Legality of insurance firm subsidy doubted

Date: 08/02/1996

By Tim Jones

A FORTNIGHT after clearing 2.4 billion ecu in aid to a French property financing company, the European Commission is casting doubt on the viability of a subsidised restructuring scheme for the country's fifth largest insurance company.

Based on the information supplied both by the French government and Morgan Stanley investment bank, Commission officials want pledges that a 435-million-ecu capital injection for Groupe des Assurances Nationales (GAN) is part of a genuine and radical restructuring.

The company, which is 80&percent; owned by the state, ran into major losses three years ago prompted by heavy exposure to property lending and disaster insurance claims. In 1994, losses totalled 830 million ecu.

To turn the company around, President Jean-Jacques Bonnaud announced a restructuring plan in early 1995 aimed at restoring GAN to profit in 1996. In return, the French state injected 435 million ecu through the creation of 10.8 million GAN shares, representing 11&percent; of its capital.

This was not notified to the Commission. “This was not a subsidy,” says a French official. “It was a capital increase through a share issue.”

The restructuring plan foresaw the divestment of 750 million ecu in 'non-strategic' assets, as well as the sale of 1.2 billion ecu of the loan portfolio at its property lending unit, UIC.

By the first half of 1995, losses had been cut to 60 million ecu, but the Commission is still not entirely satisfied.

With a downturn in business activity at the end of 1995, GAN is still highly exposed to the real estate lending sector and a debt book of 1.9 billion ecu at UIC. GAN is committed to a complete redirection of UIC, with reforms to both risk management and productivity gains producing a return to the black in 1996-97.

Moreover, the board has been slow to come forward with the sale of all or part of GAN's 93&percent; owned banking arm Crédit Industriel et Commerciel (CIC), which contributed 60 million ecu to GAN group profits in the first half of last year. It is thought GAN could get 2 billion ecu for CIC, although some members of the board would be unhappy at the sale of such a strategic unit.

Most recently, GAN has announced the sale of 66&percent; of the capital in CFJPE and an accompanying portfolio of industrial holdings for 140 million ecu to Banexi, a business arm of BNP, and Crédit National.

Commission officials expect a decision to be taken on the GAN aid by the spring, around the same time as the investigation into the payment of 327 million ecu of aid to shipping firm Compagnie Générale Maritime (CGM) is due to end.

“Neither of these is big money aid, but both could be embarrassing for the French if they actually have to pay (the aid) back,” said a source close to the negotiations.