LONDON  - Insurers could be next to face the dividend chop. Regulators have already warned the likes of Allianz and Aviva to think twice about giving cash to shareholders. Most dividends look safe after recent market falls. Yet an extended lockdown could put even the strongest companies’ payouts at risk.

Regulators are singing from the same hymn sheet. Although the Bank of England stopped short of telling insurers to follow banks and slash dividends, on Tuesday it urged chief executives to “pay close attention” to how they distribute capital. European regulators have made similar warnings.

Insurers are getting it from all sides. A sharp fall in stock markets has eroded the value of assets held to back policies. Plunging long-term bond yields drag down the rate at which liabilities are discounted, pushing them up. Credit rating agencies are downgrading companies. Every three-notch lowering forces an insurer to hold four times more capital against a 10-year corporate bond. The first quarter alone caused European insurers’ solvency ratios, a measure of the capital firms have to absorb claims over and above the regulatory minimum, to fall on average by 20 percentage points to 190%, Moody’s reckons.

There’s a way to go before dividends are at risk. One rule of thumb is that most would have to consider limiting payouts if their solvency ratio falls below 160%. Take Allianz. UBS reckons its measure has declined from 212% to 202% since the end of last year. But the Munich-based group’s stress scenario suggests the ratio would still be 164% even if stock markets plummeted a further 30%, interest rates fell another 50 basis points while spreads on sovereign bonds rose by a similar amount, and it launched its planned share buyback.

Some look closer to the edge. UK insurer Aviva’s solvency ratio has dipped to 182%, from 206% at the end of last year. UBS analysts reckon Legal & General’s equivalent measure is now around 161%. Things could get worse. If the lockdown drags on, downgrades and defaults will soar. Governments may pressure insurers to freeze or lower customer premiums, or pay more claims.

Investors are differentiating between insurers. Allianz’s shares are currently trading on a 6% forward dividend yield, whereas the UK’s Legal & General and France’s Axa yield around 10%, suggesting a greater probability of a cut. Munich Re has already cancelled its buyback. Investors should prepare for disappointment.

 

 

CONTEXT NEWS

- Sam Woods, Deputy Governor of the Bank of England, wrote to heads of insurers on March 31 saying they should pay “close attention” to the need to protect policyholders and maintain “safety and soundness” when considering bonuses or dividends.

- Woods’ letter follows a similar message from the European Insurance and Occupational Pensions Authority on March 17. In a statement, the European insurance regulator warned the region’s insurers to take measures to “preserve capital” and take a prudent approach to dividends and variable compensation.

- UK insurers’ shares all fell on April 1. Legal & General, Aviva and Prudential fell 9.6%, 8.5% and 7.9% respectively. All firms’ shares had risen slightly by 0945 GMT on April 2.

 

 (Editing by Neil Unmack and Oliver Taslic) ((Aimee.Donnellan@thomsonreuters.com; Reuters Messaging: Aimee.Donnellan.thomsonreuters.com@reuters.net))