ING Says It’s Preparing U.S. Insurance Unit for Possible IPO
November 11, 2010 by Maud van Gaal
By Maud van Gaal – Nov 10, 2010
ING Groep NV, the largest Dutch financial-services company, said it’s taking steps to prepare its U.S. insurance business for an initial public offering and reported a sixfold increase in banking profit.
ING rose as much as 4 percent in Amsterdam trading after saying it plans to bring accounting and hedging practices for variable annuities at its U.S. insurance unit “more in line with U.S. peers,” while banking earnings surged as loan-loss provisions fell.
ING agreed to split its insurance and banking units by the end of 2013 to gain European Commission approval for a government bailout, which included 10 billion euros ($13.8 billion) of state aid and the transfer of 21.6 billion euros of U.S. mortgage assets. The company plans to separate the two businesses by the end of the year, and is considering IPOs of both its European and U.S. insurance units.
“They are taking substantial action in the next two months to boost the reserves of the U.S. variable annuity business, after which it will be much easier to embark on the IPO route or to sell the variable annuity business,” said Cor Kluis, an Utrecht-based analyst at Rabo Securities. “This had to happen and I think the market knew that. I am glad they are doing it now.”
ING climbed 25.5 cents, or 3.2 percent, to 8.22 euros by 2 p.m. in Amsterdam. The stock has gained 19 percent this year, valuing the company at 31.5 billion euros. The Stoxx Insurance 600 Index advanced 4.5 percent in the period.
Final Writedown
Net income fell to 371 million euros in the three months through September, missing analysts’ estimates, as ING wrote down goodwill at the U.S. insurance unit by 513 million euros to help prepare the business for a stock sale. Changing the accounting and hedging practices may lead to a further writedown of about 1 billion euros before tax in the fourth quarter.
No further writedowns on the variable annuities business are expected after the fourth quarter, Chief Executive Officer Jan Hommen told reporters on a call today.
“The VA issue looks resolved,” Thomas Nagtegaal, an analyst at Royal Bank of Scotland Group Plc in Amsterdam, wrote today.
Underlying earnings, which exclude asset sales and special items, beat analysts’ estimates. Profit before tax on that basis rose to 1.53 billion euros from 801 million euros a year earlier, compared with the 1.39 billion-euro estimate.
Europe, U.S.
The insurance IPOs are likely to take place in 2012, though they could occur in the fourth quarter of 2011 if conditions are favorable, said Hommen.
“While the option of one IPO remains open, we are going to prepare ourselves for a base case of two IPOs for our insurance businesses: one Europe-led IPO with solid cash flow combined with strong growth positions in developing markets, and one separate U.S.-focused IPO with a leading franchise in retirement services,” Hommen said in a statement.
The Europe-led share sale will include the European and Asian insurance operations and the regions’ investment management activities, Hommen said. No decision has been taken on the Latin-American business.
The insurance unit had pretax profit excluding asset sales and special items of 18 million euros, down from 551 million euros a year earlier. The company booked the goodwill writedown as “the U.S. legacy business had a reserve inadequacy which reduced the fair value of U.S. insurance in relation to shareholders equity,” ING spokeswoman Victorina de Boer said by phone.
Reducing Costs
ING aims to reduce annual costs in the U.S. insurance operations by 100 million euros. “The aim is to create a strong and profitable U.S. business, which over time can be IPOed when earnings and market circumstances improve,” the company said.
“Progress at presenting the insurance business as capable of being sold” is “key” to ING’s shares, said Christopher Hitchings, a London-based analyst at Keefe, Bruyette & Woods in a note dated Nov. 3.
ING was created by the 1991 merger of insurer Nationale Nederlanden and NMB Postbank Group. European Union regulators approved ING’s taxpayer-funded bailout in November 2009, after the company agreed to sell its insurance and U.S. online banking divisions and make additional payments to the state for the risk transfer of U.S. mortgage assets.
Basel Impact
ING and the Netherlands have appealed the decision by the European Commission, the EU’s antitrust regulator, on measures taken against the company after it received the bailout. ING is contesting the calculation of the amount of state aid it received and the imposition of price restrictions. The appeal will be heard at the earliest by the end of this year, ING’s General Counsel Evert Vink said last month.
The banking division, which will keep the ING brand-name after the split, reported pretax profit excluding divestments and special items of 1.5 billion euros, up from 250 million euros in the year earlier period, as loan provisions fell.
The bank’s core Tier 1 capital ratio, a key measure of the ability to absorb losses, rose to 9 percent from 8.6 percent at the end of June. ING said its bank is well-positioned for Basel III requirements.
Based on current draft rules, the negative impact on the core Tier 1 ratio would be 70 basis points, the lender said. The Basel Committee on Banking Supervision in September agreed on rules that more than double capital requirements for banks. A basis point is a hundredth of a percentage point.
ING is still evaluating the position of its Real Estate Investment Management unit within the bank as it aims to reduce property-related risk, Hommen said today. He expects to give an update on the process by the end of this year.
KKR & Co., Vornado Realty Trust and Apollo Global Management LLC have shown interest in the unit, people with knowledge of the situation said last month.
To contact the reporter on this story: Maud van Gaal in Amsterdam at mvangaal@bloomberg.net
To contact the editor responsible for this story: Frank Connelly fconnelly@bloomberg.net
