Downturn worse than Great Depression

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Insurance giant Legal & General has warned the UK has yet to feel the full brunt of the credit crunch, with the downturn likely to be worse than the Great Depression. 

The one-time star of the insurance world has reported a pre-tax loss of £1.1 billion in 2008, mainly as a result to the sharp fall in the value of its investments. Last year L&G reported a profit of £758 million.

However, Legal & General says it is in a strong position to weather the storm, with enough capital provisioning to "cover the worst default levels since the Great Depression".

Insurers have escaped the sort of scrutiny endured by banks during the recent downturn, partly because of measures taken during the last spell of stockmarket turbulence in the early part of the decade when the solvency of many came under severe pressure.

However, L&G’s figures are set to serve as a wakeup call that will put the sector firmly back into the spotlight amid concerns over the effect of the downturn on balance sheets.

Tim Breedon, chief executive of Legal & General, said: "We believe we have a fundamentally sound strategy, a strong track record, and a good opportunity to generate additional value for shareholders by taking the right decisions around risk mitigation and business development during 2009."

He added that the company’s balance sheet “remains our priority in 2009".

The insurer is now likely to become more selective about the customers it deals with, and products could soon become more expensive. It is expected to look to reduce the pressure of high levels of sales, and the impact of this on its capital reserves, by hiking prices and limiting the number of new customers.

Its sales have already shrunk from £9.8 billion in 2007 to £9.4 billion last year.