COVID-19: the unintended consequences of suspended dividends

​“The current climate and COVID-19 have created huge uncertainty and anxiety for those who have declared but not yet paid dividends.” Sara Ager CEO of Greenkite.

· Re/insurers adopt different strategies on dividend payments in coronacrisis
· 'Only right and proper' to ensure suitable financial provision for looming global recession
· Suspended dividends could create tax issues for shareholders
· Increase in remote working could lead to a whole market restructure

The significant risks and uncertainty created by the COVID-19 pandemic present re/insurance leaders with a "really tricky situation to unpick and predict”, says one industry expert.
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Major insurers including Hiscox, Aviva, and RSA have suspended dividend payments to shareholders as the strain of the COVID-19 pandemic continues to stress economies around the world.

Moves to delay payments followed calls to insurers from regulators across multiple regions, such as Europe, Australia, and Mexico, to protect capital. However, there have been mixed reactions across the industry, with different approaches being taken.

On April 2, 2020, the European Insurance and Occupational Pensions Authority (EIOPA) called on re/insurers to “temporarily suspend all discretionary dividend distributions and share buybacks aimed at remunerating shareholders”. A key reason for urging the industry to take action was “to ensure a robust level of own funds to be able to protect policyholders and absorb potential losses”, EIOPA said.

The authority said it was crucial for insurers to maintain their capital position and urged them to employ a “prudent approach” to variable executive remuneration policies.

On April 8, Hiscox, Aviva and RSA released statements that dividends would not be paid on the dates originally agreed by their boards, citing the need to support businesses and customers during the “extraordinary challenges” presented by COVID-19.

Each company was keen to stress that it had a strong capital position and that it recognised the importance of cash dividends to shareholders, adding that they expected to review the situation.

One major firm decided to take a different route. Munich Re unveiled its decision on March 31 before the EIOPA’s call to action, saying it would halt buybacks “until further notice” but continue with its proposal to increase its dividend payment to €9.80 per share.

Global insurer Generali unveiled plans on April 10 to divide its dividend payments into two. The dividend proposal of €0.96 per share will be split into €0.50 per share to be paid on May 20, with a second payment of €0.46 per share to be made by year-end, subject to regulatory requirements.

The insurer said its decision to stagger the payments was made “in light of the recent communications from regulatory bodies” regarding the COVID-19 fallout.

In addition, group CEO Philippe Donnet, members of the group management committee and other managers with strategic responsibilities have chosen to reduce their fixed compensation by 20 percent. This will take effect from April 2020 and last until year-end.

A statement from the firm added: “Even if the final impact of the COVID-19 crisis is still uncertain, there is no reason to doubt the group’s stability, whose solvency ratio remains solid and well within the target operating range.”

Going ahead

One insurer that decided to go ahead with payment was Legal & General (L&G). It announced on March 4 that its full year dividend for 2019 was up 7 percent to 17.57 pence per share from 16.42 pence in 2018. In its outlook statement at the time L&G said: “Our confidence in future growth and dividend-paying capacity is underpinned by the group’s strong balance sheet, with £7.3 billion in surplus regulatory capital and significant buffers to absorb a market downturn.
“We have a proven operating model which is reinforced by robust risk management practices.”

However, some have speculated that L&G may yet suspend the payment ahead of the June 4 deadline. The pressure not to pay out is growing.

“COVID-19 has created strain across the whole of the economy, and it is only right and proper to ensure investors and big corporate entities make suitable provisioning for the looming global recession, and this naturally should impact on investors and shareholders,” according to Sara Ager, CEO of insurance and financial services consultancy Greenkite.

She added: “No matter what the size of the entity, the current climate and COVID-19 have created huge uncertainty and anxiety for those who have declared but not yet paid dividends.”

Ager also flagged up a potential issue with delaying funds in this way. “A decision to delay seems the prudent response, but for the shareholder receiving a dividend there is a requirement for the dividend to be included on their tax return, at the date the dividend was declared—not the date it becomes payable.

“Does this mean that the unintended consequence is that decisions to defer and delay create tax liabilities for beneficiaries?”

The right balance

Greenkite founding associate Shân Millie said it is clear that re/insurers’ boards have a lot of issues to balance.

“In the UK the Prudential Regulation Authority’s letter of March 31, 2020, was essentially an instruction to prioritise policyholders, and focus on capital and other significant risk management issues.

“COVID-19 is about as severe as it gets as significant risk goes. We’ve seen general insurance players recently taking what is no doubt a very tough decision not to pay dividends—Aviva, Direct Line, Hiscox and RSA—while life and pensions giant Legal & General is going ahead with theirs.”

Millie highlighted that motor insurers have “a really tricky situation to unpick and predict”, explaining that plummeting claims today could become a claims surge tomorrow.

“Will the newly-found ‘ability’ for remote working mean commuting changes and the whole market restructures?” she asked.

Decisions on dividends may be tough for those in leadership positions, but S&P Global Ratings highlights a silver lining in terms of ratings.

The ratings firm said that decisions by insurers to suspend dividends “will not hurt their credit quality”.

Dennis Sugrue, credit analyst at S&P, said: “Insurers’ decisions to curb or suspend dividends, bonuses, and other discretionary capital distributions doesn’t always indicate constrained capital or cash.

“We believe it points to the uncertainty regarding the COVID-19 pandemic and the hefty costs that could materialise as a result.”

S&P said it does not consider the recent wave of insurers electing to skip upcoming dividend payments as a sign of systemic capital weakness across the industry and do not consider this a trigger for rating actions.

But the firm added that deterioration in an insurer's capital or liquidity position, alongside suspended dividends, could, ultimately, still hit ratings.

“We are actively engaging with insurers to understand the implications of COVID-19 on their capital positions,” S&P added.

Everyone is hoping that the scourge of COVID-19 ends as quickly as possible. But as lockdowns are extended and concerns about the potential for a second wave of infections are discussed, the pressure on insurers to withhold dividends and take more far reaching actions will only increase.