing not to a pay a dividend will also raise questions about Aviva’s own view of the current market conditions, it’s not exactly a vote of confidence.

”The announcement leaves UK peer Legal & General (L&G) looking isolated after it announced last Friday that it intends to stick with its 2019 final dividend despite suggestions from the regulator that the cash might be better off used to strengthen the balance sheet ahead of the gathering storm. If it can sustain both the dividend and the balance sheet through the disruption the board will be praised for sticking by its shareholders in tough times, but Aviva’s move will raise questions about whether that’s achievable.”

L&G confirmed it was going ahead with its £750m dividend payment to shareholders, despite the warning from the Bank of England. 

Duration uncertainty

Meanwhile, RSA had also announced it is suspending its dividend to preserve capital, starting with the payment of 15.6p per share due on 14 May. Management said it does not know when dividend payments will resume due to the uncertainty of the duration of the pandemic, and there may not be an interim dividend payment as usual.

RSA confirmed it had a Solvency II coverage ratio in excess of 150% on 31 March and prior to suspending its dividend.

Its shares fell 4.0% in early trading.

Hargreaves Lansdown believes that longer-term, group chief executive Stephen Hester has made improving the group’s underwriting results and controlling its costs his priority, but that the Covid-19 pandemic will probably put these plans on hold, although when normality returns Hester should be able to pick up where he left off.

Navigating the crisis

Direct Line Group’s (DLG) Solvency II ratio capital ratio stood at around 176% on 31 March, after accounting for the suspension of the group’s share buyback program, of which £29m of a planned £150m had been completed, The board has said it will monitor the situation on an ongoing basis. Its shares fell 8.4% in early trading.

DLG chief executive Penny James has firmly focused on cutting costs and leveraging recent investments in technology, but Covid-19 may upset the timing slightly, therefore its success would depend on how James navigates the crisis, according to Hargreaves Lansdown.

Ryder said: “While both RSA and Direct Line would probably be considered well capitalised for normal operations, the coming months are not going to be normal. Motor insurance claims are falling thanks to empty roads, but it’s possible that other claims may rise going forward.”

Unable to forecast outlook

Hiscox’s board decided that its resolution to approve the 2019 final dividend of 29.6 cents per share that was scheduled for payment on 10 June 2020, will now no longer be put to shareholders at the Annual General Meeting (AGM).

It agreed that for 2020 the company will not propose an interim dividend payment or conduct any share buyback.

But Hiscox’s capital, liquidity and funding positions remain strong.

“Trading across the group for the first two months of the year was ahead of expectations, however in view of the uncertain impact of Covid-19 on the global economy, it is unable to accurately forecast the outlook for 2020,” Hiscox said in a statement on its website. “As such, Hiscox is withdrawing all financial guidance for 2020 until there is more clarity.”

The insurer said it remains confident in its ability to return to its normal 90-95% combined ratio target range for the retail business in 2022.

Ryder added: “It’s worth remembering that the bailout of American insurer AIG was a key moment in the 2008 financial crisis, and we can’t risk a loss of confidence in the industry now. We understand, therefore, why the regulator isn’t comfortable leaving it to management to assess their capacity to pay a dividend, but some consideration should be given to shareholders that are relying on dividend income from their pensions to pay bills and for other basic necessities. Diversified portfolios will help mitigate this pain, but given the breadth of cuts over the last few weeks almost every portfolio will be feeling the pinch.”

Hyett, concluded: ”The spotlight now moves onto the UK’s remaining insurers and which camp they will fall into.”

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