Sun Alliance takes £100m home charge

Sun Alliance yesterday became the second big insurer to make a provision for losses from mortgage indemnity insurance. The company said it would take a £100m charge against its 1994 profits to cover expected losses arising from the weakness in the housing market. Although the provision will cut Sun Alliance's profits from a forecast £400m to about £300m, the shares rose 5p to 298p because the provision will wipe out expected losses in coming years.

Stephen Dias, insurance analyst at Goldman Sachs, said Sun Alliance's timing probably reflected the fact that 1994 was overall a very profitable year for the company, so it was a good time to take the hit.

The losses arise from the steep rise in house repossessions in the early 1990s after the collapse of the property market. Mortgage indemity insurance protects the lender from losses on the top slice of a loan that is in default, where the value of the property has fallen below the amount advanced by the lender. Sun Alliance is the leader in the field, with a market share estimated at 20-25 per cent.

Yesterday's announcement was largely a change in how the group accounts for losses on that business.

In the past, it recognised a loss only when the claim came in, but the new basis projects losses based on the number of mortgages in arrears that are projected to become repossessions.

Legal & General was the first to change to this basis of accounting for the losses, making an £84m provision in 1992.

The other principal companies in the market - Royal Insurance and Eagle Star - have yet to make provisions on the arrears basis.

A spokesman for Eagle Star said it had been putting aside £12m-£13m a quarter to cover mortgage indemnity claims. Royal has been tracking the losses on a similar basis and is expected to lose £40m-£45m on mortgage indemnity business in the year to March.

Trevor May at BZW said the total cost to British insurers of mortgage indemnity business was likely to reach about £3bn by 1997.