Are stateowned insurance companies ASR and Reaal indeed planning to join forces, like I predicted in February last year? It seems like it. Unfortunately, I have doubts whether this ASR plan is a sensible one.

Last year, during January and February 2013, was the time of the nationalization of SNS Reaal. The bank/insurer, with its ill-reputed business unit SNS Property Finance (SNS PF), could not further bear the mounting losses coming from this real estate and property management subsidiary. 

Consequently, the bank/insurer had to be nationalized by the Dutch government, in order to save the normal banking and insurance operation (respectively SNS Bank and Reaal insurances) from the financial house of cards, that was SNS PF. 

Both SNS Bank and Reaal – the main business units of SNS Reaal – were totally respectable companies, without major flaws and/or hidden problems and losses.  However, both business units had almost drowned, due to the soaring losses, sometimes outright fraudulent behaviour and legal problems, caused by SNS Reaal's problem child ‘Property Finance’, where litterally almost everything was wrong that could be wrong.

I invite you to read (for instance) the shocking story of Spanish entrepreneur Jaafar Jalabi of property development company ‘Parcelatoria Gonzalo Chacón’ (behind the first link). Jalabi went through an enduring legal battle with SNS PF (through its Spanish subsidiary Procom Desarrollos Urbanos), based on accusations coming out of thin air. In spite of the fact that Jalabi won every trial which SNS PF started against him, he lost millions in legal and non-legal damages.

Summarizing, you could say that SNS PF was an accident waiting to happen. And it happened indeed during the first months of 2013.

Anyways, in my January 2013 article about the (intended) nationalization of SNS Reaal, I sketched three possible scenarios for the future of SNS Reaal and its business units Reaal insurances and SNS Bank:

Here are three possible scenario’s for a rescue plan that are widely discussed nowadays:

• SNS Reaal puts (parts of) SNS Property Finance and other bleeders in a so-called ‘bad bank’ and sells this in combination with a state guarantee;
• SNS Reaal as a whole is nationalized by the Dutch government and the bank and insurer are split up and divided over the current state-companies ABN Amro (banking) and ASR (insurances);
• SNS Reaal is rescued by letting the shareholders and holders of normal bonds and subordinated bonds bleed for the losses that the bank suffered. The bank will probably be either partly nationalized, or it will receive additional state-support. This would be a novelty in the Dutch banking industry;

Now, I am pleased to say that three out of those three scenarios seem to have (partially) played out indeed:

Concerning bullet one: this bad bank for SNS Reaal, in which SNS Property Finance could be ‘defused’, became Propertize BV. 

Propertize, becoming an independent stateowned company (i.e. directly owned by state-operated management company NLFI), cleared the path for a 'no-thrills' takeover of the main business units Reaal and SNS Bank, as the main source for the mounting losses had been taken out of the equasion.

With respect to bullet three: this scenario did not play out in full. 

Although the subordinated bondholders indeed had to bleed for parts of the losses of SNS Reaal, the normal bondholders were rescued by the Dutch state after all:

The twist was that the Minister did some partial burden-sharing on behalf of the shareholders and holders of subordinated bonds, but saved the normal bondholders.

And with respect to the remaining bullet two: last weekend, finally the (anticipated) news was published by Het Financieele Dagblad that ASR (the other stateowned insurance company in The Netherlands) is making plans to take over Reaal, the insurance company within the SNS Reaal group 

[The article mentioned hereunder stood in the printed edition of the newspaper alone, of which I don’t have a link available of course – EL].

ASR is looking for investors to jointly take over Reaal.

Stateowned insurance company ASR is looking for private investors to jointly bring out a bid on the other insurance company in government hands: Reaal. 

With this announcement of ASR yesterday, and with the cabinet’s decision that ASR gets the leeway to do so, the amalgamation of both stateowned insurance companies seems a viable scenario. Until now, the interest from the industry has been poor, in spite of the fact that everybody is allowed to make a bid for Reaal.

