There is nothing like a bit of scaremongering to put the skids under nervous investors and yesterday it was the turn of the insurers to stir things up.
The catalyst for another bad day in the London share market was a letter from the Association of British Insurers, the industry body, to Alistair Darling in which it gave notice that its members may need to ask investors for £50 billion to cover new European capital requirements.
The prospect of a large recapitalisation is pinned on concerns about the proposed Solvency II rules, which come into force in 2012 and essentially would require insurers to hold more capital. Companies such as Legal & General, which have big pension annuities books, could be hit hard as the rules would force them to hold less risky, low-yielding assets that may not match their obligation to pay out to annuity holders over time.
However, Blair Stewart, an analyst with Merrill Lynch, dismissed the warning as lobbying, noting that such a large recapitalisation would be roughly equivalent to the entire market cap of the quoted UK insurance sector. He said most people in the City thought that there would be significant changes to the proposed rules to make them more palatable to the industry. By Mr Stewart’s reckoning, the companies most affected in Britain would be: L&G, which has a £20 billion annuity book and could face costs of £1.1 billion; Aviva, which has an £18 billion book and may need to find £1 billion; and Prudential, which has £13 billion of annuities and is on course for costs of about £700 million.
Such fears, combined with news that Odey Asset Management, the hedge fund, had increased its short position in the stock, made L&G the biggest blue-chip faller, closing 6½p, or 8 per cent, down at 68p. Aviva fell 15p to 390¼p and Prudential slipped 11p to 514½p.
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The FTSE 100 dropped 2.15 points to 4,817.55, further fuelling concerns of a stock market correction after its recent good run.
Lloyds Banking Group fell 6.6p to 99.41p after reports that it had won backing from shareholders to raise £10 billion in a rights issue to reduce its participation in the Government’s asset protection scheme. Royal Bank of Scotland fell 2.2p to 53.3p and Barclays eased 11p to 359p.
The mining sector also lost ground, with Rio Tinto falling 19p to £23.12 and BHP Billiton closing 28p lower at £15.57½ after spot iron ore vessel bookings to China in August by Australia and Brazil, the two largest exporters, fell to a nine-month low.
It was a better day for BP, which was the session’s top gainer, ending 22p up at 541½p, after the oil group said that it had made a significant find in the Gulf of Mexico.
Randgold Resources rose 131p to £36.89 after the price of gold hit a three-month high as investors switched out of stocks.
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Retailers also made ground after an upbeat research note from Bank of America-Merrill Lynch. The broker said that Marks & Spencer, up 1½p at 339½p, was its top clothing pick.
? New York: Blue chips on Wall Street were weaker as investors wrestled with the latest data which showed that losses in the private sector labour market had moderated only slightly in August. The Dow Jones industrial average closed 29.93 points lower at 9,280.67.