AV disclosed in their recent Q1 results that they have strengthened their IGD solvency position, boosting the measure from £2.0 bln (31 Dec 08) to £2.5 bln (31 Mar 09).  They have achieved this primarily in two ways. Firstly by increasing their hedges on their equity exposure such that a 40% fall in markets will only reduce their IGD solvency by £200 mln (as opposed to £800 mln at 31 Dec 2008) but still leaving themselves able to profit from a rally such that a 40% rise in equity markets will boost their solvency by £800 mln (it feels like they have bought put options in order to achieve this asymmetric pay-off profile).  Secondly AV have announced that 35% of shareholders have taken up the scrip dividend offered in conjunction with Aviva’s 19.91 pence final dividend for 2008.  In this way AV effectively retain an extra £200 mln of earnings that would otherwise be paid out as a cash dividend.  Aviva are so pleased with this take-up that they plan to offer a scrip dividend alternative for the 2009 payout as well.  In reality the recent scrip dividend is the equivalent of a 2.5% stock placing for cash, and as such it is mildly dilutive to earnings per share. Issuing scrip dividends also increases the cash cost of paying an unchanged dividend in future years.

However, the bottom line to all this is that Aviva’s 33 pence annual dividend has just become even safer and the likelihood of a rights issue recedes even further into the distance, and the risk of the NAV being undermined by a dilutive rights issue recedes along with it.