Last May, when ING Group’s new chairman and CEO, Michel Tilmant, declared that he was splitting Europe’s biggest bancassurer into distinct banking and insurance divisions, staffers and customers, not to mention competitors and investors, were taken aback. Combining banking and insurance, after all, had been the prevailing business model for big European financial services companies for decades. Now here was the head of the Netherlands’ ING, the putative exemplar of this supposedly synergistic strategy, abandoning it in an open admission that bancassurance didn’t live up to its billing.
“The new structure recognizes that insurance and banking are two different businesses with different tools for driving profit, even if there are synergies between them,” Tilmant tells Institutional Investor during an interview in his almost-too-orderly office -- not a paper in sight -- at ING’s headquarters in a south Amsterdam office block. The CEO is quick, however, to downplay the possibility that ING will retreat altogether from either insurance or banking, asserting that “having the two operations gives us better growth opportunities and provides more stable profits than if we were just to focus on one.”
But ask this dynamic CEO, whose résumé is adorned with two big bank restructurings, whether ING might exit the lackluster U.S. insurance industry -- where it has famously spent billions on acquisitions, including the July 2000 purchase of Aetna Financial Services, and still harvests more than half of the group’s E55.4 billion ($72 billion) in insurance revenues -- and he becomes ever so evasive. “In the U.S., as elsewhere, if the market evolves or moves, then we will analyze the situation and decide what to do,” he temporizes.
Tilmant’s reluctance to tip his hand about the U.S. insurance business is sure to stoke speculation that his decision to effect an amicable separation between insurance and banking could signal much more dramatic changes at ING -- and further undermine the received wisdom that banking and insurance products should be peddled as a package.
“Michel keeps his own counsel more than many CEOs,” confides Baron Albert Frère, the billionaire Belgian investor and majority shareholder in Brussels-based holding company Groupe Bruxelles Lambert. “While I have no idea what strategy he will follow down the road, I have no doubt that Michel won’t hesitate to dramatically restructure the group through transformational deals if it will boost returns.”
Frère speaks from personal knowledge. In the 1990s he hired Tilmant, a fellow Belgian, to revamp and sell Banque Internationale à Luxembourg, Luxembourg’s largest bank, and, not long after that, to do the same with Banque Bruxelles Lambert, Belgium’s second-largest bank.
Tilmant’s no-less-radical realignment of ING takes the Dutch bank’s old units -- ING Europe, ING Americas and ING Asia/Pacific, in all of which banking and insurance were integrated -- and recasts them into six divisions focused on insurance or banking but not both: Insurance Americas, Insurance Europe, Insurance Asia-Pacific, Wholesale Banking, Retail Banking and ING Direct, the last being the thriving online banking operation.
“There are still opportunities to cross-sell, but the focus now is on being excellent in the individual business lines,” contends Fred Hubbell, who heads ING’s global insurance operation. “Trying to run insurance and banking simultaneously in our various markets under a complex matrix structure was cumbersome and took attention away from execution.”
Tilmant, in his usual remodeling mode, has sold eight low-margin or noncore businesses, from an unprofitable Argentinean insurance operation to a poorly performing U.K. money manager -- Baring Asset Management -- for more than E1.7 billion in all. That leaves ING with a portfolio of banking and insurance enterprises that possess critical mass in mature markets or lead most competitors in less-developed ones.
The company’s dual vision but sharper focus appears to be working. ING’s net profits grew 48 percent in 2004, to E6 billion, mainly because the company got rid of those unwanted businesses, registered robust growth at ING Direct and in its Asian insurance operations and raised prices and whacked away at assorted costs in its mature U.S. and European businesses. Revenue growth was a lot less impressive: just 5 percent, to E67.8 billion, reflecting flat growth in the U.S. and Benelux markets from which ING still derives more than two thirds of its sales. Nevertheless, the company’s stock has risen 22.4 percent since Tilmant took over late last April -- almost triple the 7.9 percent gain for the MSCI European financials index.
