Pensions: How safe is... Legal & General

By THIS IS MONEY
Updated: 05:26 EST, 29 October 2008

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Fitch rating for L&G: AA (overview: Oct 22 – stable)

L&G share price over one year: down 45.31%

CDS rate for L&G: 220 (Oct 22)

Stock market falls have battered Legal & General's share price of late. Its results for the July to September period show a decline in its Insurance Group surplus, a treasure-chest used to buffer any volatile in its equity investments. It now stands at £2.9bn, down from £3.4bn at the end of June.

The company is making a success of its Self-invested personal pensions business: these accounted for more than half of its UK pension sales. However some onlookers worry that its equity portfolios drop in value is a forerunner to a rise in defaults among its corporate bonds.

The problem with many insurers is that they invest heavily in the international corporate bonds market to finance their businesses. If these bonds fail to pay returns, they have a funding shortfall.

Also, as the industry is not transparent, it is almost impossible to tell who owns what, so it is difficult to quantify a company's exposure to risky assets - unlike shares and government bonds. This makes insurance companies more vulnerable to rumours and panic in the markets.

Fitch's downgrade of the insurance industry (mentioned on the main insurance page) is difficult to turn a blind eye to when taking this into consideration.

It cannot be ignored however that L&G is still regarded as highly capitalised relative to the market – it has more capital in reserve than any other life company – so there is little need to worry about it more than any of the other major players.

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