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Zurich tipped to prefer security to price on £150mn+ Eagle Star sale

The auction of Zurich Insurance Group's UK legacy business Eagle Star is complicated by an intra-group reinsurance contract, The Insurance Insider understands.

Because the winner of the KPMG-run auction will need to replace the reinsurance contract, sources said this favours bidders with a strong credit rating that can provide long-term peace of mind to Zurich once the deal is complete.

At least four indicative bids have been submitted, according to sources. The process is thought to have included the largest players in the sector: Berkshire Hathaway, Swiss Re, Catalina and Enstar.

But sources also speculated that among these usual suspects, the advantage probably lies with Swiss Re and Berkshire Hathaway due to the strength of their balance sheets.

Last year, Zurich chose Swiss Re to complete the $950mn transfer of its other UK P&C run-off portfolio. Specialist buyers of legacy assets such as Enstar and Catalina tend to be more aggressive with their bids; relying on their ability to price in their lower assumptions on liabilities once the work of their expert run-off claims managers is factored in.

These bidders are likely to emphasise the fact that a higher price will further benefit Zurich's stated aim of freeing up $1.5bn from the divestment of non-core assets.

The contrasting strengths of the bidders puts in place an interesting dynamic for the bidding process, especially as Swiss Re is thought to be less keen on liabilities with asbestos exposures.

Eagle Star has significant UK asbestos exposures which, arguably, are less certain in the light of the UK Supreme Court ruling in March against a group of five run-off insurers that means mesothelioma sufferers can claim on their employer's liability policy relating to the time of exposure regardless of when the disease manifested.

However, sources say the impact may be limited, as much of the employers' liability business that was once a big part of the Eagle Star book was removed by Zurich prior to the disposal process.

Berkshire Hathaway has consistently demonstrated its appetite for large legacy risks with US asbestos liabilities, including the multi-billion dollar reinsurance covers written for CNA and American International Group in recent years (see table), together with the acquisition of Equitas.

One other potential bidder might be Fairfax Financial's RiverStone, which surprised market watchers by purchasing the $1.3bn of net reserves in Brit Insurance's UK run-off book.

Zurich used in-house transfers to manage Eagle Star's liabilities and net assets down to circa £150mn at year-end 2011, according to a Financial Services Authority return seen by The Insurance Insider.

A year earlier, the unit had more than £400mn of net assets. As of the end of 2011, Eagle Star now has core tier 1 capital of £161mn and total admissible assets of £402mn, down from £687.9mn a year earlier.

Zurich declined to comment.

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