Market Report: Insurers in spotlight after talk of consolidation

The takeover spotlight was shone on the insurance sector yesterday with a review from Merrill Lynch bringing a spot of excitement to an otherwise dull market.

Merrill's note pointed out that the UK life and pensions market has provided some of the most impressive new business statistics in Europe over the previous two years. On average, UK companies increased new business volumes by 30 per cent in 2006. Interesting to note were comments that the insurance sector was "ripe for consolidation" as companies are struggling to grow in an overly competitive market while impending regulatory changes will reward the large and diversified. Standard Life, which has been the best-performing life insurance stock this year, added 2p to 340p; Old Mutual, the third biggest insurer, remained flat at 175.3p, following earlier gains; while the mid-cap stock St James's Place jumped 20.75p to 457.25p. The stocks were upgraded to "buy" from "neutral" with price targets of 390p, 210p and 516p, respectively.

United Utilities shot to the top of the blue-chip leader board with a gain of 23.5p to 796p following the announcement of the sale of its electricity distribution assets. Analysts said this would put the utility into play as a potential bid target like the rest of the sector. United also reported better-than-expected full-year results with a 16 per cent rise in underlying pre-tax profits. Severn Trent added 7p to 1563p.

Heading the other way, Imperial Tobacco ran out of puff on persistent speculation it is to improve its bid for the Franco-Spanish company Altadis from €47 a share to €52 a share. This would value the maker of Gauloises and Gitanes cigarettes at more than £9bn and would trump a €50-per-share bid tabled by CVC Capital. Imperial dropped 44p to 2186p. British American Tobacco was also out of favour, 31p worse off at 1687p.

The airlines also failed to take off. British Airways slipped 8.5p to 456p after reporting falling passenger traffic for May, partly due to the weak US dollar. It added that its premium traffic is not likely to show any growth in the near term. Mid-cap stocks easyJet and Ryanair flew lower after Ryanair warned of lower growth. EasyJet dipped 38p to 525p, while Ryanair was down €0.4 at €5.

Despite gains earlier in the day as fears over Chinese markets eased, the FTSE 100 index closed 31.3 points down at 6,632.8. Traders cited jitters ahead of interest-rate verdicts from the European Central Bank, which is expected to raise rates to 4 per cent today, and the Bank of England later.

Intermediate Capital was the worst performer in the FTSE 250 after warning that it expected prices and structures "to get worse before they get better" and said net income interest may fall. Merrill Lynch repeated its neutral stance while Daniel Stewart cut its target price to 1,850 from 2,000, and shares plunged 9 per cent, off 162p to 1738p.

The speciality plastics company Victrex was another mid-cap faller after it warned of a softening in semiconductor demand and said it would continue to suffer from the strength of the pound. Despite posting an 18 per cent rise in first-half profits, shares in the company, which makes polymers used in everything from car engines to microchips, fell 48p to 762p.

Bid talk surrounding the engineering group FKI sent its shares higher, up 2p to 40p. This time the rumour doing the rounds is that General Electric is considering a 170p-a-share bid. Some traders pointed out that GE does not need such a deal, but it didn't stop the share price jumping.

Among the minnows, the drug developer Phytopharm has unveiled positive pre-clinical data that gives hope to sufferers of Parkinson's disease. The data showed that Phytopharm's product Cogane reverses the changes in the brain involved in the disease. Although the trials are at an early stage, the hope is that Cogane will be able to restore normal control of movement for Parkinson's sufferers. Shares in the company added 2.5p to 56.75p.

Toledo Mining Corporation jumped 86.5p to 432.5p after it was awarded a key mining contract in the Philippines. The Australian company Investica, which has an 11 per cent stake in Toledo, gained 38.5p to 312.5p on the back of the news.

Finally, Feedback dropped half a penny to 4.25p after it entered into a company voluntary arrangement (CVA) to repay £8m of director's loan and pension debts. The maker of computer-based equipment said it would face insolvency if the CVA is not approved.