Lansdowne positioned for L&G share fall

Lansdowne Partners has revealed a short position on insurer Legal & General, indicating hedge funds have started to position themselves for a possible rash of rights issues or dividend cuts among large life insurers keen to bulk up their balance sheets.

Lansdowne has a net short position on 0.48 per cent of Legal and General. The insurer's shares have lost a third of their value in the last week, making a paper profit of almost £1.5m on the company's 11 per cent drop yesterday.

Life insurers such as L&G are vulnerable to falls in the value of investments they have, hard-hit in the credit crunch. Media at the weekend reported that the insurer was in negotiations with the Financial Services Authority about how much money it should set aside to cover defaults in its bond portfolio.

L&G, however, yesterday denied the reports, countering that it is not involved in any talks with the financial market regulator beyond routine discussions in the run-up to its results, which are due next month.

But the market was not convinced. The City regulator is drawing up new "stress tests" designed to check whether insurers can withstand dramatic falls in stock markets or increases in bond defaults.

L&G shares have fallen by more than one-third in the past month on concerns the insurer may launch a rights issue or cut its dividend to maintain its capital buffer as corporate bond defaults rise and stock markets fall.

Yesterday's share falls among other big life insurers, including Aviva and Prudential, reflected the feeling that if L&G were to announce a rights issue, its rivals would be unlikely to sit back and would likely undertake their own cash calls to avoid becoming the sector's capital laggards.

"As soon as one does a rights issue and boosts its balance sheet, everybody else looks a little light and wants to catch up," one City analyst looking at the sector said.

There is already ongoing flow of rights issues from Lloyd's insurers, where Beazley on Friday joined rivals including Catlin, Chaucer and Omega in a cash call as it seeks capital to expand in the US and take on rivals for market opportunities presented by the demise of some larger insurers such as AIG. Bankers see Lloyd's insurers Amlin, Brit, and Hiscox as other prime candidates for rights issues.