Speculation is growing that Independent Insurance may be planning a rights issue to raise up to £75m, rather than sell a stake to a rival or resort to extending its reinsurance cover.
The insurer needs a cash injection to bolster its £316m capital base and remove uncertainty over the company's future growth plans.
But Barrie Cornes, ING Barings Charterhouse, said the rights issue would have to be heavily discounted to be attractive to investors. He said it would not necessarily have a negative impact on the company, as it would remove some of the uncertainty clouding the company's short-term future.
The share price is generally continuing to slide, trading at 118p on Tuesday, down from 140p last week. Prices collapsed in February from around 400p when the company issued a profits warning.
David Wharrier, from analysts Fitch, estimated the insurer would require £75m of extra capital by the end of 2001 if it was to keep pace with rate rises averaging 15% in the company's main lines of business.
Last week Fitch gave Independent a BBB rating and a negative outlook because of concerns over the company's direction following the resignation of its chief executive Michael Bright.
Independent suffered a 40% drop in its year 2000 operating profits to £40.1m following losses on its French operations and unprofitable motor fleet lines.
Independent declined to comment.