Legal & General Group PLC (LON:LGEN) is facing substantial bond market losses and should not be paying a dividend because of coronavirus uncertainty, the UK Shareholders Association (UKSA) has warned.
The shareholder group's policy director, Dean Buckner, formerly an insurance data specialist at the Financial Conduct Authority and Bank of England, estimated that the FTSE 100 life insurer was as of 4 May sitting on £10bn of paper losses because of the slide in bond prices since due to the Covid-19 pandemic.
READ: Global dividends forecast to fall at least 15% in 2020
L&G, which had just under £70bn of bonds on its balance sheet at the end of 2019, confirmed in April that it was still intending on paying its previously recommended final dividend of 12.64p, a payment worth £754mln next month.
The estimate, first published in The Times newspaper, of mark-to-market losses was based on the default sensitivities stated in L&G’s 2019 annual report and the current level of corporate bond spreads
UKSA noted that as bond spreads vary a lot between sector, only the company knows the precise number, with the falls in bond prices due to illiquidity and potential defaults in the coming recession.
An L&G spokesman said: “We simply do not recognise these numbers. Our decision to pay our recommended dividend is considered, prudent and affordable. It is the right thing to do for our thousands of personal shareholders, for the pension system and the economy.”
L&G shares have fallen 40% since mid-February, similar to Aviva PLC (LON:AV.), but on Monday afternoon were up 3% to 188.9p.
Insurance analysts have expressed caution about life insurers since the pandemic hit financial markets, with those at JPMorgan Cazenove recently keeping a 'neutral' rating on the sub-sector, while Goldman Sachs earlier warned that the sector faces growing risks the longer that interest rates remain near zero, credit spreads remain wide and equity markets remain depressed.
“The longer that capital markets remain dislocated, the greater the risks for the sector,” the Goldman analysts said, noting that the low interest rates and tight credit spreads that have driven insurers to “search for yield” has herded them into lower-quality investment grade corporate credit.