View from City Road: The benefit of the doubt
Thursday 10 December 1992
The deal's structure - in effect a rights issue with BAT the sole shareholder - underlines the attractions of being part of a deep- pocketed conglomerate. Commercial Union and General Accident had to raise money on the open market through preference share issues and Royal Insurance issued a convertible bond last week. The battered composite sector has raised pounds 900m so far in 1992.
BAT's rationale is that the worst of the domestic mortgage indemnity nightmare is over; motor and household insurance rates have hardened and now is the time to go
out and grab some of this profitable business.
But each new premium written reduces Eagle Star's all-important solvency ratio, in turn reducing customers' confidence in its policies. This is where BAT's capital injection in the form of ordinary shares comes in.
It has also capitalised a pounds 260m loan made to Eagle Star earlier in the year, most of which was in turn lent on to BAT's US insurance giant, Farmers.
BAT can easily afford such an investment. It will increase gearing by only 3 percentage points and should not damage earnings if Eagle Star starts paying dividends as anticipated to the parent next year, after a two-year lapse.
But shareholders must wonder whether Eagle Star should be trusted with the money. It has been crucified by UK domestic mortgage indemnity losses amounting to pounds 213m in 1991, and likely to reach another pounds 100m this year.
Combined with losses on commercial mortgage business, Eagle Star has lost pounds 640m in the past two-and-a-half years, equal to the figure BAT paid for it in 1984.
Domestic mortgage indemnity losses are expected to continue at about pounds 25m- pounds 30m per quarter at least until mid 1993.
Newly-appointed Martin Broughton, the managing director of financial services, appears contrite about previous losses. He deserves the benefit of the doubt.
On this basis, the shares, which have outperformed by more than 40 per cent this year, will continue to attract followers.
- 2 Rarest Beanie Baby of them all could be sold for £62,500 on eBay
- 3 Professional big game hunter Ian Gibson crushed to death by elephant during hunt
- 4 Farmer told to tear down mock-Tudor castle after hiding construction behind hay bales
Yemen crisis: Meet the child soldiers who have forsaken books for Kalashnikovs
Alan Rickman admits editing 'terrible' script with friends in Pizza Hut behind backs of writers on Robin Hood: Prince of Thieves
Rarest Beanie Baby of them all could be sold for £62,500 on eBay
Professional big game hunter Ian Gibson crushed to death by elephant during hunt
Farmer told to tear down mock-Tudor castle after hiding construction behind hay bales
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
iJobs Money & Business
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...
£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...