In an investors’ note that was issued on Tuesday, JP Morgan says that Legal & General still assumes only 30 basis points for defaults while insurance competitors such as Prudential assume three times as much.
The company considers that Legal & General would need £864m to bring its reserves into line – £210m more than the firm’s 2007 operating profit.
The note states: “The FSA could still challenge Legal & General’s assumptions for the following reasons – they are unchanged since 1999 despite increasing credit risk in 2007 and the first half of 2008, market conditions are clearly worse and 21 per cent of bonds are asset-backed securities and a further 37 per cent is international financial debt.”
JP Morgan also issued an underweight rating on Legal & General last Friday, accusing the company of “destroying shareholder value by expanding the annuity business in a very benign credit environment”.
Hargreaves Lansdown pensions analyst Nigel Callaghan says: “If it has to up its default assumption rates it would have a serious impact on its profits and its pricing in future.”
Legal & General spokesman Richard King says: “We see annuity business as profitable and we are not running out of capacity. We decide capacity on a risk basis and we are happy with our para- meters.”