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PARIS-France's $3.46 billion rescue package for insurer Groupe des Assurances Nationales will recapitalize the company, guarantee against future real estate losses and pave the way for privatization sometime this year.

The 20 billion franc bailout will cover insurance losses arising from GAN's aggressive premium-cutting strategy to gain market share in the 1980s, as well as investment and lending losses from the ongoing slump in the French real estate market. According to French Finance Minister Jean Arthuis, GAN has accumulated losses from its insurance activities and from real estate amounting to 35 billion francs ($6.06 billion) since 1992.

Receipts from the future privatization will return to the French government in repayment for the recapitalization expenditure. But insurance market analysts are unsure at the moment if the company will be sold for as much as 20 billion francs.

If the selling price is less, "the difference will be met by the taxpayer," says Jean-Christian Huard, insurance analyst at Paris-based stockbroker Societe Generale Equities & Derivatives.

The rescue plan has to be approved by the French Parliament and the European Commission in Brussels, Belgium. E.C. sources say they cannot comment on the situation until they receive the full details of the new GAN bailout plan. Meanwhile, discussions with government officials and financiers will get under way.

The French government recapitalized GAN with 2.5 billion francs ($432.5 million) in 1995, a rescue which also required the approval of the European Commission. The European Commission formally approved that recapitalization in September 1996. The current GAN rescue package is the second-largest bailout of a French financial institution in two years. The bank Credit Lyonnais has received two state-backed rescue packages totaling about 50 billion francs ($8.65 billion).

Just as the government announced its plans to recapitalize GAN, the company announced a restructuring plan which separates its insurance activities from its real estate and investment divisions. This means that policyholders will not be affected by any further deterioration in real estate-related losses and all insurance claims will be met in full, a company spokeswoman said. The company said in a statement that it has changed its accounting procedures, a move that will give a clearer picture of its finances.

The size of the GAN bailout package did not come as any surprise to insurance market analysts, even though in public statements GAN management has never quoted loss figures as large as 20 billion francs ($3.46 billion). Mr. Arthuis said that the responsibility for this loss is shared by the company's management, the insurance industry regulators, and the French government, which owns 80.4% of the company.

Some insurance market analysts wonder whether there is more bad news on the horizon. "I guess that the past managements (of GAN) underestimated the potential losses. They wanted to have a smooth management of the situation," said Mr. Huard.

A GAN spokeswoman said that the previous chairman of the company, Jean-Jacques Bonnaud, had requested a state-backed cash injection of 10 billion francs ($1.73 billion) last October but was turned down (BI, Dec. 23, 1996). At the time, the government wanted to privatize GAN's retail banking affiliate, Credit Industriel et Commercial. Mr. Bonnaud objected to this, claiming that the sale of CIC would undermine the asset value of GAN unless the state stepped in to compensate.

The privatization of CIC was called off for lack of a high enough bidder. Mr. Bonnaud was dismissed by Finance Minister Arthuis over the CIC disagreement.

The French government's rescue package proposes a two-part plan:

An 11 billion franc ($1.90 billion) cash injection in 1997 to recapitalize the real estate lender Union Industrielle du Credit. The sum will also be directed to "give the group's insurance companies a proper financial structure with respect to statutory requirements," a GAN statement said.

A company spokeswoman said she did not know if this meant that GAN's life and non-life companies are under-reserved. "If the technical reserves are not sufficient, they will be increased at the end of the (accounting year) 1996," she said. GAN will publish its year-end results for 1996 in late April.

The state will commit to cover losses amounting to 9 billion francs ($1.56 billion) incurred by the GAN holding company for loans made by Baticredit-Finance, the defeasance structure-a program set up in 1995 to group and sell GAN's underperforming real estate assets.

In addition, the state has pledged to enable the GAN holding company to satisfy all possible future equity needs of UIC.

Under the restructuring plan, GAN's insurance, real estate and banking divisions will be separated completely. The holding company will be named Societe Generale du GAN. This will have three divisions:

Insurance under the subsidiary GAN S.A.

Retail banking under Compagnie Financiere de CIC et de l'Union Europeenne.

UIC and the defeasance structure.

Thus the insurance business and the retail bank CIC will not be exposed to the real estate losses. The insurance division GAN S.A. will maintain a 48% share in CIC. The 10-year agreement between GAN and CIC for the bank to sell GAN insurance products, signed in 1995, will remain.

The GAN spokeswoman said that it is still unclear how the company would be privatized, whether sold as a whole or whether separate sales would be held for each division.

The future of GAN's foreign operations is equally unclear. This is up to the government to decide, she said.

Mr. Huard speculated that French insurers would not be interested in the whole of GAN's business, which represents a 5% share of the total life and non-life market. For example, Assurances Generales de France has been speculated to be a potential bidder for GAN. But AGF's core business is in transport, credit, health and industrial insurance lines, which does not correspond with GAN's portfolio. An AGF spokesman said he did not know whether the company is currently interested in GAN.

Mr. Huard said French insurers may want to invest in the company to prevent takeover by a foreign buyer. But the markets are still confused about the company's value. "It is not clear what is a fair value for the stock," he said.

As a result of the state support, the GAN group's consolidated losses for 1996 should amount to 5 billion francs ($865 million), the company said.