A string of Britain’s biggest insurance businesses have caved to pressure from the Bank of England and axed dividend payouts to investors in light of the coronavirus pandemic.
Aviva (AV.L), Direct Line (DLG.L), Hiscox (HSX.L), and RSA (RSA.L) all suspended or cancelled dividends on Wednesday. It follows pressure from regulators to preserve cash while the global economy faces huge uncertainty due to COVID-19.
The Bank of England wrote to insurance bosses last week asking them to consider whether dividend payouts were “prudent” in the current climate.
Deputy governor Sam Woods wrote: “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, and in so doing to ensure that their firm can play its full part in supporting the real economy throughout the economic disruption arising from COVID-19.”
European regulators added to pressure days later, saying in a statement that companies “should take measures to preserve their capital position.”
“This is a difficult decision, not least in terms of the initial impact it will have on shareholders,” RSA chairman Martin Scicluna said in a statement on Wednesday.
“The company has a strong capital base, but we think it is right and prudent, for the many businesses and people that we support as well as wider stakeholders, to take these steps now, and ensure that RSA is well placed to continue doing what we can to help through this crisis.
“No company exists in a vacuum and at this time we judge it to be in the best long term interests of RSA to show forbearance on dividends."
Shares in insurers fell sharply on the news. Aviva was down 8.4%, Direct Line fell 6.3%, and RSA dropped 2.3%. Hiscox remained flat.
The Bank of England said in a statement: “We welcome the prudent decision from some insurance companies today to pause dividends given the uncertainties associated with COVID-19.”
Russ Mould, investment director at stockbroker AJ Bell, said: “The issue does not appear to be the insurers’ ability to pay. Instead, [regulators] wants the insurers to keep the capital as an extra buffer against potential losses relating to COVID-19 and the associated economic downturn.
“There may be another reason for insurers to wish toe the regulatory line, namely public perception. Paying out large amounts of cash to shareholders when tales of refusal to pay out those hit yet again by floods or whose livelihood has been destroyed by the lockdown is not necessarily a good look.”
The move to cancel dividends by the bulk of the UK insurance industry piles pressure on Legal & General. The insurer last week put out a statement in defiance of regulators saying it still plans to pay out a dividend.
Bank of America analysts said on Wednesday 8 April that the Bank of England’s “lack of comment on companies which still intend to pay their dividends suggests that the regulator is not intending to pursue action against them.”
“However, further actions can not be ruled out following today's coordinated releases,” analysts wrote.
Legal & General (LGEN.L) stock fell 6.1%.
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