Shares in struggling Zurich fall on fears of £1.6bn rights issue

Speculation intensified yesterday that Zurich Financial Services is poised to launch a rights issue of up to £1.6bn to shore up its draining capital reserves, sending shares in the embattled insurer tumbling 17 per cent in Switzerland.

Zurich is due to announce its half-year results on Thursday. The company fired its chief executive earlier this year after its fifth profits warning.

James Schiro, the new chief executive of the group who replaced the ousted Rolph Huppi, is expected to announce radical financing plans to shake up the group. It lost £497m in the World Trade Centre attacks and has a £366m asbestosis claims bill.

Shares across the European insurance sector fell sharply yesterday as fears at Zurich took hold on the market. Axa dropped nearly 7 per cent, also burdened by fears that the details of its final results will disappoint when it reports.

Morgan Stanley downgraded its outlook for the sector to "cautious" from "in-line", saying insurers will need to undertake radical restructuring to recover from the capital shortfalls they have experienced over the past two years. Its analysts say Zurich's tangible capital, the amount it has available to support new business, has fallen by 50 per cent in the past two years.

One analyst said a rights issue from Zurich was "imminently possible", calling the company the European equivalent of the UK's cash-strapped Royal & SunAlliance. Shares in Royal & SunAlliance – another rights issue candidate – closed 5.2 per cent lower.

Other options are available to Zurich, but a rights issue is widely expected as previous attempts to raise debt have failed. Mr Schiro, who joined Zurich from PricewaterhouseCoopers, may sell off unprofitable parts of the business, but disposals are unlikely to reach a good price while markets remain subdued. Shareholders may be asked to forgo their dividend to allow Zurich to hold on to precious capital reserves.

Zurich posted a loss for the year 2001 of £270m from a profit of £1.6bn in 2000. Analysts believe the group will need more funds if it is to benefit from the rocketing premiums strong insurance companies are starting to charge.