World Economy

European Insurers’ Dividend Growth in Doubt

European Insurers’  Dividend Growth in DoubtEuropean Insurers’  Dividend Growth in Doubt

Expectations of rising dividends and share buybacks from Europe’s insurance companies are fading as ultra low interest rates make it harder for them to meet new capital regulations.

Rock-bottom interest rates reduce insurers’ investment returns, raising the risk of them having to eat into capital reserves to pay policyholders, Reuters reported.

With yields on some government bonds -- staple investments for insurers -- turning negative recently, the International Monetary Fund (IMF) warned last month of a “high and rising” danger to weaker mid-sized European life insurers.

Calling for urgent action to tackle the issue, it cited 2014 data from the European insurance regulator showing 24 percent of the region’s insurers may not be able to meet new minimum capital requirements if interest rates remain low for a protracted period of time.

Insurance stocks have until recently found favor with investors, hitting 14-year highs this year, partly because of their high dividends. But that has started to change.

 Exercise Caution

“Expectations for dividends and buybacks have become more restrained in the last few months,” said Andrea Williams, European equities fund manager at Royal London Asset Management.

Insurance watchdog chief Gabriel Bernardino told the Reuters Regulation Summit that insurers should exercise caution over dividends as they strive to meet new capital rules akin to those imposed on banks after the financial crisis.

The hit to solvency levels could mean some mutual insurers reliant on a single area of insurance need capital injections, according to Paul Traynor, international head of insurance at BNY Mellon.

The STOXX Europe 600 Insurance index currently offers a dividend yield of 4.3 percent, against 3.4 percent for the broader FTSE Eurofirst index.

While no large listed insurers are expected to ask shareholders for more cash, any stress among smaller peers could damage confidence in the sector as a whole, the IMF said.

 Reversing Course

Some analysts are speculating that as the year goes on, listed insurers’ capital reserves over and above those required by impending so-called Solvency II rules will shrink. The rules are due to go live in 2016.

As a result, many investors that had piled into insurance stocks as a safer, income-offering way of playing the financial sector -- given the regulatory and litigation uncertainties facing banks -- are now reversing course.

The European insurance index has dropped 9 percent from its 14-year high since the IMF’s report, while the banking sector has fallen only 3 percent.

Although the big insurers are expected to deliver on promises of cash made so far, hopes for greater returns in the future appear to have run their course, analysts said.

Barclays last week cut its rating on the European insurance sector to “negative” from “neutral,” citing “significant and growing capital and earnings headwinds”.


Underpinning concerns for future payouts is the state of the government bond markets, with many offering next to nothing to investors. Ten-year German Bunds have sold off in recent weeks, but are still paying yields of only 0.6 percent.

Europe’s regulator, the European Insurance and Occupational Pensions Authority, and national insurance supervisors may be wary of letting insurers pay out too much of their capital to shareholders while Solvency II beds down, analysts said.

Big insurers such as Allianz, Axa and Generali had hoped Solvency II would free up capital, for example by fully taking into account the diversification of their businesses as reflected in in-house capital models.

But EIOPA has already told national supervisors to make sure those internal models include capital cushions against possible losses for sovereign bond holdings, an indication of the tight rein the watchdog will keep on insurer capital.