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."
Diving in at the deep end is no excuse for shirking the style stakes
- 1 Why I'm on the brink of burning my Israeli passport
- 2 War is war: Why I stand with Israel
- 3 L'Oreal cuts ties with Belgium supporter Axelle Despiegelaere after hunting trip photographs
- 4 World Cup 2014: Robin van Persie appears to give his bronze medal to eccentric Netherlands fan moments after being handed it by Sepp Blatter
- 5 Iraq crisis: How Saudi Arabia helped Isis take over the north of the country
Ian Thorpe gay: Olympic swimmer comes out in Parkinson interview
Death in the Valley of the Dolls: Heroin overdose turns the spotlight on prostitution boom in California's tech industry
Supermoon 2014: When and why will the moon look bigger and brighter this summer?
Woman, 61, jailed for seven years after drink-drive death of cyclist
Gaza-Israel conflict: Pro-Palestinian demonstrators take to streets of London, Paris and New York in wave of protests
Sustained immigration has not harmed Britons' employment, say government advisers
War is war: Why I stand with Israel
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Australia facing international condemnation after turning around Sri Lankans at sea
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
iJobs Money & Business
£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...
£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...
£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...
£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...