Legal & General slashes dividend

Insurer halves final payout to save cash and doubles corporate bond reserves
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The Independent Online

Legal & General bowed to reality yesterday and halved its final dividend to preserve capital strength after losses on investments sent it to a £1.5bn annual loss.

The life insurer slashed the payout to 2.05p a share after doubling the reserves set aside to cover defaults on its holdings of corporate bonds.

The decision to cut the dividend for the first time in living memory "was not a decision taken lightly by the board", Tim Breedon, the chief executive, said. "Despite the strong cash flow and capital strength reported today we still feel the focus should be on the strength of the balance sheet."

He added: "The board has taken the view that the world is a very different place. We considered all options including increasing it."

Legal & General doubled its reserves against corporate bond defaults to £1.2bn, enough to protect it from a 1930s-style slump. It also suffered £1.2bn of investment losses, mainly from equities. The company is reducing its exposure to equities and sold more than £1.1bn of shares in 2008 and so far this year.

L&G's shares dropped 7.4 per cent to 39.7p. The stock, down 48 per cent this year, had been hit by investor fears that insurers would be the next victims of the financial crisis but had rallied in recent days. The dividend cut will save the company £127m. The insurer said its capital surplus was £1.8bn at the end of 2008 after accounting for the dividend.

L&G's shares came under severe pressure after it failed to give a figure for the surplus with its new business figures in late January. The company was forced to rush out a statement in mid-February when it said the surplus would be at least £1.6bn. At the time, Mr Breedon suggested the dividend was safe.

But L&G's rival life insurer Aviva suffered three weeks ago when it froze its full-year dividend, sparking fears that it was being complacent about its capital position.

The slashing of L&G's final dividend meant that the full-year payout fell to 4.06p from 5.97p a year earlier.

Analysts at Panmure Gordon said: "The cut in dividend was expected by some and is probably as a result of the impact on Aviva's share price following its maintenance of its dividend despite capital concerns."

Mr Breedon said the company was now focusing on reducing risk and increasing cash flow to protect its balance sheet. There would be "plenty of cash" to increase the dividend from its new base, he added.

He said the outlook for 2009 was "pretty gloomy" for L&G. The company cut 10 per cent of its UK workforce from about 6,500 last year and will make a similar reduction this year to bring down costs, he said.

L&G gave extra details on its portfolio of collateralised debt obligations. Mr Breedon said 40 per cent of the underlying bonds would have to default before L&G took a hit.

Mr Breedon criticised the "quantitative easing" measures adopted by the Bank of England, saying that the Bank's focus on buying gilts was a mistake and led to pension deficits. The Bank should instead buy more corporate bonds, he said.