Royal & SunAlliance, the beleaguered insurance giant, needs to raise £1bn of extra capital if it wants to compete with its peers and grab new business, according to the investment bank Credit Suisse First Boston.
The report is a further blow to RSA, whose share price has been battered by concerns that it does not have enough capital.
The share price dropped to a 17-year low last week when RSA slashed its dividend, hinted it might launch a deeply discounted rights issue and said it would close its UK life insurance business. Yesterday RSA's shares dropped 2.5p to 105p.
The insurer has already raised £725m through a wide-ranging disposal programme in the past year, but analysts believe this will not be enough for the company to deliver its aim of boosting its general insurance business.
Credit Suisse predicts that RSA will try to raise the £1bn by increasing its reinsurance to cover 21 per cent of all premiums written.
At the moment RSA has reinsurance with Munch Re, which covers 10 per cent of its premiums. The company said it was "considering" increasing this cover.
Reinsurance has the effect of increasing capital for an insurer because, in return for a charge, the reinsurer takes away some of its liabilities. This means that the insurer does not have to have the capital to cover pay-outs on these liabilities. It only has to have the money to pay the fee to the reinsurer.
It is normal for insurers to buy reinsurance cover, but some analysts believe RSA is increasingly resorting to financial engineering such as reinsurance and using profits which have not yet been made when calculating its solvency.
Moody's, one of the biggest rating agencies, said it had put the insurer on review for a possible downgrade from its current rating of A1. Mark Hewlett, a managing director of Moody's, said: "We believe they need more capital but there is some degree of uncertainty about whether they will get it."
Gordon Aitken, an analyst at Credit Suisse, said RSA's pension fund also raised concerns because it has plunged to a deficit of about £200m from a surplus of £382m six months ago.
The company denied that the situation created an immediate funding crisis because the money did not have to be paid out immediately. But RSA will have to fund contributions to its 50,000-member scheme this year, after having a holiday from making payments for the past four years.