Dutch Finance Minister Jeroen Dijsselbloem has called it ‘not erratic, but nevertheless complex, that one stateowned company is allowed to make an offer for another stateowned company’. He emphasized that the sale will take place in an open and transparant process, in which ASR by no means gets a preferential treatment. According to the minister, the European Commission will look after this.

Yesterday, the cabinet decided that the sale of Reaal would commence this summer. The process of limited sale will last at least until December. 

The possibility of an IPO of Reaal, which never published its annual data yet, was ruled out, as this would simply take too long. Earlier, the news was published that Reaal would be separated from the nationalized company SNS Reaal.

Until now, insurance companies outside ASR were hardly interested to buy Reaal (inclusive SNS Asset Management). […] 

In theory, Delta Lloyd is a potential buyer, as CEO Niek Hoek promised earlier to look into the possibilities for a takeover. However, Hoek immediately tempered high hopes: ‘Will this takeover yield real added value, or just problems?!’, he stated in February. Only after costly investments in a combined ICT-infrastructure, this takeover would offer economies of scale to Delta Lloyd.

This reluctant stance of Hoek [ and the fact that he will leave his function within one year – EL] offers some leeway to ASR, when it wants to buy Reaal. 

Although a stateowned company, ASR formally never received state support. The cabinet has now allowed ASR to look for financial partners…

The takeover of Reaal by ASR is something that I reckoned with, since January last year. 

However, whether it would be a sensible takeover or not, is everybody’s guess for a number of reasons:

• First, just like ASR (and as a matter of fact NN Group too), Reaal is a general insurance company, which sells mainstream products like mortgages, life insurances, indemnity insurances, annuities and pension insurances. As far as I know, it does not have a specialty-of-the-house, that would make it a more interesting buy for ASR.
  
  In fact, there is no synergy within the product range, as both insurance companies are 98% interchangeable. This leaves, in my humble opinion, economies of scale as the only real advantage, at the expense of a long and difficult merging process and enormous ICT expenses.
  
• Second, ASR itself is an insurance company that has emerged from the amalgamation of five or six independent insurance companies, which took place under the Fortis flag. A large part of the last decade has been used by ASR to merge the companies, management, personnel and the ICT systems infrastructure together, at the expense of tens of millions of euros. 
  From my own personal working experience at (Fortis) ASR, I know that it was a helluva job to put management, personnel and ICT infrastructure of six independent ‘shops’ – each with their own modus operandi –together and turn this into one healthy and adroit company, which can truly compete with its competition.
  Due to this experience, I really wonder whether ASR will become a better, more competitive company from the takeover of Reaal. Personally, I have serious doubts about that.
  
• Third, even if the takeover of Reaal succeeds, it will always spread the smell of a state-aided takeover; in the eyes of the general public one stateowned company is favoured, during the takeover of another stateowned company.
  
• Fourth, also Reaal has been involved in the ‘usurious profits policy’ affair (see my article series about NN Group behind the aforementioned link). This could lay a burden upon the takeover of Reaal by ASR, which itself has also been involved in this very affair.

Except for the economies of scale, the only other advantage of this takeover is mentioned in the remainder of the article, which I didn’t print: ‘Allegedly, according to official documentation, the combination of ASR and Reaal would be easier to sell at the financial markets and it would yield more money eventually’.

Plans look always splendid… on paper.

Summarizing: the takeover of stateowned insurance company Reaal by the also stateowned insurance company ASR sounds very obvious and logical from the perspective of the Dutch state and it could be more attractive for shareholders. 

Nevertheless, I really wonder whether this is a smart takeover, which will indeed bring the intended economies of scale and the competitive advantage that it promises; at the stock exchanges or in negotiations with other parties for a (minority) takeover [The Dutch state wants to keep a majority stake - EL].

The blatant reluctancy of other insurance companies like Aegon, NN Group and Delta Lloyd to place a bid, should be treated as a warning signal with respect to the takeover of Reaal.