The Exeter-based company said tough new rules on how it is allowed to sell pensions and insurance polices, together with a "feel-bad factor" were also responsible for the decline.
The result was a drop in new annual premiums from pounds 17.3m in the first half of 1994 to pounds 12.5m in the first six months of this year. The decline was worse for new single premiums, down 39 per cent from pounds 73.8m to pounds 44.7m in the same period.
Martin Jackson, the group finance director at London and Manchester, said: "I can't put my hand on my heart and say that the money has gone to the National Lottery rather than to London and Manchester.
"But we have got an awful lot of small-premium business. There is only so much disposable income to go round. It must be a factor for some of our industrial branch business."
The productivity of London and Manchester's 700-strong salesforce was badly dented by a new product disclosure regime since January. Staff are taking longer to explain products to prospective clients.
Some clients have been put off by the delays and refuse to buy policies.
Fear of unemployment also reduced people's willingness to start long- term savings schemes.
The continuing crisis in the housing market affected the company's estate agency chain, forcing a reduction in the number of branches from 85 to 78. But Mr Jackson added that the chain had grabbed a larger proportion of overall sales.
London and Manchester has also boosted annual premiums from its corporate pensions and private health insurance by 9 per cent to pounds 4.1m, partly through increased recruitment by firms with group policies.
David Hubbard, chairman, said: "The longer-term outlook must be positive, with the need for the private sector to complement the benefits of an over-burdened welfare state.
"In the immediate future, we expect little, if any, change in the difficult environment in which the life assurance industry finds itself today. It is unlikely that volumes of new business will be written at the levels of past years."
Dividends rose to 6.08p per share, which remained unchanged at 355p.