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Legal & General shares plummet as price war erodes profit margins

SHARES IN Legal & General plummeted 10 per cent yesterday as the market absorbed the full impact of its aggressive stance in the price war for savings and pensions.

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."