Dividend halts to mitigate COVID-19 impact despite regulatory inconsistencies: Moody's

Dividend constraints on insurers would support their capitalisation, partially moderating the decline in Solvency II ratios experienced as a result of financial market volatility in the first quarter, according to Moody's.

Earlier this week, the European Insurance and Occupational Pensions Authority (EIOPA) urged re/insurers to temporarily suspend all discretionary dividend distributions and share buy backs aimed at remunerating shareholders in wake of the ongoing pandemic.

EIOPA stressed the importance of insurers preserving their capital position in balance with the protection of the insured. It also asked for insurers to apply a "prudent approach" to the variable executive remuneration policies.

The European Union (EU) regulator's request echoes similar recommendations from national supervisors, and from non-EU authorities in the region such as Switzerland's FINMA and Norway's Finanstilsynet.

In response, Moody's noted that “while European regulators' recommendations vary significantly from country to country, we believe they will result in an overall reduction in insurers' total distributions to shareholders, at least on a temporary basis."

It added that "this would support insurers' capitalisation partially moderating the decline in Solvency II ratios experienced as a result of financial market volatility in the first quarter of this year.”

While some EU regulators have explicitly requested that companies refrain from paying dividends and buying back shares for the time being, others have asked only for a temporary suspension of share buyback programmes, and asked companies to consider whether planned dividend payments should be suspended to support their risk bearing capacity. A small number of regulators have also called explicitly on insurers to prudently manage discretionary policyholder bonus payouts, including the Belgian National Bank and the Norwegian FSA.

In response, most companies rated by Moody's have announced that they will either entirely suspend previously announced share buybacks, or reduce their size. The rating agency noted that there is more divergence regarding dividends, with some companies postponing decisions on whether to make a payout to shareholders, and others sticking to their initial distribution plans. A minority of companies have already paid out dividends in relation to FY 2019.

"We understand that at this stage the proposed restrictions apply to distributions to external shareholders but not to intercompany payments from subsidiaries to parents, which would reduce available liquidity at the parent holding companies," said Moody's.

"High returns via dividends and share buybacks have been a key component of European insurers’ appeal to equity investors," it added. "The partial suspension of share buybacks and dividends is therefore likely to somewhat reduce the investment case for equity investors. Whereas this will reduce insurers' financial flexibility, we believe this effect will only be temporary. The negative effect on individual companies will also be limited as it is a sector-wide as opposed to a company specific phenomenon."