ING remains by far Europe’s biggest combined banking and insurance operation, with 20 million banking and 40 million insurance customers. It has 113,000 employees, offices in more than 50 countries and a market capitalization of almost E50 billion. Yet because of its $16 billion shopping binge for U.S. insurers and the drag from years of sluggish global economic growth, ING could use a bit more capital: Its core tier-1 Bank for International Settlements capital ratio is 7.7 percent, well below the 9 percent that is typical for European banks, reckons Goldman, Sachs & Co.
In its core Dutch market, ING sells 28 percent of all life insurance and 21 percent of nonlife products -- almost double the respective market shares of its nearest competitor, Aegon. ING is the fourth-largest U.S. life insurer, with a 4.6 percent market share (not that far behind No. 1 American International Group, with 6.7 percent). The group ranks as the second-largest international life insurer in Asia and one of the biggest life insurers in Latin America. In toto, insurance accounts for 54 percent of ING’s operating profits and banking the remainder.
The bancassurer’s capital predicament could yet tempt Tilmant to unload the U.S. insurance operations. But an even more powerful motive for doing so may simply be this: The logic of ING’s owning a substantial U.S. insurance operation has been undermined by a lack of success at cross-selling insurance through the company’s banking network and banking services through its insurance network. Discouragingly for ING, analysts estimate that less than 30 percent of its insurance policies are sold through its banking outlets -- a ratio that is smack in line with the sales achieved by insurers through less costly joint venture distribution deals with banks.
The success of the joint venture arrangements, which don’t require banks to tie up lots of prudential capital in insurance operations, are a key reason that the once-bright vision of bancassurance colossi all over Europe, if not the globe, has been fading. Another stumbling block, however, has been the staunch resistance of independent insurance broker-dealers, whose national associations have threatened to boycott bancassurers like ING if they introduce pricing structures that are much lower than those of the broker-dealers. At the same time, broker-dealers have been reluctant to push banking products, such as mortgages, whose commissions are less generous than those on insurance products.
“Too often bancassurance has been seen as a magic vision,” acknowledges Tilmant. “You can sell a lot of your insurance products through your banking channels, and this has a great competitive advantage. But you can also sell through a joint venture partner and through brokers and agents. At the end of the day, you do what makes the most sense.”
TILMANT INHERITED IN ING A COMPANY THAT one research analyst charitably describes as “a confusing patchwork of businesses.” That the group would have a curious configuration, however, is not surprising. ING grew out of a 1991 merger between the Netherlands’ largest insurer, Nationale-Nederlanden Group, and the country’s third-largest retail bank, NMB Postbank Group. Jaap van Rijn, the former head of Nationale-Nederlanden who became ING’s first chairman, had a dream that the group’s retail bankers would sell insurance policies, while its insurance brokers would sell banking products.
Like many other finance industry executives at the time, van Rijn was enamored of the global financial supermarket concept: strategically located one-stop shops offering everything from annuities and life insurance to retail clients, to equity deals and merger advice to corporate clients. Van Rijn, though, asserted that the merger of Nationale-Nederlanden and NMB Postbank “cemented” their positions at home, providing them with the platform and the clout to expand abroad.
The banker left the company in 1992, when he reached its mandatory retirement age of 62. But his successor and spiritual heir, Aad Jacobs, who had been an insurance executive at Nationale-Nederlanden, pushed Internationale Nederland Group (as ING was then known) into international investment banking and money management by purchasing Barings in 1995. That proud old London firm had been bankrupted by 28-year-old rogue futures trader Nicholas Leeson. Jacobs was able to buy Barings, with its sizable Asian and U.S. operations, by agreeing to assume £860 million ($1.4 billion) in debt and paying a symbolic £1.
He was far from done shopping. Jacobs’s next big purchase was Equitable of Iowa in 1997, for $2.2 billion, giving ING its first substantial presence in the gigantic U.S insurance market. Late that same year the 61-year-old Jacobs, who was then just seven months from retirement, bought Frère’s newly revamped Banque Bruxelles Lambert for E4.1 billion. In a flash, ING became the largest Benelux financial services company. Jacobs also expanded into Eastern Europe, acquiring a 25.9 percent stake in Poland’s fifth-largest bank, Bank Slaski, for roughly E60 million. (ING would later lay out an additional estimated E350 million to boost its holding to more than 80 percent.)
