Profit warnings from Fortis and Skandia send shares tumbling

Insurance stocks were dealt another hammer blow yesterday as Fortis, the Belgian financial giant, and Skandia, the Scandinavian insurer, both announced they were likely to miss earnings targets.

Shares in the insurance sector nosedived for the second day running after a shock profits warning from the Dutch insurance giant Aegon on Monday that troubles in the US would lead to a 30 to 35 per cent hit on its profits.

Shares in Royal & SunAlliance led the FTSE 100 fallers list with an 11 per cent fall to 166p. It was followed lower by Prudential, off 8 per cent to 420p, Aviva, which fell 7 per cent to 355p and Friends Provident, down 3.5p at 125.25p. Insurers in Europe also tumbled with Aegon down another 14 per cent on top of Monday's 18 per cent fall and Axa fell 11 per cent. The fall in insurance stocks was a key factor behind a fresh slide on the London stock market. The FTSE 100 fell to fresh six-year lows for the third day in a row. The index lost 37 points, or 1 per cent, to close at 3,858 having at one point breached the 3,800 mark for the first time since August 1996.

The market was given some last-minute respite by a revival on Wall Street as the Dow Jones oscillated wildly between a gain of 100 points and a fall of 100 points.

But few traders were confident the market was about to mount a strong recovery. "This correction isn't over yet," said Tom Hougaard, market strategist at the spread betting firm City Index.

"Nothing has changed, we're in a vicious bear market. Every day you're going to see people selling into strength."

However hopes of a rebound on Wall Street rose after a recovery in the dollar drove the euro back below parity.

The euro suffered its worst one-day fall in 10 months, falling 2 per cent from $1.009 late on Monday to a low of 98.97 cents.

The reversal surprised traders who had watched the dollar follow Wall Street stocks in free-fall over the past few weeks.

In the European insurance sector, shares in Fortis fell 12 per cent after it said earnings may fall short because stock holdings had dropped about €900m (£573m) below their purchasing price. Skandia, meanwhile, said sales had slumped 28 per cent, which knocked 15 per cent off its share price.

All eyes are now on Prudential, the UK's second-biggest insurer which reports its interim figures today to rally the sector spooked by solvency fears as markets continue to fall.

Analysts expect Prudential to reassure the market of its financial strength, although it too could take a hit from its substantial holdings in the US corporate bond market. Its shares fell 9 per cent yesterday to 420p.

Only about 50 per cent of its £80bn with-profits fund is in equities, compared to an historical industry norm of between 70 and 90 per cent, meaning it will not have been as damaged by market falls as others.

In comparison, Standard Life holds about 80 per cent of its fund in equities. Ned Cazalet, an independent insurance analyst, estimates it is currently running at a 15 per cent loss, after a loss of about 10 per cent last year. Mr Cazalet says: "Prudential's financial condition should be better than some of the other large insurance companies. Its equity content is way below other insurers and won't have suffered as much."

Norwich Union, Aviva's life and pension business that has traditionally been bullish in equities, is being forced to cut maturity payouts on with-profits policies by 5 per cent, as well as slice 0.5 per cent from some annual bonuses.

It's with-profits fund is down 8.3 per cent this year. Bonuses were declared at the start of the year on the assumption of a 7.25 per cent return.

To protect dwindling with-profit funds, insurers are imposing sizeable market value reductions on policyholders wanting to cash in their funds of up to 22 per cent.