Property slump hurts insurers

CONCERN over the financial strength of Royal Insurance will deepen this week when the company reports heavy losses for the first half of the year and a big cut in its interim dividend.

Together with the results of other composite insurers over the next few weeks, the losses will confirm the deepening crisis in the British insurance industry brought on by the collapse in the property market. Interim pre-tax losses for the sector are expected to total around pounds 300m.

The biggest problems have again been caused by domestic mortgage indemnity insurance, which covers building societies against their losses on home loans. Insurers set aside pounds 1.3bn last year against losses on MDI cover and are expected to have to do much the same this year.

Shares in Royal Insurance led a general stock market fall in the composite insurance sector on Friday, dropping 17p to 167p amid deepening gloom that MDI losses were likely to remain high for the next two years. Royal is expected to plunge pounds 65m into the red, although this will be slightly down on last year's pounds 97m interim loss. The interim dividend is likely to be slashed to around 2p, compared with 11.25p last time.

The company's solvency ratio, the measure of its financial strength, will drop to around 25 per cent compared with the 30 or 40 per cent that most insurers believe to be the safe minimum. 'If there is no upward movement in the investment markets, the ratio could be at 21 per cent by the year end,' Charles Coyne of the stockbroker Credit Lyonnais Laing said.

Royal tried to boost its capital earlier this year by putting a 49 per cent stake in Royal Life, its life assurance company, up for sale at around pounds 300m. But it failed to find a buyer.

Sun Alliance, the company most heavily involved in the MDI market, does not report until September, when it is expected to show a loss of about pounds 115m, unchanged from last year.