L&G loses more than £1bn

Legal & General confirmed a cut in its dividend after announcing an operating loss of £189m and after tax loss of more than £1bn under traditional financial reporting rules.

Under the new insurance financial reporting rules (EEV) it made an operating profit of £870m but an even bigger loss after tax.

Financial highlights (2007 in brackets)

• IFRS operating loss £189m (profit £658)
• IFRS loss ordinary activities after tax £1,130m (profit £718)
• IFRS shareholders' equity per share 61.2p (86.5p)
• Recommending reduced final dividend of 2.05p per share (4.10p)
• Recommended full year dividend 4.06p (5.97p)
• Full year recommended dividend cost £239m (£369m)
• EEV operating profit £870m (£848m)
• EEV loss from ordinary activities after tax £973 (profit £1,153m)
• EEV shareholders' equity per share 111.2p (129.1p)
• IGD surplus £1.9bn at 31 December 2008 before payment of final dividend (£1.8bn after final dividend of £120m)
• IGD capital resources of £4.4bn after dividend. Coverage ratio of 169% of required capital
• Estimated IGD surplus £1.5bn (after final dividend) at 23 March 2009

Group chief executive, Tim Breedon, said: “Today's dividend recommendation balances our strong operational cash generation and the need to promote balance sheet resilience. We took action in 2008 to improve business cashflow and strengthen capital by substantially increasing our credit default reserves, reducing our equity exposure, and managing our cost base. Our £1.8bn IGD surplus after dividend is strong and resilient to further stress scenarios.

“Balance sheet strength remains our priority in 2009 and will be underpinned by further improvement in the cash profile of our businesses and management of costs. We will be selective about sales growth and are reducing new business capital strain through product design and pricing action. Today's dividend decision reflects our realism about the current environment, but also our confidence in the business model and underlying strength of the Company to trade through current economic uncertainty and emerge stronger after the recession.”

The company said: “The IFRS operating result was a loss before tax of £189m (2007: profit £658m) which reflected the £650m cost of provision for increased short term non profit annuity credit default assumptions as announced in February. Total UK non profit annuity credit default reserves now stand at £1.2bn. IFRS result before tax was negative £1,491m (2007: profit £883m).

The EEV operating profit of £870m (2007: £848m) was reduced by £137m for in-force assumption changes and variances (2007: reduced by £162m). The EEV loss before tax of £1,381m (2007: profit £1,171m) included the impact of provisions for increased short term credit default reserving. In 2008, on a best estimate basis, Legal & General Pensions Limited has reserved an additional £313m (before discounting) to allow for increased short term credit default reserves over a four year period. Economic assumption changes include £272m to reflect the present value and cost of capital of the in-force element of the additional reserve.