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RPT-ANALYSIS-B.A.T stays silent on Re

LONDON, June 15 (Reuters) - B.A.T and Swiss insurer Zurich gave no clues about the future of Eagle Star Re, the British tobacco and financial services group's reinsurance unit, at extraordinary shareholders meetings last week.

The EGMs are part of a year-long process which should culminate in Zurich merging with B.A.T Financial Services some time in the autumn.

However, within insurance circles it is widely known that Zurich chief executive Rolf Hueppi has no intention of Eagle Star Re, a part of B.A.T through general insurer Eagle Star, being part of the package.

At a presentation last month, Hueppi said Zurich was studying in depth the future of its two reinsurance operations -- Zurich Re and the Eagle Star unit.

"We are discussing an opportunity, not a problem...We are looking at an imaginative solution for Eagle Star Re."

Plans to merge Zurich and B.A.T's insurance operations were first announced last year. The deal gives Zurich greater global reach, including B.A.T's Farmers insurance operation.

However, right from the start a question mark hung over the future of Eagle Star Re within the grand scheme.

Analysts say that it brings little new to Zurich Re's operation, but the big stumbling block is its poor performance.

The company reported a net loss of 13 million pounds ($21.3 million) on net premiums of 197 million in 1996, a year most reinsurers consider one of their best ever.

"Eagle Star Re is clearly for sale. It has been under-reserved for years and they lost money even in 1996," one London based insurance analyst said.

Although the company made a 20 million pounds profit in 1997, analysts believe this still represents a poor performance at a time when the insurance industry is basking in a period almost totally free of major claims.

The big problem, though, remains concern over the possible long-tail liabilities which may be lurking in the British reinsurer's books.

"There is no doubt that Hueppi would prefer not to take Eagle Star Re on to Zurich's books," said one analyst, who declined to be named, with a German owned stockbroker.

Among the options open to Zurich are the sale of Eagle Star Re, a management buy-out or putting the company into run-off.

Having so far failed to find a buyer, speculation among corporate financiers has turned to an MBO, although the other routes have not been ruled out altogether.

"There certainly has been speculation about a management buyout, but MBOs are hard to arrange for capital intensive operations," the analyst said.

Market talk that Zurich may also sell off Zurich Re was rejected by analysts. "They make too much money out of it," said the London based analyst.

A merger of the two reinsurers is thought equally unlikely, unless as a last resort it proves the only way to dispose of Eagle Star Re.

Putting the company into run-off, where existing business would be wound up and no new business taken on, would put a cap on any potential black holes, but at a price.

London-based run-off specialist Eastgate Group is expanding rapidly and would be an obvious candidate for the job, analysts said.

Eagle Star and B.A.T refuse to comment on the reinsurer's future.

($ = 0.611 British Pounds)

02:04 06-15-98


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