Michael Bright's abrupt resignation as chief executive of Independent Insurance in April was like hanging a “for sale” sign on the door, according to some analysts.

The troubled insurer now has a hole at the top and a hole in the reserves to fill. Its growth projections this year mean up to £150m is needed to keep the solvency margin the right side of 50%. The capital shortfall has left the board engaged in a delicate high-wire act to sustain its share price, its credit rating, its book of business and its independence.

Garth Ramsay, the chairman, who temporarily has taken the reins, says no approaches have either been made to or received from another insurer. He adds that no option has been ruled out so far. But analysts are sceptical about some of the alternatives.

Roger Hill of UBS Warburg said: “Shareholders are likely to reject a rights issue while stock is trading at near asset value. And offloading some of the future growth by resorting to proportional reinsurance capacity is too short term.”

Independent can already reduce £200m of net written premium growth in the coming year using this method. But resorting to more of the same would not help restore investor confidence, particularly as reinsurance rates are hardening fast and would reduce the group's earnings per share.

Ramsay covered the bases in the 2000 results with a list of possibilities such as “the introduction of debt, additional equity, hybrid and other alternatives”. But his dilemma is to find the capital quickly enough to ward off the rating agencies but without further denting the confidence of the shareholders.

The solvency margin has already dropped from 71% at the end of 1999 to 53% at the end of 2000 – the board states it will maintain the level around 50%. Problems will arise if the solvency rate drops below this level, as the rating agencies may well downgrade and brokers could then take fright. Meanwhile, business is booming. Gross written premiums soared by 64% to £830.1m in 2000 and are predicted to reach £1.2bn by next year.

Ramsay says there have been a number of players pulling out of the liability market, so there is room for growth. Roger Hill sees another reason to find a strategic partner, apart from simply solving the capital problems. He feels the company needs a rethink anyway, after outgrowing its “new kid on the block” tag.

When Bright founded the company in 1987, he was the first to launch a major insurance company in the UK since the Second World War. Independent prospered, with a clear strategy of investing in underwriting and targeting the medium-sized to large companies with commercial property and casualty business through a small number of key brokers.

In the late 1990s, Independent bucked the market trend and delivered profits and growth side by side, without relying on investment returns. But Hill believes its philosophy was geared to winning rather than maintaining market share.

“If you look at the lines of business they are in, they have become market leaders, particularly in employers' liability,” Hill said.

“The company has matured and is likely to become more like other players.

“The culture has to change as they face other insurers free-loading on its expertise and matching its prices.”

Indeed, a number of top staff have taken their expertise elsewhere. One former underwriter, Keith Rutter, has formed his own insurer, called The Underwriter, and several other staff have been recruited to Fusion, a new commercial retail facility backed by the Lloyd's vehicle SVB. Fusion is headed by former Independent assistant general managers Kevin Pallett, Geoff Crisp and Stuart Pettet.

Without Bright at the helm, Independent will undoubtedly change. Not only did he found the company, he also owns 6.18% of the shares and was known as Mr Independent. An ebullient and strong character, he personified the company. A new broom will sweep in a new approach.

His stepping down was billed as the first step in regaining market confidence. But there are two markets here – one is the city and the other is insurance. While investors are disillusioned, it remains to be seen how the insurance market will react.

Ramsay says brokers have been positive so far – there has been no suggestion they will take business elsewhere and he points out Bright has had no direct dealings with brokers for many years. “There is no change for the brokers in terms of their point of contact, whether it is the underwriter or the claims handler,” he said.

Moreover, he adds that brokers understand the market changes and the reinsurance packages which the insurer bought that led to what he sees as a City over-reaction.

The company lost two-thirds of its value after issuing a profits warning and a poor set of results earlier this year. The share price collapsed after external actuaries Watson Wyatt told the company to increase reserves for the second year running – leading many to ask if past high returns were built on low reserves. The size of the reinsurance package, £248m, sent pulses racing.

Independent has blamed its predicament on the law reforms that made justice more accessible and awards bigger. Changes to the Ogden Tables, used to calculate compensation for long term injured, changes to the bodily injury awards tables, and the advent of no-win no-fee litigation have had severe repercussions on an insurer that specialises in liability.

“There were some quite large reported claims that had taken a while to come through,” director John Blakemore said, after the profits warning in January.

Nigel Munns, a partner at actuary B&W Deloitte, said Independent could face hits from both known and latent claims.

“The payments for serious injury claims have increased by some 30%, so if you reserved £1m for a claim in 1999, you would now have to pay £1.3m” he said.

“Liability insurers are also exposed to claims that are created by legal precedents after the risk has already been taken.”

But Independent has under-estimated the impact these law reforms would have on claims. It acknowledged it had to bolster reserves because of pipeline claims in the 1999 results and acquired £6m of additional reinsurance on the advice of Watson Wyatt. In hindsight, this appears to have been too small.

When news of the massive reinsurance package in the 2000 results emerged, SG Equity Research said in a note to clients that Independent's management “effectively admitted to naivety, weak management control and poor judgment”.

“It looks as if they have mispriced the business,” said Roger Hill. “The fat they had in the reserves had to be discounted away.”

Bright must feel aggrieved. With liability business accounting for about 40% of its book, Independent was particularly exposed to the rise of the litigious society and the impact of regressional claims. He still managed to deliver an operating profit of £40.1m and a final year dividend of 5.75p.

Bright suffered a market backlash because of the recommendation of an external actuary, the only general insurer in the UK which carries out the exercise – ironically, an actuary he needed on board to satisfy sponsors in order float the company in the first place.