Firm

 Valua*on  

Session  9  
© Pierre Faddoul - 2019
  Financial  Ins.tu.on  analysis  
 Determining  value  of  an  insurance  company  
  Financial  Ins.tu.on  analysis  
 Embedded  Value  (EV)  
The   formal   defini.on   of   EV   includes   the   adjusted   net   worth   of   assets   and  
value  of  in-­‐force  business.  Adjusted  net  worth  is  the  realized  net  asset  value  
of  capital  and  surplus,  while  the  value  of  in-­‐force  business  is  comprised  of  the  
present  value  of  future  aIer-­‐tax  profits  and  the  cost  of  capital.    
  Financial  Ins.tu.on  analysis  
 Adjusted  Net  Asset  Value  (ANAV)  
ANAV  is  equal  to  the  sum  of:  
 
Net  Asset  Value  (shareholders’  equity)  
 
+  
 
Adjustments  to  Net  Asset  Value  (aIer  taxes  and  PH  par.cipa.on)  
•  unrealised  gains  and  losses  (+/-­‐)  
•  intangibles  (start  up  costs,  Deferred  Acquisi.on  Costs,  …)  (-­‐)  
•  revalua.on  of  par.cipated  companies  (+)  
•  cross  par.cipa.ons  (-­‐)  
  Financial  Ins.tu.on  analysis  
 Value-­‐In-­‐Force  (VIF)  
Defini.on:  
Present  value  at  valua.on  date  of  future  industrial  profits  (aIer  
taxes   and   reinsurance)   expected   to   emerge   from   all   contracts  
exis.ng   at   valua.on   date,   aIer   allowance   for   the   cost   of  
financial   guarantees   and   op.ons,   the   cost   of   non-­‐financial   risks  
and  the  cost  of  holding  the  required  capital  
 
Value  of  in-­‐force  (VIF)  =  value  “implicit”  in  the  contracts  already  
in-­‐force  
  Financial  Ins.tu.on  analysis  
 Value-­‐In-­‐Force  (VIF)  
  Financial  Ins.tu.on  analysis  
 Value-­‐In-­‐Force  (VIF)  
  Financial  Ins.tu.on  analysis  
 EV:  Water  Fall  Chart  
  Financial  Ins.tu.on  analysis  
 Value  of  new  business  
§  The   VNB   is   a   measure   of   the   economic   value   of   the   profits   expected   to  
emerge  from  new  business  net  of  the  cost  of  suppor.ng  capital.  VNB  is  
the  increase  in  EV  over  the  period  due  to  new  business.  

§  Formula/Methodology:  same  as  VIF  

  Financial  Ins.tu.on  analysis  
 Appraisal  value  
  Financial  Ins.tu.on  analysis  
 Some  ra.os  
§  Annual   Premium   Equivalent   (APE):   APE   is   a   measure   of   new   business   wri\en   by   a   life  
insurance   company.   It   is   computed   as   the   sum   of   annualised   first   year   premiums   on   regular  
premium   policies,   and   ten   percent   of   single   premiums,   wri\en   by   the   Company   during   any  
period  from  new  retail  and  group  customers.  

§  VNB   margin:   is   computed   as   VNB   for   the   period/APE   for   the   period.   It   is   similar   to   profit  
margin  for  any  other  business.    

§  Agency:  number  of  agents  

§  Loss   ra*o:   measures   the   total   incurred   losses   in   rela.on   to   the   total   collected   insurance  
premiums  

§  Expense   ra*o:   is   calculated   by   dividing   the   incurred   underwri.ng   expenses   by   the   earned  
premiums  
 
§  Combined  ra*o:  measures  the  incurred  losses  and  expenses  in  rela.on  to  the  total  collected  
premiums.  

§  Solvency  ra*o:  of  an  insurance  company  is  the  size  of  its  capital  rela.ve  to  all  the  risk  it  has  
taken,  which  is  all  liabili.es  subtracted  from  total  assets.  
FINANCIAL  INSTITUTIONS  

Case study of M&A failures:

