L&G climbs on talks of surplus

Shares in Legal and General leapt 18p to 477p yesterday after the insurer said it was in talks with the Department of Trade and Industry over a surplus in its long-term life insurance fund.

The announcement excited the market, because it follows a similar decision by the much smaller United Friendly insurance company to allocate £275m of its investment funds to shareholders after talks with the DTI.

But L&G, which estimates the surplus in its life fund at more than £2bn, insisted there would be no bonanza for shareholders. Tony Hobson, finance director, said: "We just want to explore the possibility of transferring funds on a more rational basis. We feel at the moment that the return we can give to shareholders is too closely linked to the bonuses we pay out to our with-profit policyholders and we would like more flexibility."

David Prosser, chief executive, said: "We're not talking about a bonanza for shareholders. We are not going to undermine the financial strength of the long-term fund." But he added that a change in the basis on which the funds are allocated between policyholders and shareholders would help to support a progressive dividend policy. Such surpluses build up in insurance company funds because of a conservative policy towards the distribution of bonuses to policyholders.

The company announced the move yesterday as it reported strong financial results for last year. Pre-tax profits fell £13m to £164.9m because L&G accounts for unrealised investment losses through the profit and loss account rather than through reserves like most other insurers. These were high last year because of the fall in bond and equity markets around the world. But at the operating level, profits rose from £145.5m to £216.6m. The dividend rises 8 per cent to 21.7p.

Mr Prosser said that although the insurance underwriting cycle was now on the way down again, there were other positive factors that would propel the company forward. He said that L&G had succesfully adapted its structures to the new regulatory regime. The company made a provision in its reserves for pensions mis-selling compensation, but would not say how much. However, Mr Prosser said he expected it to be in line with the company's share of the market, which would suggest a provision of about £100m.