Watchdog frets over Royal & Sun

CITY regulators are challenging ailing insurer Royal & SunAlliance over its recovery strategy, sources say. RSA, led by £1m-a-year American boss Bob Mendelsohn, had its profits razed by a £293m write-off for asbestosis claims.

It also faces guaranteed annuity rate (GAR) liabilities of £1.2bn on two of its with-profits funds. In its case, unlike that of mutual Equitable Life, shareholders can be asked to pick up the GAR tab.

Mendelsohn's plan to revive the group includes releasing capital from the life business, possibly through reinsurance or securitisation. Experts say his earlier hopes of selling the life side are likely to be frustrated as buyers will be scared off by the weakness of its with-profits funds. It has, however, just unveiled a deal to sell its offshore life business to Friends Provident for £133m. The company, which also faces a fine for pensions mis-selling, is selling other non-core businesses in a bid to raise £800m.

But the Financial Services Authority is concerned that its actions may not be enough.

Worries centre on two of RSA's with-profits funds, the £9bn SunAlliance & London fund and the £11bn Royal & SunAlliance Life & Pensions fund. Insurance expert Ned Cazalet said RSA had boosted the funds' figures through several controversial techniques, including reinsurance deals and counting future profits as capital. He added: 'The RSALP fund is in a stronger position than the other one, which is kippered.'