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Dutch central bank seen to back Delta Lloyd/NN deal

A report on the Dutch insurance sector by the country's central bank is an implicit sign of support for the potential merger between Delta Lloyd NV and NN Group NV, a Dutch insurance analyst told S&P Global Market Intelligence.

Dutch insurers need to make "extra efforts to respond to the sweeping changes to their markets" over the next few years, De Nederlandsche Bank NV said in releasing the report Dec. 13. Low interest rates, technological advances and "fierce competition" in the nonlife insurance market in particular mean that insurers need to accelerate their efforts to adapt, it added.

"We would ... encourage specific insurers to launch cross-border operations in order to diversify and create critical mass," the central bank said.

The central bank's tone should be seen as an implicit nod of approval for a deal between Delta Lloyd and NN Group, said Joost van Beek, an analyst with Theodoor Gilissen Bankiers.

"It gives evidence to the logic of NN acquiring Delta Lloyd," van Beek said in an interview. "We believe that the Dutch central bank is really [backing] this to happen."

NN Group launched a €2.4 billion bid for Delta Lloyd in October, although the latter swiftly rejected the €5.30-per-share cash offer as insufficient. Arguing for a higher price, Delta Lloyd in mid-November laid out a series of synergies that it claimed would save the combined entity €200 million a year, although NN Group executives a day later suggested that they would not pursue a deal at all costs.

The top management of the two groups are still in talks, Hans Duine, an investor relations officer at Delta Lloyd, told S&P Global Market Intelligence. Saskia Kranendonk, head of media relations for NN Group, declined to comment on the process of negotiations.

Van Beek said the central bank is likely to have given the deal its implicit backing because of fears over financial-sector stability and concerns that Delta Lloyd might otherwise draw attention from non-Dutch investors. Delta Lloyd carried out a rights issue earlier in 2016 but still reported a Solvency II ratio of 156% at the end of the third quarter, 80 percentage points lower than that of NN Group.

"I think they looked at the track record of Delta Lloyd with the previous management, which was much more risk-taking," van Beek said. "That's not something that the central bank wants the management of a large insurance company to be. It's a matter of reducing the risk profile of the large players."

He also said a sale to NN Group could prevent Delta Lloyd from being acquired by a foreign company with which the Dutch central bank would have a harder time dealing. Asian investors have been increasingly active in European insurance in recent years, notably the £3.47 billion purchase in 2015 of Amlin Plc by Japan's Mitsui Sumitomo Insurance Group to create MS Amlin Plc. In the Dutch market, Anbang Insurance Group Co. picked up VIVAT NV in the same year for €150 million.

"My personal belief is that the central bank doesn't really like [dealing with foreign managers], because [the regulators] have less understanding of [these managers'] way of thinking, the way they trade, etc.," van Beek said. "And maybe for Chinese management, the interest of a healthy Dutch market is of lesser importance."

The prospects for M&A activity involving companies with sizable life insurance exposures like Delta Lloyd and NN Group will depend to a large extent on the outlook for interest rates, van Beek said. As interest rates rise, life insurers fare better because they can more easily make money to match their promises to policyholders.

Stefan Schneider, head of strategic research at Deutsche Bank, told S&P Global Market Intelligence that interest rates should continue ticking up, especially as the incoming administration of U.S. President-elect Donald Trump seems set to adopt an expansionary fiscal policy that should push up inflation and, therefore, U.S. interest rates. This, in turn, could help to push up yields on assets like benchmark 10-year German bonds, he noted.

The Federal Reserve on Dec. 14 raised its main interest rate to between 0.50% and 0.75% and said policymakers foresaw three rate hikes in 2017, up from a previous median of two.

"In terms of the long-term rates, from what we perceive from the new administration coming in, we have adjusted our U.S. rates forecast quite substantially," Schneider said before the Fed's decision. "We see 10-year [U.S.] Treasuries going above 3.5% by mid-next year [from 2.62% as of 8 a.m. ET on Dec. 15]. Assuming this, rates in the eurozone -- our benchmark is the German 10-year Bund -- will move towards 1%."