Aviva pulls final dividend due to Covid-19 after BoE pressure

Insurance group Aviva bowed to central bank pressure on Wednesday and pulled its final dividend as it braced for the financial impact of the coronavirus pandemic.

Aviva said it remained well capitalised with strong liquidity. By retaining the final dividend, the estimated group capital ratio will increase by 7% to approximately 182%.

“It remains too early to quantify the impact of Covid-19 on claims expenses in our life and general insurance businesses, and the potential effect of capital markets and economic trends on our results,” Aviva said on Wednesday, adding that it was reviewing all material discretionary and project expenditure.

It added that it expected to reconsider any distributions to shareholders in the fourth quarter of 2020.

Aviva joined RSA, Hiscox and Direct Line in cancelling its final dividend after the Bank of England told insurers to consider their financial strength when deciding on dividends during the crisis, which could lead to a surge in claims. However, Legal & General said on Friday it would go ahead with its final dividend.

The BoE backed RSA and other insurers deferring payouts. In a statement the central bank said: "We welcome the prudent decision from some insurance companies today to pause dividends given the uncertainties associated with Covid-19.

"When insurers are considering whether or not to proceed with any dividend payments, their boards should pay close attention to the need to protect policyholders and maintain safety and soundness."

Last week Britain's "Big Five" banks cancelled £7.5bn in dividend payments to shareholders last week under pressure from regulators to keep more capital on their balance sheets.

The insurance industry faced similar calls from the Prudential Regulatory Authority and the European Insurance and Occupational Pensions Authority (EIOPA). The four companies on Wednesday pulled a combined £1.3bn in dividends, taking April’s total of cancelled, deferred or suspended dividend payments to £4bn across the UK market, and the aggregate income lost to shareholders this year to £19.3bn.

This "pours the pressure on Legal & General" said AJ Bell investment director Russ Mould.

“Other FTSE 100 insurers yet to confirm or change their dividend plans in light of the intervention from both the PRA and EIOPA include Phoenix Group, Admiral and Prudential.

“The issue does not appear to be the insurers’ ability to pay. Applying EIOPA’s own Solvency II ratio, which measures how much capital insurers have to hold to be confident they can withstand a worst-case loss scenario, all of the seven FTSE 100 firms appear well buttressed."

“Instead, EIOPA, like the PRA with the British banks, wants the insurers to keep the capital as an extra buffer against potential losses relating to COVID-19 and the associated economic downturn."

Mould added that public perception may have also played a part in the insurers' outbreak of responsibility.

“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," he said.

"By contrast, it is a good look for regulators and politicians to take a tough line even if, with plenty of justification, the insurance industry can say it did not need the taxpayer bail-outs that the banks hoovered up during the great financial crisis of 2007-09."

“This combination of regulatory intervention and greater public awareness of the issue of dividend payments is a new, variable element for equity investors and income-seekers to address. Whatever the length of the Covid-19 lockdown and the duration of the subsequent economic downturn, this debate may be one of their longest-lasting effects."