Bottom Line: A good purchase for Sedgwick

TSB Group was patting itself on the back yesterday after selling Noble Lowndes for pounds 110m, a price equal to 19 times the last set of earnings from the pensions consultancy. This looks fine and dandy until one notices that Noble Lowndes suffered a 50 per cent tax charge last year, which is surely a bit hefty for a firm in the business of financial advice.

A closer inspection reveals the reason: Noble Lowndes suffered unrelieved losses of pounds 3.1m in the US last year. During the TSB years, the firm bought up several small US benefit consultancies, and failed to integrate them until the original vendors had retired and business had gone elsewhere. So much for the latest TSB success story.

If one adds back the pounds 3.1m to Noble Lowndes' pre-tax profit of pounds 11.5m and recognises that the figures are now nine months out of date, the price paid by Sedgwick starts to look a lot more reasonable.

The deal means Sedgwick will derive about 20 per cent of its profits from consultancy, a more stable source of earnings than insurance broking. The suggestion from one analyst that Sedgwick was 'trying to do a Marsh & McLennan but 20 years too late' looks too harsh a verdict.

The long-term prospects for insurance broking are less rosy now than when Sedgwick's American rival started to build up its consultancy business. But Sedgwick retains a strong position in the tougher market.

The outlook for pensions consultancy is good. Ageing populations and the need for state pension reform could offer Noble Lowndes substantial opportunities. In the UK, the Goode committee's review of pensions legislation is likely to create further work. Employers also need to clarify the import of the Barber and Coloroll pensions judgments.

In the first six months of the year, Sedgwick increased its brokerage income by 4 per cent to pounds 352.4m, a 2 per cent rise excluding acquisitions. Expenses increased by 5 per cent.

Next year could be a good year for Sedgwick. If Lloyd's is successful with its corporate capital initiative, the group may benefit next year from the easing of corporate capital constraints. And once again there are hopes that the US rating increases may be on the way.