Breakingviews-European insurer dividend angst looks overdone

Thu Feb 21, 2013 5:43pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By George Hay

LONDON, Feb 21(Reuters Breakingviews) - The angst that has gathered around European insurers looks overdone. The shares of UK insurer RSA (RSA.L) tanked 14 percent on Feb. 20 after it cut its dividend by a third. Then on Feb. 21, Allianz (ALVG.DE), AXA (AXAF.PA) and Swiss Re (SRENH.VX) respectively held, slightly increased and substantially increased their own payouts. The latter trend is the one that matters.

RSA cited a common headache for European insurers as the reason for its payout cut. All are struggling with low bond yields, a legacy of the flight to safe assets caused by the euro zone crisis. For RSA, that meant investment income dropped 11 percent.

But investors should pause before they fear for other companies. RSA is a general insurer and its investment income suffers disproportionately because its assets are largely of shorter, lower-yielding maturities than the likes of AXA and Allianz, which have big, longer-term life insurance divisions. More importantly, RSA’s decision not to cut its dividend during the financial crisis took its payout ratio to almost 80 percent, which is way too high.

AXA and Allianz might just be sailing too close to the wind. But it doesn’t look like it. Their payouts are a more manageable 40 percent of earnings. The free cashflow that both will generate by 2014 should cover their respective payouts twice over, and Allianz in particular has fat capital reserves even under more stringent “Solvency II” reforms, according to Citi research. Swiss Re, meanwhile, is returning to investors unused reserves earmarked for Storm Sandy.

The big question mark is Aviva (AV.L), which will report on March 7. New Chief Executive Mark Wilson may decide a cut is worth it: Aviva’s current 7 percent dividend yield is uncomfortably close to its likely 9-10 percent free cashflow yield. Yet, following the announcement of a major restructuring, the UK insurer should also have a strong capital position and a dividend payout covered two times by free cashflow in 2014, Citi reckons. Now that AXA and Allianz have eased the pressure, Aviva may prefer to hold the line too.

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CONTEXT NEWS

- Allianz announced on Feb. 21 that net profit for 2012 was up 96 percent to 5.5 billion euros, helped by double-digit growth in its insurance business operating profit and a one-third increase in asset management operating profit.

- The asset management division saw third-party net inflows increase to 114 billion euros in 2012 from 38 billion in 2011, with much of the improvement coming in Europe.

- Allianz said it would keep its dividend for 2012 stable at 4.50 euros, though full-year net profit after minority interests more than doubled to 5.2 billion euros.

- AXA reported a decline in net income to 4.15 billion euros from 4.19 billion the year before, a period that had been boosted by 1.4 billion in exceptional gains. Analysts had forecast net income of 4.43 billion.

- AXA also raised its dividend by 4 percent to 0.72 cents a share.

- AXA’s revenue rose 2 percent on a like-for-like basis to 90.1 billion euros, as gains in property and casualty and life businesses outweighed a decline in asset management. Analysts had predicted 94.8 billion euros.

- Swiss Re also said on Feb. 21 it would pay out a one-off 4 Swiss francs per share special dividend, as well as increasing its annual payout 17 percent to 3.5 Swiss francs per share.

- By 1130 GMT on Feb. 21, Swiss Re was up 2.4 percent at 75.6 Swiss francs, AXA had fallen 2.4 percent to 13.4 euros and Allianz was down 1.1 percent to 103 euros.

- Reuters:

Allianz eyes calmer 2013 as euro crisis abates [ID:nL6N0BL1AB]

AXA says 2012 earnings fall 4 pct, lifts dividend [ID:nL6N0BL180]

British insurer RSA cuts dividend as investment sags [ID:nL6N0BK196]

Swiss Re shares hit near 5-yr high after special dividend [ID:nL6N0BL1AJ]

- For previous columns by the author, Reuters customers can click on [HAY/]

(Editing by Pierre Briançon and Sarah Bailey)

((george.hay@thomsonreuters.com))

((Reuters messaging: george.hay.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS INSURERS/DIVIDENDS/

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