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Morgan critical of L&G reserves for defaults

JP Morgan claims that Legal & General is the UK insurer most likely to issue a profit warning and suggests it could be breaching FSA guidance by not increasing capital reserves despite poor market conditions.

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.”

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