Legal & General hit by rising longevity

Legal & General has warned of a challenging year for the insurance and wider financial services industry after annual profits were hit by people living longer than expected.

Tim Breedon, L&G's chief executive, said that to limit the effects of the credit crunch on the wider economy regulators needed to inject liquidity into the financial system and cut interest rates. "2008 looks like a challenging year for the economy, the housing market and the [investment] market," Mr Breedon said. "We don't think the savings market is going to grow. The protection market may fall a touch in 2008 because of lower housing activity."

But he said Legal & General could outperform the rest of the market, helped by distribution deals such as its link-up with Nationwide Building Society. He also flagged strong demand for L&G's bulk annuities business.

The company, the most domestic-focused of the top insurers, reported 2007 operating profit of £912m, down 26 per cent, and lower than an average analysts' forecast of £1.1bn. The figure was reduced by a £269m charge to cover extra payouts it expects to make for people living longer. The "longevity" charge follows similar announcements from Prudential and Aviva.

Mr Breedon said last year longevity was better than expected – people died earlier – butthat the future was uncertain and regulators were urging insurers to make cautious assumptions. "We need to reserve with prudence," he said.

Analysts said that the underlying profits were in line with forecasts, which were widely spread because of different expectations of one-off charges. The shares rose 3 per cent to 122.9p.

There has been an "explosion" in demand for L&G's bulk annuities business, which takes over the pension funds of companies, Mr Breedon said. Contributions to pension funds are rising, and accounting changes mean the funds now directly impact companies' profit and loss accounts. Investors are taking this into account when valuing companies and finance directors want to offload the risk, he said.

Mr Breedon said L&G, which was a big shareholder in Northern Rock, was "concerned" about the handling of events leading up to the bank's nationalisation last month. "It is clear to us that had the situation been handled differently the residual value to Northern Rock shareholders might have been significantly higher than appears likely to be the case now," he said.

The company proposed a final dividend of 4.1p to take the annual payout to 5.97p, a rise of 7.6 per cent.