Legal & General shares plummet as price war erodes profit margins
Friday 26 February 1999
L&G's share price fell 109.5p to 798p as the market learned of a sharp fall in profit margins during 1998 due to its strategy of slashing customer charges.
David Prosser, the chief executive, has made swinging cuts to charges on pensions and Personal Equity Plan in the past two years, offering PEPs tracking the FTSE 100 index for as little as 0.5 per cent a year - half the usual amount.
The cuts have led to a boom in new business for L&G. Last month, shares rose to a new peak of more than 900p as it reported a 21 per cent jump in new business during 1998. But the market failed to anticipate a fall in profit margins, which shrank from 15 per cent to 11 per cent because of the lower charges.
Confidence was further eroded yesterday by a series of heavy one-off costs revealed in its full-year results. They included a big investment in new computer systems and higher provisions for the future owing to lower interest rates. The company is also facing a pension mis-selling bill approaching pounds 1bn.
In spite of a 13 per cent rise in profits to pounds 369m, the one-off costs prompted some analysts to downgrade their recommendations. James Pearce, of Fox-Pitt Kelton, the financial adviser, said the stock was overvalued even after a 10 per cent fall.
Mr Prosser said the results should be seen as part of a long-term strategy. L&G was positioning itself as a volume provider, allowing it to take advantage of government demands for cheaper financial services.
"The margins are down but we have always said that it was our strategy to offer a good deal to the customer. And one has to accept that means one has to operate on lower margins to get the better volumes."
L&G has spent the last three years ditching its image as a lumbering insurance giant, instead aiming to be cheaper than its life insurance rivals. The company has already launched two pension schemes that fit the Government's blueprint for "stakeholder pensions" - low-cost pensions aimed at workers with no retirement savings.
It will also offer low-cost Individual Savings Accounts, the tax-efficient savings vehicle that will replace PEPs and Tessas.
While observers were taken aback by the figures, most endorsed Mr Prosser's low-cost strategy.
One analyst said: "They are positioning themselves very effectively for future trends. It is difficult in the short term and it will take time. But, in a few years, they will be one of the few with the attributes for success."
- 1 Autistic teenager beaten up by bullies makes them watch 20-minute video about autism
- 2 Nick Kyrgios calls former Olympian Dawn Fraser a 'blatant racist' after she tells Wimbledon star to 'go back where their parents came from'
- 3 Chris Moyles reportedly set to make radio comeback with new breakfast show on XFM
- 4 The Greece debt crisis explained in less than 100 words
- 5 Cristiano Ronaldo storms out of interview after being asked about possible sale of Manchester United target Sergio Ramos
Florida man sentenced to two-and-a-half years for having sex on the beach in front of a child
Autistic teenager beaten up by bullies makes them watch 20-minute video about autism
Eiji Tsuburaya: Godzilla co-creator honoured in today's interactive Google Doodle
Bakery sends 'horrific' version of Frozen-themed birthday cake to unsuspecting customer
Florida teacher sentenced to 22 years in prison for sexually abusing three pupils
More Britons believe that multiculturalism makes the country worse - not better, says poll
Osborne to cap family benefits at £23,000 – announced ahead of his post-election Budget
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
Sickness and disability benefits could be reduced by £30 a week as part of £12bn welfare cuts
iJobs Money & Business
£40000 - £95000 per annum: Recruitment Genius: This is an exciting opportunity...
competitive: SThree: Are you passionate about sales?Do you have a keen interes...
£17000 - £30000 per annum: Recruitment Genius: This is an exciting opportunity...
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...