Legal & General has set aside £269 million to cover the cost of its commitments to pay an income for life to thousands of holders of its annuities, who are living longer.

As a result, L&G's profit for last year came in £321 million lower at £912 million by the measure of European embedded value, accounting for one-off factors that boosted its outcome for 2006.

But yesterday's more resilient stock market accepted chief executive Tim Breedon's description of the results as "robust". The shares finished 2.75p ahead at 121.75p, where they yield 4.9 per cent after a 4.1p final dividend gave shareholders a 7.6 per cent increase for the year.

L&G said the pay-out was under-pinned by strong cash flow and future prospects. Unlike many other companies it is continuing a £1 billion share-buy-back programme, on which it had spent £516 million by the end of February.

"The strength of our balance sheet is unimpaired by the credit crunch," Mr Breedon said. "We have no material exposure to credit-impaired securities and our AA+/Aa1 financial strength ratings are unchanged.

He added that L&G's "distinguishing characteristics of capital strength, breadth and diversity of product and distribution position us well to deliver long-term growth and shareholder value in 2008".

L&G is one of the Britain's leading providers of annuities, writing £1.1 billion of new single-premium contracts last year.

"This positions us well in a business which has the potential to grow exponentially and where we intend to continue as a key player," Mr Breedon said.

Of the extra provision last year he added: "We have always expected them to live longer, but it is the rate of improvement which we are changing."

L&G's general insurance operation was also hit by £84 million of exceptional weather-related losses from last year's storms and floods. A sharp drop in margins on unit-linked investment bonds offset more resilient protection business in 2007, but Mr Breedon said margins on bulk annuity market - taking on the liabilities of company pension funds - are not expected to drop from their present levels. Overall annuity margins fell to 9.1 per cent to 2007 from 10.7 per cent the year before.

"We fully expect the first two quarters of 2008 to continue at the higher levels that we saw in the fourth quarter of 2007," Mr Breedon said of the bulk annuities.

"This is a market that has the potential to double, double and double again."

He confirmed that L&G could consider bolt-on deals to boost its savings operations, after minor acquisitions made as part of its joint venture with Nationwide last year.