Legal & General reassures on capital

Insurer quashes concerns over need for a rights issue

By Sean Farrell,Financial Editor
Wednesday 18 February 2009 01:00

Legal & General reassured nervous investors about its capital position yesterday as the life insurer said its corporate bond holdings could withstand a recession on the scale of the 1930s.

L&G announced it had more than quadrupled its default allowance for corporate bonds to 130 basis points a year for 2009 from its normal 30 basis points. Reserves set aside for such defaults have nearly doubled to £1.2bn. The company made the move because of the expected toll the deepening recession will take on companies’ ability to repay debt.

“The planned additional reserves … follows a thorough sector-by-sector review of our portfolio, and default experiences from the 1930s and subsequent recessions,” L&G said.

Investors had grown increasingly jittery over L&G’s financial strength after it failed to spell out its level of surplus capital when it issued new business figures at the end of last month.

L&G rejected speculation that it might be forced to raise new capital. Tim Breedon, the chief executive, told analysts that a rights issue was not on the cards.

“We have no plans whatsoever at this stage to raise capital,” he said.

Analysts were divided over whether the insurer would have to cut its final dividend to conserve capital. Cazenove analysts said the payout was easily affordable. “L&G clearly does not need to raise capital at this point and we continue to believe that the executive management of the company intend the dividend will be paid,” the analysts said.

The insurer’s shares gained as much as 14 per cent yesterday but closed up 2.3 per cent at 45.3p. The stock lost more than a quarter of their value in five straight days of declines before yesterday’s update and tumbled to a 13-year low on Monday.

The insurer announced that its surplus capital, the buffer beyond the regulatory minimum, had fallen 45 per cent to £1.6bn in the final quarter of 2008 due to falls in equity markets and the shifting of capital to support the corporate bond portfolio.

The company said it had worked closely with the Financial Services Authority in coming up with the new reserves but insisted that its talks with the regulator were not unusual. The watchdog has told life insurers to run stiff tests on their investments’ ability to withstand losses.

Odey Asset Management, a hedge fund, revealed yesterday that it had cashed in on L&G’s woes by taking a 0.35 per cent short position in the company’s shares on Friday. Lansdowne Partners, another hedge fund, said on Monday it had increased its short position to 0.6 per cent from 0.47 per cent on Friday. Short sellers borrow stock and sell it expecting to buy it back more cheaply when the shares fall.

Credit Suisse analysts said: “Over the medium term the appetite for the shares is likely to be limited, particularly from investors outside the UK, and suffer from general investor concerns around its overweight exposure to UK corporate bonds and the UK macro outlook.”

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