View from City Road: The benefit of the doubt

LIKE the prodigal son, Eagle Star has been forgiven by its parent. After it lost a fortune in the past two-and-a-half years, BAT Industries has prepared a fatted calf in the form of a pounds 190m capital injection.

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Tax Manager / Accountant

£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...

Ashdown Group: Contracts Executive - City of London

£35000 - £37000 per annum + benefits: Ashdown Group: Contracts Executive - Cit...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...

Recruitment Genius: Call Centre Debt Collector - Multiple Roles

£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Day In a Page

Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

Uganda's giants are flourishing once again

After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

After 350 years, the riddle of Britain's exploding fleet is finally solved

Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
Airbus has patented a jet that could fly from London to New York in one hour

Airbus has patented a jet that could fly from London to New York in one hour

The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
10 best sun creams for kids

10 best sun creams for kids

Protect delicate and sensitive skin with products specially formulated for little ones
Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

Tate Sensorium

New exhibition at Tate Britain invites art lovers to taste, smell and hear art
Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

Nice guy Finn is making up for lost time – and quickly

He was man-of-the-match in the third Test following his recall to the England side
Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

Remember Ashton Agar?

The No 11 that nearly toppled England
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks