In Moody's terminology, it has put the companies on review 'for a possible downgrade'. In practice a review usually means that a downgrade will follow in about a week.
A downgrading would affect more than pounds 3bn worth of bonds and debentures. It would make it more difficult for the companies to raise money on the debt markets and would push up the cost of financing the companies' debts.
Sun Alliance and its subsidiary London Insurance currently have relatively healthy Aa2 ratings for long-term debt. Eagle Star's long-term rating is lower at A1, while BAT stands at A2 for its senior debt with a Prime-1 rating for its short-term finance. Royal has the lowest rating at A3.
Moody's said the move arises from concerns about the insurers' exposure to the UK property markets, particularly through their extension of mortgage indemnity cover to building societies and centralised mortgage lenders.
As the property market has slumped, these policies have cost the insurance companies dearly. Eagle Star has set aside pounds 170m to cover losses in this area over the past 18 months, while Royal lost pounds 100m on mortgage indemnities in the first half of this year and Sun Alliance lost pounds 108m.
The Institute of Insurance Brokers said earlier this month that four of Britain's top 17 insurers have seen a serious diminution in their capital and may be trading at below their 30 per cent solvency margin, a safety net that ensures they can meet their obligations.