L&M plays to its strengths

The Investment Column
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The Independent Online
The insurance industry has been up against it recently, so it was no surprise that London & Manchester's superficially impressive 5.3 per cent increase in distributable profits from pounds 33.6m to pounds 35.7m, relied heavily on investment income and other non-trading factors.

The underlying picture, showing a drop in new life annual premium income of 37 per cent, and a slide in single premiums of 57 per cent is more meaningful, if worrying.

The outlook is pretty gloomy on the pensions side, too - new single premium business reduced by 25 per cent to pounds 32.7m even if existing savers are putting more into their plans than before.

Despite the gloomy numbers for new premium income, L&M remains fairly optimistic. The company has slashed its fixed operating costs by 24 per cent, part of a reorganisation that has seen it lose a fifth of head office staff in the past year and the fall in income, which has continued in the first months of this year, will be righted, the company claims, once its 700-strong sales team is reshaped into 18 new business centres.

L&M has signalled its intention to stick to its core business areas, and last year sold its residential mortgage company, netting a pounds 7.3m profit into the bargain. The previous year, the company disposed of its consumer finance and commercial property services operations.

True, its loss-making estate agency chain - which dropped another pounds 2.6m last year - will not go.

But if predictions of a recovery in the housing market prove to be correct, this may turn out to be a wise move. In any event, the company's 78 branches contributed 13 per cent of its premium income so it can justify its existence through cross-selling alone.

By playing to its strengths in its bottom-end socio-economic niche, L&M claims not only to be a viable player but even to be on the look-out for potential acquisition targets with a distribution strategy similar to its own.

With a market capitalisation of only pounds 500m, that may be wishful thinking but the shares could be buoyed by the prospect of corporate activity the other way round. Even if takeover speculation proves unfounded, a dividend of 18.7p, up 9 per cent, means L&M is yielding a reasonably attractive 5.6 per cent. That will underpin the shares.