• The Commercial Union affair
Nicholas Davenport
It has always been my conviction that if Mr Harold Wilson were to be returned with a large majority the bottom would fall out of the stock markets. The reason is that a big majority would then enable the revolutionary Marxist Left to get the upper hand in the Cabinet debates. They would then argue that because the Labour manifesto contained the Marxist clauses about the extension of public enterprise, the nationalisation of Ports, shipbuilding, ship-repairing, marine engineering, aircraft manufacturing and land required for development and re-development, the setting up of a National Enterprise Board to administer publicly owned shareholdings and extend Public ownership into "profitable Manufacturing industry," the achievement of "a major redistribution of wealth and income" by means of an annual tax on wealth Over £100,000 and a swingeing transfer tax in addition to the tax cln capital gains, etc., a big Labour majority in the election must therefore be interpreted as mean
Rig that the British people wanted to c .uly out a revolutionary change in the structure of society and to see the beginning of the end of Private enterprise. Mr Benn would then
k, be in full cry, picking out the
ulggest and most efficient companies to nationalise, Mr Foot Would be whipping up his cornMittee looking into all incomes over £10,000 a year (in spite of the Protests of Mr Clive Jenkins) and !VII' Healey would be devising new Posts in his budget which would Make the rich, as he put it, "howl With anguish." Such a prospect would 1 feel sure, make the bottom ran out of the market.
But the most extraordinary thing FfIaPPened. The bottom has already alien out of the market because of a £62112 million rights issue _announced by the Commercial Llnion
week. at the beginning of last
, It was a strange thing for a great Insurance company to do in the Middle of a stock market slump. A 'rights" issue of this enormous size Would be a formidable undertaking even in a "bull" market. In a "bear" Market it was merely an invitation mr holders of Commercial Union • -hares to sell slices of their portfolio in order to take up the new shares 2,_ffered at 60p on the alluring yield rsdsis of 17 per cent. Of course, the
sue brought down the price of the old shares from 84 to 70 (77 as I
write) but there was still a profitable margin. The result was a slaughtering of the prices of other insurance shares which were being sold. Pearl dropped 18p to 96, Royal 26p to 140, Sun Alliance 30p to 195, General Accident 16p to 72 and Phoenix 24p to 90. Wild rumours ran through the market that other insurance companies were going to make equity issues and even the joint stock banks. The Midland actually had to deny that they had any intention of making a cash call on shareholders. The market blood-letting last week could be called the slaughter of the innocents. Happily they are -now recovering.
Why did the Commercial Union drop such a monstrous brick? The issue was designed, it is said, to increase the company's capital base and its technical solvency margin, the ratio of shareholders' funds to non-life premium income, which had been eroded over the past two years by the fall in the value of its investments. This it will now do, bringing the ratio up from the current 24 per cent to near 32 per cent. But•whoever thought that the Commercial Union was not immensely comfortable, if not strong, in a financial sense? Their profit before tax in 1973 was £43 million and outside their accident business the new life sums assured totalled £1,262 million. Incidentally, the minimum ratio required by the Department of Trade is only 10 per cent. I cannot help thinking that the board of the Commercial Union were moved by a mixture of anger and fear. They were no doubt angered by the failure of their bid for the St Martin's Property Company which, if successful, would have raised the ratio of shareholders' funds to non-life premium income to around 40 per cent. As every one knows, the £107 million counter-bid from Kuwait won the day and I now have a rich Arab landlord when I go to my desk in the City. I can imagine the Commercial Union directors saying: "Damn the Arabs! They are not going to spike our guns. We will get , the money we want from the strongest merchant bankers in the City — Jewish origin and all!" And they got their huge issue underwritten by Kleinwort Benson, Baring Brothers, Lazard Brothers, and J. Henry Schroder Wagg. But to what extent were the directors actuated by fear — fear of inflation or fear of Mr Harold Wilson's return? They need have no fear of inflation in itself, for inflation sends their accident premiums sky high. They might reasonably have fear of the world trade reces sion which most economists — and now the World Bank in its annual report — have been forecasting, for bad trade usually brings more fires and Commercial Union is one of the biggest fire insurers in the world. Indeed, if the motor industry is a fair index of general business activity it might be said that a world trade recession began to make itself felt after the middle of this year. They might also — and much more reasonably — be afraid of the threat to world peace and stability which Dr Kissinger dwelt upon in his remarkably gloomy speech to the United Nations when he said that unless there was more international co-operation the world was heading for disaster. But that speech was delivered after they had decided on their rights issue and 1 do not suppose that an insurance company which does not acknowledge claims from war would be disturbed at the thought of a nuclear catastrophe. No, it seems to be that the directors of the Commercial Union must have been actuated by fear of the imminent return to power of Mr Harold Wilson.
Yet I must point out that if Mr Wilson is returned with only a small majority — say, not much more than 10 to 20 — there would be an immediate recovery on the Stock Exchange. A bare majority would be interpreted as a victory for the moderate social democrats and a defeat for Mr Benn and Mr Foot.
A technical recovery is certainly overdue. The FT 'thirty' index fell last week to 182 — the lowest level for sixteen years. The two-thirds drop from the top has been the most severe of any bear market we have ever seen. The reverse yield gap is narrowing, for the 11 per cent average dividend yield on ordinary shares is getting near the 15 per cent yield on old Consols. If only the 29per cent earnings yield on the share index were real, instead of being inflation-faked.
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