ABN Amro’s acquisition by RBS/
BS/Fortis
 RBS-led consortium takeover of ABN
Amro
Summary:  
§  The  transac.on:  biggest  financial  acquisi.on  ever  
§  Considera.on:  USD  100  billion    
§  Target:  ABN  Amro  Bank  (Netherlands)  
§  Buyer:   consor.um   led   by   RBS   comprised   of   For.s   Bank  
(Belgium),  and  Banco  Santander  (Spain)  
§  Acquisi.on  date:  October  2007  
§  At  the  .me  in  2007:  RBS  is  the  biggest  bank  in  the  world  by  
total  assets,  at  USD  3.77  trillion  
 RBS-led consortium takeover of ABN
Amro
Post-­‐transac.on:  
§  For.s:   in   July   2008,   CEO   Jean   Votron   stepped   down   aIer   the   ABN   AMRO   deal  
had   depleted   For.s's   capital   The   total   worth   of   For.s,   as   reflected   by   its   stock  
value,  was  at  that  .me  one-­‐third  of  what  it  had  been  before  the  acquisi.on,  and  
just   under   the   value   it   had   paid   for   the   Benelux   ac.vi.es   of   ABN   AMRO.   In  
September  2008,  For.s  was  na.onalised  by  the  Belgian  and  Dutch  governments;  
and  in  October  2008,  French  banking  giant  BNP  Paribas  announced  that  it  will  be  
acquiring  For.s  at  a  valua.on  of  ~USD  15  billion  
§  RBS:   The   group   announced   writedowns   on   goodwills   (primarily   related   to   the  
takeover   of   Dutch   bank   ABN-­‐AMRO)   of   around   £20bn   (USD   29   billion).   The  
combined  total  of  £28bn  (USD  40  billion)  would  be  the  biggest  ever  annual  loss  
in   UK   corporate   history   (the   actual   figure   was   £24.1bn   or   USD   35   billion)).   UK  
government  injects  capital  in  RBS  and  becomes  58%  shareholder,  and  further  in  
2009  to  become  70%  shareholder.  It  cost  UK  taxpayers  nearly  USD  65  billion  to  
rescue.  10  years  of  consecu.ve  annual  losses  (2008  .ll  2018)  
 RBS-led consortium takeover of ABN Amro

M a r c h   2 0 ,   April   13   –   RBS,   April  23  -­‐  Barclays  agrees  to  

A p r i l   2 5   -­‐   R B S ,  
2 0 0 7   -­‐   Santander   and   b u y   A B N   i n   a  
Santander  and  For.s  
Barclays   and   For.s   say   they   recommended   all-­‐share  
propose   a   cash-­‐and-­‐
ABN   outline   h a v e   deal,   offering   3.225   shares  
share   offer   for   ABN  
the   plan   for   a   a p p r o a c h e d   for   each   ABN   share   —   $88  
worth   about   $98  
p o t e n . a l   ABN,   invi.ng   it   billion   at   current   prices.  
billion   (indica.ve  
merger   t o   t a l k s   a n d   ABN   says   separately   it   will  
offer)  
asking  for  access   sell   U.S.   bank   LaSalle   to  
to  its  books.   Bank   of   America   for   $21  
billion  

2007  

“Crown  Jewels”  
defense  by  ABN  
 RBS-led consortium takeover of ABN Amro
May  to  July  :  
§  The   RBS-­‐led   consor.um   unveils   a   J u l y   2 3   -­‐  
bid   for   ABN   valued   at   38.40   euros   October   10th   -­‐  
B a r c l a y s   October   The   consor.um  
per   share,   worth   a   total   $95.7   raises  its  offer   1st  -­‐  Bank   O c t o b e r  
4 t h   -­‐   wins   a   bidding  
billion,  or  71.1  billion  euros;  later   f o r   A B N   o f  
B a r c l a y s   w a r   a g a i n s t  
improved   by   offering   more   cash.   A M R O ,   America  
The   consor.um   has   kept   its   offer   withdraw Barclays   for   ABN  
valued   at   the   absorbs   AMRO   with   a   70  
at   38.4   euros   per   share,   10   .me   at   67.5   LaSalle   s   offer   at  
b i l l i o n   e u r o  
percent   above   an   all-­‐share   offer   billion   euros   c l o s i n g  
date   offer,   making   it  
from   Barclays   currently   worth   ($93   billion)   t h e   b i g g e s t  
about   35   euros   per   share,   but   to   include   a  
raises   the   cash   component   to   93   b a n k i n g  
cash  element   t a k e o v e r   i n  
percent  from  79  percent  before.    
history.  
§  The  consor.um  formally  launches  
its  71.1  billion-­‐euro  ($98.2  billion)  
bid  for  Dutch  bank  ABN  AMRO  

2007  
 RBS-led consortium takeover of ABN
Amro
ABN  Amro:  
§  Founded  in  1824  
§  Total  opera.ng  income  €22.658bn  
§  Ranked  as  the  eighth  largest  bank  in  Europe  
§  Headquartered   in   Amsterdam,   with   more   than   4,500  
branches  in  53  countries  
§  Employed  more  than  105,000  people  before  the  takeover    
 
