Market Report: Insurance issues surge on bail-out hopes

Old mutual led insurance issues higher last night as the London market strengthened on speculation that American lawmakers were close to an agreement on the government's $700bn (£380bn) bail-out plan.

A dose of bid talk, positive comments on outlook from the boss of Germany's Axa and a supportive note from JP Morgan had kept the sector firm all afternoon. Late rumours from America that bipartisan agreement on the bail-out plan was in sight provided the final push, and at close Old Mutual was up 12.56 per cent or 9.8p at 87.8p, while RSA Insurance, cast as a possible target for Axa or Italy's Generali, advanced to 159.4p, up 11.08 per cent or 15.9p at 159.4p.

Aviva was up 9.92 per cent or 48.75p at 540p and Legal & General rose to 109.8p, up 9.8 per cent or 9.8p.

JP Morgan said that better risk management, positive underwriting and a lower exposure to equities means that the sector is currently stronger than it was in 2001-02. The broker also noted that while liquidity may be a potential area of concern, insurers were "naturally cash rich" and better positioned than their peers in the banking sector.

Overall, the rumours about the American bailout powered Wall Street, which in turn helped the FTSE 100 gain 101.45 points to 5197.02. The FTSE 250 was also firm, gaining 27.29 points to 8434.65.

Tim Hughes, head of sales trading at IG Index, said that a deal on Capitol Hill should act as a "springboard for a sustained push higher". "The stress on the markets means that, should any positive final decision emerge from the US, it will surely provide a swing in sentiment," he added.

The banking sector rebounded in with the wider market. Barclays was the strongest, up 7.09 per cent or 24.5p at 370p, while HBOS gained 1.94per cent or 3.5p to 184p. The shift in sentiment also aided Lloyds TSB, which slipped to 251.75p, down 15.25p, in the early part of the session but recovered to 273.25p, up 6.25p, despite negative comments from Credit Suisse, which reiterated its "underperform" rating for the stock, noting that, after acquiring HBOS, the group may face a capital deficit of around £10bn.

Deutsche Bank also weighed in, advising investors to avoid the stock, noting that while the acquisition may deliver significant benefits in terms of synergies, it will "not reduce the quantum of wholesale funding required". "In the short term we expect risks over higher loan losses and a recapitalisation of the balance sheet by equity issue or asset sale will outweigh the very significant benefits of the HBOS acquisition," the broker said, reiterating its "sell" advice.

Bradford & Bingley, which said it had sold a chunk of toxic assets to relieve its balance sheet, had no such luck. The mid-cap lender was down 15 per cent or 3.75p at 21.25p after Deutsche said that, even without further ABS [asset-backed securities] related write downs, it expects B&B to be loss-making in 2008 and 2009 on a stated basis. The broker maintains a "sell" rating with a 20p target price for the stock.

Cadbury eased to 594.5p, down 6.5p, after Citigroup downgraded the stock to "sell" from "hold", citing rising input prices. "The key driver of input cost pressures on Cadbury is coca, where sterling prices have rising 45 per cent in the year to date..." the broker said, adding: "Food manufacturing is a defensive sector and Cadbury management is executing well, but [at current levels] it is the most expensive stock in the most expensive sector. This leaves little margin for error in delivery, particularly against a backdrop that we see as more challenging."

On the FTSE 250, fresh bid rumours bubbled up around ITV, which gained 1.25p to 43.5p. This time, Bertelsmann was said to have tabled a 65p per share offer for the broadcaster.

Traders played down the talk, citing the purchase of shares by directors Peter Fincham, who bought 350,000 at 42.75p apiece yesterday, and Sir George Russell, who bought 57,500 shares at 43p apiece earlier in the week. "The share buying tells you that nothing is going on for now – unless we see a hostile offer, which looks pretty unlikely," said one market source.

Among smaller companies, Woolworths was up 0.01p at 4.92p after new rumours suggested that the Baugur-led consortium might return with a second, lower offer for the company. Earlier this year, Woolworths rejected an offer of around £50m from Baugur and Malcolm Walker, chief executive of Iceland.

Penna Consulting soared to 155p, up 26.53 per cent or 32.5, after posting a better than expected update. Penna stands to benefit from the financial turmoil as jobless bankers seek new avenues. The firm's career transition business, which generates 55 per cent net free income, has been growing as financial services institutions shed workers in the face of mounting market turmoil.