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Home > Blogs > Anthony Harrington > ING splits its banking and insurance arms—The end of the bank assurer?

ING splits its banking and insurance arms—The end of the bank assurer?

Finance Blogger: Anthony Harrington Anthony Harrington

One instance doesn’t make a trend, but the decision by the Dutch financial services group ING to separate out its banking and insurance arms in the interests of “transparency” and “simplicity”—both unarguably core values for investors post the crash—will send modest ripples through the bank-assurer sector.

As ING chief executive Jan Hommen admitted when he broke the news to press and analysts, ING has been one of the most enthusiastic proponents for almost the last two decades (18 years for the pedantically minded) of the virtues of combining the logically distinct activities of banking and insurance.

“ING has a proud history as a global financial services leader and has been a strong advocate for combining banking and insurance in one company,” he admitted.

That, however, was then, and this is now, the new, post-crash now, where different rules apply. The announcement raised eyebrows everywhere, but generated little applause and ING’s shares tanked 18%. Far-sighted decisions are seldom greeted with glee, since by definition they are made by people whose vision stretches to horizons beyond the ken of the pack.

What ING is giving up, at a stroke—or at least, when it gets around to disposing of its insurance arm, which might be any time in the next four years according to Hommen (no fire sale here)—is economies of scale, capital efficiencies and earnings stability through a diversified portfolio of businesses. I am quoting Hommen here. These are very valuable things and not the kind of benefits that a CEO generally punts into the long grass at a whim.

What it is getting back in return is actually quite a lot harder to evaluate. “Transparency” and “simplicity” are virtuous things for a company to espouse and should be rewarded by making its stock more sought after. However, understanding what a company is doing is not the same thing as being enthused by that stock. Performance is what generates enthusiasm and since ING also plans to dispose of its investment management business along with its insurance business (the two kind of go together), the company is pinning a great deal on its ability to generate above average returns from straight up and down banking. Well, good luck…

ING received a €10 billion bailout from the Dutch government back in October 2008 when the crisis was in full cry and received another, very substantial helping hand in January 2009 when the Dutch government stepped in to save it from the consequences of some horrendous US derivatives dealing, underwriting 80% of the risk on ING’s portfolio of deeply troubled US real estate investments (Alt-A mortgage securities sold to those with difficult credit histories—oh dear, but the yield looked good at the time…).

Is the split then, more a function of necessity than choice? ING says no, and the fact that it says it is going to take its time over the disposals tends to lend credence to its words. If and when the insurance business is sold or IPO’d, it will be a chunky transaction. ING says the business generates $64 billion in revenues. Definitely a deal to watch for, as will be the reaction by other banks with substantial bolt-on insurance businesses.

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Tags: banking , ING , insurance , sell off , transparency
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