Are insurance dividends next to fall?

One industry that is yet to fully face this reckoning is insurance, where the impact of the coronavirus is neither clear nor likely to be uniform – given the diversity of business models and product lines within the sector.

However, shares in well-followed income stocks including Aviva (AV.), Legal & General (LGEN) and RSA (RSA) have whipsawed in recent days as investors have struggled to form a consensus on whether final dividends already declared for 2019 are safe. Recent weeks have provided numerous examples of blue-chip boards cancelling payouts that had already gone ex-dividend.

Fears that insurers’ dividends might be next to fall were stoked on 31 March, when Prudential Regulatory Authority (PRA) chief executive Sam Woods reminded the sector’s chief executives to “manage their financial resources prudently”, and balance commitments to policyholders with investments in the economy.

“When UK insurers’ boards are considering any distributions to shareholders or making decisions on variable remuneration, we expect them to pay close attention to the need to protect policyholders and maintain safety and soundness,” wrote Mr Woods in an open letter. In turn, this will ensure that insurers can play their “full part in supporting the real economy throughout the economic disruption arising from Covid-19”.

The invocation of national duty echoed a separate intervention by the PRA, in which the regulator made an unprecedented and outright request for major UK-listed banks to cancel shareholder dividends and buybacks. This was made despite some reluctance from major lenders, and the Bank of England’s own apparent confidence in the sector’s capital levels. Instead, the PRA argued that banks should preserve extra headroom to better support the economy, rather than pass on income generated in 2019 to shareholders.

However, in a sign that insurers may feel less pressure to cut or defer their payouts, L&G told the market late on Friday that it would press ahead with a proposed 12.64p per share final dividend, worth £752m. Having given “careful consideration” of the PRA’s letter, the group concluded that its solvency position remains robust, while noting the “importance of dividend income to many institutional and retail shareholders, particularly in the current environment”.

If capital levels are a lead indicator that peers will follow suit, then investors in Admiral (ADM), Aviva and RSA (RSA) can all point to strong Solvency II coverage ratios (see chart). Life insurer Prudential (PRU) may also feel a greater degree of independence following last year’s spin-off of M&G (MNG), which also frees it from Bank of England supervision.

As the table below shows, most of the sector’s final dividends for 2019 are not due to be paid until at least mid-May. In theory, that gives insurers’ boards time before retroactively cancelling any payments, although larger payers will be under pressure from investors to provide clarity.