Royal & SunAlliance report raises fresh questions over its finances

Odds-on: William Hill looks a safe bet for stock market listing

Shares in Royal & SunAlliance, the insurance group, are expected to come under fresh pressure today in the wake of weekend reports that it may need to launch a rights issue to assuage the Financial Services Authority's (FSA) concern about its financial health. The group's shares fell 20p to 273p last week as it filed its statutory return for 2001.

The return, which underlined figures published in R&SA's recent annual report, reported a surplus on its subsidiary Sun Alliance & London Assurance's £9bn fund of only £194m compared with £352m the year before. And even the lower figure was achieved only after taking £446m of liabilities off its balance sheet through a reinsurance contract. This is entirely legitimate, but has been widely criticised.

Ned Cazalet, atCazalet Financial Consulting, a leading insurance company analyst, said: "You have to add these liabilities back in, otherwise it becomes boomerang finance ­ it comes back and hits you in two or three years."

The FSA has refrained from publicly criticising such tactics in individual cases, but its chairman, Sir Howard Davies, said in January this year: "I believe that a number of companies should be asking themselves some hard questions about the prudence of their reinsurance practices and, indeed ­ on both sides ­ about the business ethics of arrangements of this kind. We believe it is important for the long-term health of the industry, and its clients, that there is some strengthening of the industry's capital base."

As part of this process, it is thoughtR&SA has appointed Deutsche Bank to sell its Australian and New Zealand life insurance and fund management businesses for about £600m.

Mr Cazalet added that all the group's four UK life companies were potentially up for sale. Apart from Sun Alliance and London, R&SA also owns Royal & SunAlliance Life & Pensions, Royal & SunAlliance Linked Insurances and Phoenix Assurance. Last year the group wrote £2.9bn in net life insurance premiums, down £500m on the previous year.

The statutory return also reveals the group is concerned about its guaranteed annuity liabilities. It says: "There are ongoing discussions with the FSA about our treatment of guaranteed annuity rates. These discussions should lead to a change in policy liabilities and the financial support required from the parent company." As Mr Cazalet noted, these changes are more likely to be increases than decreases.

The stock market's deterioration has further increased the pressure on Royal & SunAlliance Life & Pensions.