Legal & General is halving its dividend after diving to a loss of £1.13 billion amid torrid market conditions.

The insurer's move to slash the payment for the first time in its history is a reaction to rising concerns about the solvency of the sector, where share prices have been devastated.

L&G shares slumped again today once analysts came out of a meeting with management, with some arguing they had been misled only weeks ago into thinking the divi was safe.

James Pearce at Cazenove said: “The dividend cut is unwelcome and may affect management credibility... a cut is traumatic even if it is the right thing to do given tumultuous markets.”

The shares, recently as low as 23p, lost 3.7p to 38p in a fresh sell-off. Aviva, which today went ex-dividend, also fell, losing 32.7p to 2331/4p.

L&G chief executive Tim Breedon went to great lengths today to provide all possible details of the company's finances following criticism that he was not offering enough disclosure.

Cutting the final divi from 4.1p to 2.05p saves £110 million, while the portfolio of funds has been stress-tested to assume that 1930s conditions will last for decades. L&G has a surplus of £1.8 billion.

“The market is obsessed with capital,” said Breedon. “Even though our cashflow is strong, in these extraordinary times capital becomes top priority and the dividend moves down a notch.” He said of the payout cut: “It's not a decision we took lightly. We were very attached to our progressive dividend policy.”

Breedon is shifting L&G away from writing costly insurance business, which ties up capital, towards simpler and cheaper asset management products. “Capital is going to be scarcer and more expensive for some time. That will be the biggest impact of the banking crisis,” he said.

L&G cut staff by 10% last year and expects to do the same — about 450 jobs — this year as it looks for ways to reduce costs. The loss of £1.13 billion for 2008 compares with a profit of £718 million a year earlier. Rival Aviva recently also posted a hefty loss, but maintained the dividend, a decision that sparked alarm and led to a 30% share-price slump in one day.

Panmure Gordon, which rates the shares a hold, said it “might have been tempted to turn a buyer, but such a move would be only for the brave”.