CGNU shares slide as dividend is slashed 40%

CGNU, the UK's largest insurer, yesterday announced plans to slash its dividend by 40 per cent to boost capital reserves necessary for expansion. The news shocked the City, sending its shares down 10 per cent to 717p.

The company, which was formed last May from a merger of CGU and Norwich Union, also revealed that it is changing its name to Aviva – the Hebrew word for spring, which it hopes will evoke "life, health and vitality". CGNU said it expected the name change to cost "hundred of thousands rather than millions".

Aviva will become the name of the holding company and also replace many of the 50 brands CGNU trades under in different countries if shareholders back the change at the annual meeting in May. The Norwich Union brand will be kept in the UK.

Richard Harvey, CGNU's chief executive, outlined a new strategy on dividend payments as he unveiled a 41 per cent rise in operating profit to £2bn for the 12 months to 31 December.

He said the company would return 38p a share in 2001 but for 2002 would slice the dividend to 23p. CGNU hopes to increase the payment by 5 per cent a year from the new, lower, level.

Mr Harvey admitted that shareholders would feel "disappointed about their income". He added: "We cannot continue to pay out almost our entire earnings. It was OK when we were predominantly a general insurer, but growing the life company is capital intensive and we believe it is very much in shareholders' interests."

Prior to the merger, CGNU's various constituents paid high dividends compared with the insurance sector and the FTSE 100 in general. The new policy will save the company £350m in 2002 and reduce its dividend payment from 8 per cent of shareholders' equity to a more normal level among insurers of 5 per cent.

The move prompted fears in the City about CGNU's capital position. Its surplus capital – funds used by insurers as a valuable cushion and to fund expansion – has fallen dramatically in the past few years. Surplus capital now stands at £2bn, down from £2.8bn in 2000 and £5.2bn in 1999.

Gordon Aitken, an analyst at Credit Suisse First Boston, said: "The capital is needed to fund growth and CGNU has grown very fast – so it is a nice problem to have."

CGNU is facing particular problems because of its rapid growth record in the past year and has seen compound growth of 24 per cent since 1999. Almost all major insurers have seen their capital deteriorate due to the fall in the stock market, leading to Royal & SunAlliance among others to announce dramatic dividend cuts.