Zurich in £1.5bn cash call

£100m half-year losses force insurer to strengthen capital base.

The insurance company behind Allied Dunbar, Eagle Star and Threadneedle Asset Management is planning a cash call of at least £1.5bn in a desperate attempt to shore up its depleted capital base.

The life-saving cash injection for Zurich Financial Services will be announced on Thursday in what is expected to be the first of many in the insurance sector where international regulators are on the alert since stock market volatility started to sap insurers' financial strength.

It is one of a number of measures expected to be deployed by the company to strengthen its capital base when it announces half-year losses in the region of £100m.

A year on from the terrorist attacks on September 11, many insurance companies are thought to be working on ways to boost their depleted capital cushions.

In the UK, for instance, Royal & SunAlliance has admitted it is considering a rights issue.

The terrorist attacks had two impacts on the insurance industry: large bills for insurance claims; and a depletion of their financial strength because of stock market turbulence.

But these problems have worsened since then because of the continued fall in the value of their equity investments which are one of the measures used by regulators to gauge insurers' solvency.

After aborting an attempt to raise cash from bond investors last month, Zurich is thought to be planning to tap equity investors for a hefty share issue which could amount to as much as £2bn.

The fund-raising exercise follows months of intense speculation and confusion about Zurich's plans to bolster its financial strength and restore its profitability.

Some analysts believe it could even need a cash injection of up to £5bn while others believe it is under no pressure to tap investors.

Standards & Poor's recently put Zurich's credit ratings on watch for a potential downgrade because of concerns about its financial strength.

However, Rob Jones, insurance analyst at the ratings agency, pointed that it was one of at least 20 insurance companies around the globe which it was analysing closely.

With new chief executive Jim Schiro at the helm, it is understood to have prepared the ground with its disillusioned shareholders for a sophisticated cash raising exercise. Its shares have fallen more than 50% in the last year and they lost another 11% in Zurich yesterday on speculation about the cash raising exercise.

The company - which used to have a dual-listing on the London stock market - refused to comment .

Mr Schiro took over from the discredited Rolf Huppi who was ousted in May after four shock profit warnings. He promised at the recent annual meeting to improve profitability and strengthen the balance sheet.

UBS Warburg, the Swiss investment bank, is thought to have constructed a special structure to raise funds under which it guarantees to pick up those shares not subscribed for by investors at a minimum price.

Zurich has also faced speculation that it might sell off some of its operations to raise cash. Under the previous management it grew rapidly through acquisition, particularly in the United Kingdom where four years ago it bought the financial services arm of British American Tobacco.