L&G’s share price plunged 10 per cent on Monday after newspaper reports claimed the firm might have to make a cash call or cut dividends to plug a gap in its solvency.
The Financial Times reported concern that L&G may struggle to meet solvency requirements if it was forced to stress-test its assets against a further 20 per cent fall in equity and bond markets, as the FSA is believed to have asked insurers to do. This was based on the fact L&G assumed a lower default risk than other insurers such as Prudential and Friends Provident.
But L&G announced this morning that despite increasing its default assumptions for the next four years from 30bps per annum for corporate bonds to around 130bps per annum, at December 31 its surplus capital stood in excess of £1.6bn.
Chief executive Tim Breedon also quashed the possibility of an imminent cash call, claiming during a conference call: “We have no plans whatsoever at this stage to raise capital”.
But a cut to dividends was not ruled out. Breedon said: “The board has not met to discuss the dividend at this stage. We are not making a dividend forecast in any way.”
The stockmarket responded positively to L&G’s boost to capital reserves, with shares up 2.48 per cent to 45.4p by 12.30pm.