The financial-supermarket strategy continued apace under Jacobs’s successor, Godfried van der Lugt, the former head of NMB Postbank, who became ING’s CEO in June 1998. He promptly bought BHF Bank, Germany’s sixth-largest corporate and investment bank, for more than E3.5 billion, in two tranches in 1998 and ’99, and then ReliaStar Financial Corp., the eighth-biggest U.S. life insurer, for $6.1 billion, in 2000. Thereupon he heaved a sigh and retired.
His successor, Ewald Kist, who had run ING’s insurance operations, in turn shelled out $7.7 billion in July 2000 for Aetna Financial Services, which has a sizable presence in Latin America and Asia in addition to its U.S. operations. In all, ING acquired 12 major banks or insurers in six years at a cost of almost E28 billion, quadrupling revenues to E73.6 billion in 2001.
Yet many of the acquisitions from ING’s spending spree soon began to look like impulse purchases. Although some yielded a decent annual average return on capital of better than 8 percent -- notably, Bank Slaski and Banque Bruxelles Lambert -- many of the biggest deals led to losses and write-downs.
Barings, which lacked critical mass in most of its markets, never recovered from the 1997 Asian currency crisis: By 2003, ING had dumped most of the venerable British institution’s unprofitable investment banking and brokerage operations. Money-losing BHF Bank, another operation of middling size but prestigious heritage, has been battered by Germany’s endlessly stalled economy. Last October, ING disposed of the bulk of the bank to BHF rival Sal. Oppenheim jr. & Cie. for one sixth of the purchase price, retaining a E1.3 billion loan portfolio and several private equity investments.
In 2002, ING took write-downs adding up to $271 million on its U.S. insurance business, hacking one third off the operation’s profits, which still came in at $547 million. Stock prices and interest rates both fell postbubble, hitting ING’s investment income while shrinking margins on its products. Then-CEO Kist reduced the operating costs of ING’s U.S. insurance business by 20 percent by laying off 2,200 employees and standardizing information technology and product offerings across the bank’s three main American insurance subsidiaries. Yet revenues have remained relatively flat in the division.
ING was so flush with capital for so many years that “people did not need to talk about these things [return on investment and profitable growth],” muses Tilmant.
The late-1990s boom hid the flaws in ING’s supermarket strategy. Although the bancassurer overpaid for several of its acquisitions, like BHF Bank, and those much-touted banking and insurance synergies never materialized, the group prospered in both of its business lines. Profits rose 460 percent between January 1992 and December 2000 (or 21 percent a year on average), and ING’s market capitalization hit E80 billion in January 2001 -- up 16-fold since the bancassurer’s creation ten years before.
Nevertheless, strategic errors, particularly the massive outlay on U.S. insurance, caught up with ING when the bubble burst in spring 2000. As the insurance business’s investment portfolios plunged in value, ING’s shareholder equity dropped 40 percent, from E35 billion to E21 billion, from December 1999 to December 2003.
Rather than jettisoning ING’s less promising businesses, Kist in 2002 decided that ING should husband its earnings to shore up its balance sheet. (For investors who wanted their dividends paid in cash rather than shares, ING sold new shares and distributed the proceeds to them, ending payments from profits.) ING’s tier-1 banking capital and prudential insurance ratios were on a par with the rest of the industry’s but notably below those of key rivals like AIG and Fortis. Kist did bring down ING’s debt-to-equity ratio from 20 percent in December 2001 to 13 percent in last year’s first quarter, though that was still above his goal of 10 percent and several percentage points above those of ING’s prime competitors.
So at the beginning of last year, debt-burdened ING was like conjoined twins: one banking, one insurance -- and both weak. Yet the bancassurer stubbornly clung to the pseudo-promise of synergies between the two, while holding on to a hodgepodge of less-than-promising operations.
TILMANT, WHO WAS THEN VICE CHAIRMAN AND head of ING’s banking operations, took over as CEO and chairman on April 28, 2004. He was named by ING’s ten-person supervisory board to succeed Kist, who retired at 60. Called “naturally charming but consciously seductive” by a friend, Tilmant, 52, is tall, gregarious and dapper, with slicked-back black hair. Colleagues find him easily approachable; Tilmant is fond of hallway chats. “To really know what’s going on in an organization you’ve got to observe and listen closely to your managers and employees, not just read reports,” the CEO says.
