Jeremy Warner: Legal & General halves dividend for investors

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The Independent Online

Outlook Who would be a non-executive director of a life insurance company right now? Banks look almost transparent by comparison, while even if the chief executive isn't pulling the wool over your eyes, figuring out whether the company is solvent or not is like trying to get your head around the theory of relativity. It all depends crucially on what assumptions you use and the myriad different ways you can value your assets.

Meanwhile, the industry cannot even agree on what accounting standard to use, adding a further, hopeless, level of confusion to the quagmire of reported numbers. It's a black-box industry that even the actuaries struggle to understand.

Legal & General's Tim Breedon has been wrestling with this problem of credibility from the moment the credit crunch first hit, but has so far failed to dispel concerns that life insurance is about to go the same way as the banks. In desperation, he's now trying a novel approach; he's halving the dividend, even though he insists he doesn't have to.

The effect is further to add to what Mr Breedon believes is an already perfectly adequate capital buffer, and in the process hopefully convince investors L&G won't after all need to have a rights issue. It's a funny old world that forces you to cut the dividend to bolster confidence in your company, but that's the way of things now. Will it work? There wasn't much sign of it yesterday, when the shares sunk a further 7.2 per cent. But unless you believe we're heading for economic Armageddon, Mr Breedon perhaps deserves the benefit of the doubt.

We now live in a safety-first environment which rejects the high-risk, high-return aspirations of the past. Mr Breedon therefore thinks it appropriate to wrap himself in an extra layer of fat to see him through the nuclear winter that may be closing in on us. He may not need it, but why take the risk? You won't get any thanks if you do. It's hard to know whether these decisions were all Mr Breedon's, or instructed by the regulator, but whatever the answer, it seems like a reasonable approach in current circumstances.

Life assurers may look fiendishly complicated, but the investment judgement that has to be made is remarkably simple. It all comes down to whether you believe corporate bonds, which provide the backbone of most life funds, are going to the wall in a repeat of the Great Depression or whether you take a more benign view of the future.

All life assurers claim to have stress-tested these portfolios against truly horrendous assumptions on default, and still they declare themselves solvent. But what if the outcome is even worse? If it is, then by the time we get there it is unlikely tapping the markets for more equity will still be an option. Policyholders will have to kiss goodbye to their "reasonable expectations". On the other hand, all it requires is for a little bit of confidence to return, and the outcome will be much more pleasing.

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