Aviva’s announcement this morning of a second major cut in dividend payouts since 2009 – taking the opposite course from its peers – highlights the contrasting fortunes in the UK life insurance sector, Fitch Ratings says.
The dividend cut will help reduce Aviva’s debt leverage and strengthen its capital. This is positive for the group’s credit profile, which has suffered in recent years from lower capital strength relative to its peer group.
In contrast, the other major life insurers that have reported their 2012 results so far – Old Mutual, Legal & General and Standard Life – have all raised their dividends after strong results and capital surpluses. Prudential will report next week. As well as having more resilient balance sheets, we believe other life insurers are more sheltered from peripheral eurozone countries.
Aviva continues to suffer from its exposure to southern European economies, with the value of new business in Italy falling sharply to GBP29m from GBP75m in 2011 and sales of long-term savings products in the country dropping by 30%. Aviva’s GBP3bn loss for 2012 was mainly driven by a GBP3.3bn writedown on the disposal of its US business.
We believe the dividend cut also reduces the likelihood of further cuts after the 2013 interim dividend. This is something that new CEO Mark Wilson will be keen to avoid following a similarly large cut under former CEO Andrew Moss.
The transformation of Aviva under new management is progressing rapidly as it continues to strengthen its balance sheet and narrow its focus on selected core markets. As a composite insurer with significant non-life operations to complement its life business, Aviva has one important advantage over its major UK-based peers – the diversification benefit that arises from having these two different types of business.
We will comment further on UK life insurers’ results after the main insurers have completed their announcements. We do not rate Aviva, but monitor the company as part of our coverage of the UK life insurance sector.