When Tilmant graduated with a business degree from Université Catholique de Louvain in 1976, his father, a well-off brewery CEO, encouraged him to indulge his yen for travel. He found a purposeful way to do so: Subsidized by the Belgian government, he visited more than a dozen American states and more than 60 engineering companies to report on how they were handling emerging-markets projects to help Belgian engineering firms in their bidding. Eager to soak up more of the fast-paced, performance-oriented U.S. business culture he had experienced on his tour, Tilmant in 1977 took a job as a management trainee at J.P. Morgan & Co. in New York City. After completing the yearlong program, he joined the firm’s Brussels office and crunched the numbers for loans to build North Sea oil platforms. International in his outlook and at ease with information technology and back-room processing, he rose rapidly at J.P. Morgan. In 1983 he moved back to New York to head a new department marketing cash management and treasury services.
Three years later, Tilmant returned to Europe to build up the bank’s custodial services there, spending two years in Paris and then two in London. He spent his final 24 months at J.P. Morgan running the commercial banking operation in Belgium and supervising Europe-wide treasury, custodial and back-office information services. In January 1991, Frère lured him away to revamp Banque Internationale à Luxembourg in preparation for its sale.
“Going to BIL was great because it gave me the chance to run an albeit relatively small but still universal bank,” says Tilmant. “It was big enough to be significant and small enough to allow one to be familiar with all aspects of the business.”
Ostensibly, Tilmant was only the vice chairman and chief operating officer, but he effectively ran the bank, since BIL’s chairman and CEO was Gaston Thorn, a former prime minister of Luxembourg who knew little about banking but was invaluable for his contacts. “Tilmant went through a spring housecleaning of what was a not-very-transparent organization in preparation for a sale,” recalls a former colleague.
The former J.P. Morgan banker took a long-overdue write-off of nonperforming loans, bringing order to the bank’s chaotic books, but at a stiff price in the short term: BIL’s profits for 1990 fell by almost one third, to $29.5 million. Tilmant next launched a joint venture with Groupe Royale Belge, the U.K.'s Sun Life Corp. and France’s Union des Assurances de Paris to sell the first investment-linked life insurance products across Europe. Today the resulting PanEuroLife is one of the largest cross-border purveyors of life insurance in Luxembourg.
By mid-1991, just six months after his arrival, Tilmant had fashioned BIL into an institution with a solid loan book and good growth prospects. With the hearty blessing of Frère, Tilmant negotiated the sale of BIL to Crédit Communal de Belgique by year-end for $300 million. Frère, who controlled about 50 percent of the bank, reports that he reaped an “assez juteuse,” or rather juicy, gain on the deal.
Pleased with his bank makeover artist, Frère promptly parachuted Tilmant into Banque Bruxelles Lambert, where the Belgian billionaire’s slightly more than 20 percent stake made him the leading shareholder. The bank, whose assets were about $39 billion at the time, was inefficient and undisciplined, and Frère felt BBL was undervalued as a result.
By happenstance, ING had been thinking along those same lines. In December 1991 the Dutch bank mounted a $1.3 billion bid for BBL that Frère and his allies, who together controlled 52 percent of the bank, rebuffed because they believed BBL could fetch more once it had been pounded into shape.
“After Tilmant’s experience at BIL, I was convinced that he had the competence to bring order to the group and help develop its most profitable operations,” says Frère. With his forceful backing, Tilmant was appointed “adviser to the chairman” to Daniel Cardon de Lichtbuer -- who had supported ING’s takeover bid in opposition to Frère. Despite that inauspicious start, Tilmant won the confidence of de Lichtbuer, who also functioned as CEO.
“Michel reformed accounting throughout the bank and helped us to see where the profits were,” says de Lichtbuer. “His bottom-line focus combined with an unusual ability to make colleagues feel at ease made him the evident choice to run the bank after me.” Tilmant succeeded de Lichtbuer as chairman in January 1997, roughly five years after joining BBL.
