Insurers Aviva PLC (LON:AV.), RSA Insurance Group PLC (LON:RSA), Direct Line Insurance Group PLC (LON:DLG) and Hiscox Ltd (LON:HSX) have all scrapped their coming dividend payments due to the uncertainty around the full impact of the coronavirus pandemic.
Aware of the importance of the sector’s income to investors, the FTSE 350 foursome all said they will look to resume dividends later in the year or when the situation becomes clearer.
The Bank of England’s Prudential Regulation Authority arm sent a letter last week to request insurers remain prudent in their approach to dividends, with the European Insurance and Occupational Pensions Authority later urged insurers to temporarily suspend all discretionary dividend distributions until the economic impact of the pandemic is better understood.
As it withdrew the proposal to pay its 21.4 final dividend that had only been proposed last month and scheduled for 2 June, life insurer Aviva said it “expects to reconsider any distributions to ordinary shareholders in the fourth quarter of 2020”
FTSE 100 peer RSA scrapped a full-year 15.6p payout, which it hiked in February and was due for payment on 14 May, but said it “intends to recommence dividend payments as soon as it is prudent to do so”, which it noted may not be in time for its normal interim dividend schedule.
Motor and home insurer Direct Line, which last month cancelled its recently proposed share buyback programme as a result of the volatile conditions arising from the pandemic, said it will also no longer pay the proposed 14.4p final dividend and “will review this position” alongside July’s half year results.
Elsewhere on the FTSE 250, Hiscox said it will not now propose a final dividend of 29.6 cents per share and has also agreed that for 2020 it will not propose an interim dividend payment or conduct any share buyback.
All four insurers assured that their capital, liquidity and funding positions remain strong.
Aviva, for example, said it remains "well capitalised with strong liquidity" and that by retaining the final dividend, its capital ratio is estimated to increase by circa 7% to approximately 182% as of its previously disclosed date of March 13.
RSA said its Solvency II coverage ratio as at 31 March was estimated to have been within its target range and in excess of 150%, even before the beneficial impact of the dividend decision.
At Direct Line, the Solvency II coverage ratio was estimated to be towards the top of its 140-180% risk appetite range at 176%, meaning "in normal circumstances, the group would be well placed to pay the final dividend, taking the Group's solvency to 161%".
Hiscox said its capital, liquidity and funding positions "remain strong", with trading "ahead of expectations" across the group for the first two months of the year but was withdrawing all financial guidance for 2020 until there is more clarity, saying it remains "confident in our ability to return to our normal 90-95% combined ratio target range for the retail business in 2022".
It takes the total of cancelled, deferred or suspended dividend payments to £19.3bn so far this year, analysts at AJ Bell noted, putting pressure on Legal & General PLC (LON:LGEN), which last Friday reaffirmed its commitment to paying a second-half 2019 dividend of 12.64p a share, worth £754mln.
Share price reactions were mixed by late morning on Wednesday: Aviva and Direct Line were both down 7% to 247.5p and 271.04p, respectively, RSA was down 3% to 391.2p, while Hiscox was up 0.7% at 939p.
Analyst William Ryder 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.
“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.”
Ryder noted that the bailout of American insurer AIG was a key moment in the 2008 financial crisis, so it was understandable why the regulator was not comfortable leaving it to management to assess their capacity to pay a dividend.
But he said “some consideration should be given to shareholders that are relying on dividend income from their pensions to pay bills and for other basic necessities”.
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