Independent's troubles deepened this week as it revealed it had discovered an unknown number of reinsurance contracts allegedly signed without the knowledge of its board of directors.
The revelation came as trading in Independent shares was suspended on Monday, following the insurer's announcement that it was in preliminary takeover talks and was considering a massive share placing as it strives to maintain its solvency ratio to around 50%.
A statement by the company said that it may use the share placing to replace some of its reinsurance arrangements “as a result of new information concerning additional alleged reinsurance arrangements”.
The company said it had launched a high-level investigation into the alleged new reinsurance contracts, which are believed to be in addition to the insurance arrangements Independent revealed to shareholders in the preliminary results for the year ending December 31, 2000.
These provided £248m of cover for Independent's London Market general and regional liability accounts for 1997 to 2000 for a total premium of £105m.
The insurer also extended its £80m policy, taken out in 1999 to protect its London Market general liability for 1997 and prior years, providing £30m additional cover for a £5m premium. The leading reinsurer for the contracts is believed to be Munich Re.
An Independent spokesman said: “The board was not aware of the existence of the alleged new contracts and does not know what their impact might be on its reinsurance arrangements.”
The spokesman stressed there was no question that any fraud or wrongdoing had occurred. However, the company is facing increasing uncertainty as it approaches the July 1 renewal season, when many existing clients will decide whether to renew their business with the insurer.
On Monday (June 11), the company asked the London Stock Exchange to suspend trading in its shares after they had dropped 20% to 81.5p the Friday before.
The move led credit rating agency Standard & Poor's to reaffirm its BBB+ rating of Independent, although it has kept the insurer on credit watch.
Independent said its directors were reviewing various options, including the possibility of raising capital and seeking an offer for the company. The company said this was necessary to take advantage of the strong insurance market, which is enjoying a significant increase in rates.
The capital-raising venture is being handled by HSBC Investment Bank. Full details are expected to be published in ten to 14 days' time.
Independent claimed the move had received strong support from institutional investors.
Insurance analyst David Wharrier said Independent needed to raise between £75m and £200m and that any planned share placing would be a “hard sell”.
“It is going to be difficult for HSBC to get a share issue away after what has happened in the past few weeks, particularly if the shares are not discounted,” he said.
However, he added that Independent's investors had done well out of the insurer in terms of dividends and its share price, which at one time soared to 400p and were likely to support its plans.
Munich Re would not confirm whether it was the reinsurer.