But prior to that, with both Frère and de Lichtbuer firmly behind him, Tilmant had tightened BBL’s lending criteria -- and pulled out of real estate lending altogether. And he had delved profitably into securities trading and broking and life insurance sales. Earnings surged almost tenfold in five years. Ironically, Tilmant, with Frère’s support, wound up selling the bank to ING after all, in November 1997, for E4.1 billion. But in the intervening half-decade, the price per share had tripled.
TILMANT FOUND HIMSELF WORKING FOR ING, and the Dutch bank found itself employing the consummate financial handyman. Then-CEO Godfried van der Lugt wisely put him in charge of ING Barings, the money-losing investment bank. As its chairman from October 1998 through December 1999, Tilmant chopped costs by one quarter, laying off 1,200 of 10,000 employees. The shock treatment returned ING Barings to profitability. Promoted in January 2000 to vice chairman of ING Group and given oversight of all banking activities, Tilmant promptly put Barings’s subscale and subpar U.S. investment banking operation up for auction, eventually disposing of it to ABN Amro in early 2001 for $300 million. He also shuttered Barings’s plush London headquarters and focused the much more modest -- but profitable -- business that survived on ING’s core clients in the Netherlands and Belgium.
Tilmant, made the board’s point person for corporate finance and investment banking, next shut down ING’s volatile emerging-markets-debt trading desk. He also persuaded a wary board to sell the bank’s unprofitable Asian stockbroking operation to Australia’s Macquarie Bank for a reported $200 million.
That decisive style is typical of Tilmant. “I am very, very interested in making sure that the people around me are very concentrated on execution and performance,” he says. “I like those things. That’s probably the way I was born and raised.” J.P. Morgan, he adds, taught him the importance of controlling risks.
In almost a year as ING’s CEO, Tilmant has amply demonstrated his preoccupation with performance (or the lack thereof). The eight units he unsentimentally pruned from the bank were all either laggards or misfits. ING Insurance Argentina was stuck with a raft of unprofitable life policies following Buenos Aires’s 2002 peso devaluation; Tilmant turned it over to Zurich Financial Services Group last fall for an undisclosed sum.
He off-loaded ING’s U.S. individual life reinsurance business, whose gung-ho push to amass market share between 1999 and 2003 exhausted its reserves, last October -- in effect paying Scottish Re Group E450 million in recapitalization money to take it off ING’s hands. Although Tilmant swallowed a E500 million loss on the “sale,” he freed up E700 million in prudential capital for the ING group. Australian property and casualty joint venture Mercantile Mutual Insurance was irrefutably profitable (a 34 percent return on equity in 2003), but it offered no significant synergies with ING’s line of house-branded, predominantly life insurance businesses; the bancassurer sold its 50 percent stake in October to its partner in Mercantile, Sydney’s QBE Insurance Group, for E459 million, of which a gratifying E146 million was a capital gain.
Another square peg was the U.S.'s Life Insurance Co. of Georgia. Though passably profitable, it had never been properly assimilated into the close-knit ING family; Tilmant parceled off the insurer in November to Jackson National Life Insurance Co. of Lansing, Michigan, for E197 million. Meanwhile, the hoity-toity ways of CenE Bankiers, ING’s Dutch private bank, had grown increasingly out of step with the company’s commitment to mass marketing of financial products, so Tilmant handed it on a silver platter to another Dutch private bank, Van Lanschot, for E250 million. That also happened last October. The remaining two castoffs were Barings and BHF Bank.
Tilmant has used the E1.1 billion raised from ING’s big fall sale and a further E654 million collected from listing 30 percent of ING Canada on the Toronto Stock Exchange to reduce the company’s debt by more than one fifth, to E3.4 billion. ING’s tier-1 capital ratio has stabilized but is still fragile at 7.7 percent.
What does Tilmant do now? “He has pretty much jettisoned all the group’s money-losing and marginal operating units,” points out Bertrand Veraghaenne, a financial institutions analyst at Brussels-based money manager Petercam Asset Management, which owns some ING shares. “Now comes the tough job of figuring out how he wants to shape the group long-term.”
