Share slide takes heavy toll on L&G

INSURER Legal & General has plunged into the red as a result of falling stock markets and has adopted a controversial accounting practice to shore up its solvency figures.

The group unveiled a pre-tax loss of £131m for the six months to 30 June, compared with a £193m profit previously. The latest figures include a £492m charge to reflect the impact of falling equity prices on its investment returns.

It also said it had allowed for profits it has yet to make when calculating its key solvency figures, a practice questioned by many in the market. This enabled it to quote a healthy free asset ratio of 13.4%, from 12.1% at the end of last year.

But the ratio - which measures a firm's ability to meet liabilities such as payouts on pensions and savings plans - would have been only 10.2% had L&G not brought forward future profits. The comparison was also boosted by the Financial Services Authority's recent decision to relax the equation used to calculate the ratio. L&G did not say what the figure would have been under the FSA's previous, more onerous requirements.

The move will fuel concerns about the lack of transparency in insurers' accounts, particularly when the industry's financial strength is being hit by market volatility.

L&G's operating profits slipped to £365m from £369m previously and the dividend is up 2.5% at 1.67p a share. Underlying new business rose 34%, boosted by sales of its products through its joint venture arrangements with Barclays and Alliance & Leicester.

The pain being inflicted on the insurers by plunging markets prompted L&G to call for an FSA investigation into alleged short selling by hedge funds. Chief executive David Prosser said long-term savers were being disadvantaged by the hedge fund activity, which he said 'incentivised' people to drive down the market.

L&G has already increased penalties for taking money early out of with-profits savings or pension products, with the highest fee now 19%, in response to the stock market volatility. The move was based on L&G's belief that current market movements are outside the boundaries factored in by actuaries when they calculate a fund's likely long-term performance.