UK insurers predicted to maintain market-leading dividends

By Ralph Savage

The UK’s leading insurers can maintain their market-leading dividend payments to shareholders despite tough conditions, analysts at Markit said today.

However, in a separate note, Investec maintained its ‘sell’ advice on one of those FTSE 100 companies, Admiral, whom it said would suffer from reduced ancillary income after April 2013 amidst continually rising claims costs.

Markit, which provides dividend forecasting analysis, said the high yields currently on offer in the insurance sector show there are concerns about the sustainability of dividend payouts from these companies. It expects the major players to continue paying at existing levels, but anticipates limited growth in the coming years.

“Yields on equities are of great interest to investors at present. However, high yields must be treated with caution as they can indicate that a dividend is expected to be cut,” the company said in a statement today. “UK insurers currently offer some of the highest yields in the FTSE 100. Despite the tough macro-environment and uncertainty around capital requirements regulation Markit believes the payouts can be maintained.”

The report examines the outlook for dividends from the big payers in the UK Insurance sector in light of challenges such as low interest rates and Solvency 2 regulations.

As referred to earlier, one of the biggest challenges for Admiral, and indeed Aviva, RSA and other players in the UK motor market, will be the banning of referral fees and charges connected to credit hire in the motor claims process. Investec said in its statement today: “We do not buy the idea that a ban on legal referral fees will lower claims costs. Claims costs move upwards continually, it is an immutable law of insurance. Two specific things will hurt insurers from 2013. First the 11th edition of the Guidelines for the Assessment of General Damages published at the end of 2012 recommends Courts to increase damage awards by 9% and the Simmons v Castle ruling will impose a further 10% increase on general damage claims. A 19% rise in all general damage claims this year will occur. Claims volumes would need to collapse to see insurers benefit from legal referral fees exiting the market. We also suspect these may remain in another guise.”

Commentary:

While true in the majority of cases, the Investec note failed to recognise continued pressure on case management fees with charges for claims passed through the fixed cost RTA claims portal system likely to be capped at around £600 from current levels of £1200+. Admittedly there have been delays and challenges to this by the legal profession and the degree of pessimism over insurers’ ability to keep claims costs under control is understandable. However might Investec’s tone change if those measures were implemented? In addition, were the above to happen alongside proposals that cases valued at up to £5 000 should be heard at the small claims court, motor insurers’ handle on claims could be significantly improved.