 RBS-led consortium takeover of ABN Amro
The  consor*um:  
§  The  takeover  is  described  as  hos.le  because  the  board  of  ABN  Amro  did  not  recommend  either  
the  offer  from  Barclays  or  the  RBS  Consor.um.  It  was  therefore  the  shareholders  (owners  of  the  
company)   who   were   instrumental   in   vo.ng.   Shareholders   will   typically   support   the   offer   that  
delivers   them   the   biggest   gains.   Among   ABN’s   largest   shareholders   were   pension   and   fund  
managers,  and  because  they  own  such  a  large  propor.on  of  the  shares  their  votes  were  crucial.  
§  The   RBS   Consor.um   was   compe.ng   against   Barclays   Bank,   which   outlined   plans   for   a   €65bn  
takeover   of   ABN   in   March   2007.   Market   forces   including   the   credit   crunch   (for   more  
informa.on   see   ‘The   Ul.mate   Law   Guide   to   the   Credit   Crunch   and   the   implica.ons   for  
corporate   law   firms’)   and   the   subsequent   support   offered   by   the   Bank   of   England,   which  
pushed  down  Barclays’  share  price,  meaning  it  was  unable  to  match  the  €70bn  proposed  by  the  
RBS  Consor.um.    
§  The  RBS  Consor.um’s  offer  was  cash  rich  and  looked  more  generous  to  the  ABN  shareholders  
than  the  equity-­‐heavy  offer  from  Barclays,  which  was  lessened  by  the  fall  in  its  share  price.  
§  The  shareholders  struggled  to  choose  between  the  larger  offer  from  the  RBS  Consor.um,  which  
would  split  ABN,  and  the  lower  offer  from  Barclays,  which  was  decreasing  daily  due  to  the  fall  in  
share  price  but  which  would  ul.mately  keep  the  en.re  ABN  organisa.on  together.    
 RBS-led consortium takeover of ABN Amro
The  closing:  
§  ABN   bosses   preferred   the   Barclays   offer   because   this   would   have   kept  
the  ins.tu.on  intact  and  the  headquarters  would  have  remained  in  the  
Netherlands.  
§  One  aspect  worthy  of  note  is  the  cultural  difference  between  the  Dutch  
shareholders   and   Bri.sh   or   US   shareholders.   The   complexity   and  
poten.al  for  conflict  in  the  RBS  Consor.um’s  proposal  was  immense.    
§  The   plan   was   to   split   the   bank   into   three   parts,   and   each   of   the   RBS  
Consor.um  members  would  take  control  of  the  parts  of  the  banks  they  
were   best   placed   to   deal   with.   In   prac.ce,   this   would   mean   that   RBS  
would   take   over   ABN’s   wholesale   opera.on   and   its   Asian   business;  
Santander  would  take  control  of  the  retail  banking  franchises  in  Italy  and  
Brazil;   and   For.s   would   take   over   the   Dutch   retail   opera.on,   and   the  
asset  management  and  private  banking  arms.    
 RBS-led consortium takeover of ABN Amro
The  ra*onale:  
§  The  RBS  Consor.um  forecast  a  massive  cost  saving  and  revenue  benefits  
of  €1.8bn  if  they  successfully  took  over  ABN  
§  In   addi.on   to   cost   saving,   ABN’s   business   would   allow   the   RBS  
Consor.um  to  access  a  whole  new  group  of  clients,  par.cularly  in  fields  
where   ABN   held   strong   posi.ons,   for   example   in   debt   and   risk  
management   products.   The   member   of   the   RBS   Consor.um   who   took  
over   this   aspect   would   have   a   list   of   ready-­‐made   contacts   and   the  
goodwill   that   comes   from   having   built   business   rela.onships   over   the  
years.  The  new  owners  would  also  have  a  new  host  of  services  to  offer  
their  exis.ng  clients.    
§  Barclays  had  similar  ideas:  if  it  had  been  successful  in  merging  with  RBS,  
its  plan  was  to  eliminate  costs  of  €2.8bn  
 RBS-led consortium takeover of ABN Amro
Expected  Transac.on  Benefits:  Summary  

Source:  For9s  
 RBS-led consortium takeover of ABN Amro
Expected  returns  

Source:  For9s  
 RBS-led consortium takeover of ABN Amro
Structure  

Source:  For9s  
 RBS-led consortium takeover of ABN Amro
Financing:  
 
§  For.s:  13  billion  euro  rights  issue,  priced  at  a  heIy  44  percent  discount  
to  its  share  price.  Remaining  in  debt  

§  RBS:    
in  Eur  millions   %  of  total  
Issue  of  new  ordinary  shares   4,281   15%  
 Total  Equity  Component   4,281   15%  

Preference  shares   4,567   16%  

Other  .er  1  securi.es     1,557   6%  
Senior  funding     9,941   36%  
Bridge  funding   7,400   27%  
Total  quasi-­‐equity  &  debt   23,465   85%  
Total  RBS  considera*on   27,746   100%  

Source:  FSA  Report,  2011  

 RBS-led consortium takeover of ABN Amro
What  were  the  reasons  of  this  failure?  
 
§  Over-­‐paying:   subsequent   downturn   in   global   financials   share   price   showed   that  
banks  in  general  were  over-­‐valued  for  a  period  or  several  years  

§  Bidding  war:  Consor.um  basically  entered  in  a  bidding  war  with  Barclays  over  ABN  
Amro  

§  No   response   to   M&A   defense:   selling   the   “Crow   Jewels”   (Lasalle)   did   not   deter   the  
consor.um  nor  affected  the  purchase  price  

§  Financing:    
•  Sell-­‐off   in   global   financials   shares   due   to   the   looming   global   financial   crisis  
during/subsequent   to   the   acquisi.on   rendered   the   acquisi.on   even   more  
expensive  
•  Same  for  the  blow-­‐up  in  credit  spreads    
•  Over-­‐reliance   on   short   term   funding   which   froze   during   the   global   financial  
crisis