The CEO is reticent about his specific ambitions for ING, but he exudes confidence about the company’s prospects. “If I compare ING to its peers, then I strongly believe we have more growth opportunities, both geographically and productwise, looking at the insurance or the bank,” Tilmant says. He points out that ING is anchored in the “stable, rich [Benelux] market, where people save a lot of money,” and in the U.S., “the biggest savings market in the world,” in addition to having more exposure than most Western European and U.S. insurers to emerging markets, particularly in Asia.
“Measured by the value of new business, Asia is our most important growth engine today, and we expect that to continue to be the case,” says global insurance boss Hubbell. “In countries like Taiwan, South Korea and Japan, we have large businesses that are well positioned in the marketplace against local as well as foreign competition.”
Asia accounted for slightly more than half of the E632 million in new life insurance written by ING last year, and it’s the only region in the company’s globe-girdling sales territory that has had double-digit growth for four years running. Asian revenues rose 24 percent in 2004 and now account for 22 percent of ING’s insurance premiums and 10 percent of group profits. Making the rapid growth all the sweeter, ING’s profit margin on new Asian insurance business is 23.2 percent, compared with a mere 5.4 percent in the mature U.S. market and 17.7 percent in Europe’s. (Analysts say the December tsunami will have a negligible impact on ING’s profits.)
ING’s other high-flying operation is ING Direct, which counts 11.5 million customers in Australia, Canada, France, Germany, Italy, Spain, the U.K. and the U.S., making it the world’s biggest online bank. In a portent of the kind of expansion that can probably be expected from the cyberbank over the next few years, ING Direct’s profits shot up 186 percent in 2004, to E432 million, and now constitute 12.2 percent of the ING Group’s operating profits from banking and 6 percent of its total operating profits. What’s more, that earnings contribution comes on ING Direct’s still paltry 2.5 percent share of ING’s total revenues, indicating the rich potential margins of online banking. “The beauty of ING Direct is that it is a largely fixed-cost business,” says Hans Verkoren, global head of the online bank. “Once we pass about 500,000 clients and E7 million in deposits in any market, the overhead costs are covered, so profitability rises.”
More mundanely, perhaps, but highly remuneratively, ING Wholesale Banking and the company’s three traditional retail banking brands -- ING Bank, Postbank and ING Belgium -- utterly dominate the Benelux market. Together they account for roughly four fifths of all banking revenues and approximately 75 percent of banking profits. Although the wholesale bank operates in 40 countries, it gets the lion’s share of its profits (about 72 percent) from Benelux customers, primarily those for corporate loans. The retail banks sell every conceivable retail product and have almost 2,000 branches among them.
In emerging markets, ING owns Slaski and last July launched a new retail bank in Romania -- ING -- that now has 40 branches. ING has built up a 44 percent holding in India’s 300-branch Vysya Bank, and it remains on the lookout for other acquisitions, especially in Asia. In late March the group agreed to pay E166 million to buy a 19.9 percent share of state-owned Bank of Beijing, China’s 16th-largest bank, which has more than $24 billion in assets. “We have to be on the alert for possible acquisitions in new countries,” says Eli Leenaars, who runs global retail banking for ING. “But the first priority is to do better and grow in the emerging markets where we are now, namely Poland, India and Romania.”
In all, banking worldwide contributed 46 percent of ING’s operating profits, or E3.4 billion, in 2004, a solid performance.
TILMANT IS NEVERTHELESS BOUND TO FEEL intensifying pressure for consolidation as he mulls over the bancassurer’s long-term strategy. “Investment returns for U.S. insurers have fallen to very low levels in recent years, creating huge pressure to merge as a means of lowering costs,” points out Petercam’s Veraghaenne. “ING will have to get several years of solid earnings under its belt before it is likely to have the cash to compete with rivals like AIG or Prudential Financial in the event of a U.S. merger wave.”
The ING CEO is characteristically tight-lipped on this subject. “I won’t speculate on what might or might not happen in the event of consolidation in the U.S. market, or even on how we might expand our existing activities going forward beyond running with the promising businesses we’ve got,” he says. “But what I will say is that when it comes to consolidation and takeover speculation, I live by one rule: Concentrate on execution.”
