Advisory memorandum on the sale of REAAL and ASR May 2014 1 van 57 - 1 - - 1 - Content Foreword 5 Summary 7 Sale of REAAL 7 Sale of ASR with a dual track approach 8 ASR bid for REAAL 8 1. Introduction 11 1.1 Content of the advisory memorandum 11 1.2 Overview of market conditions in the insurance sector 12 2. Sale of REAAL 16 2.1 Role of NLFI in the sale of REAAL 16 2.2 European Commission requirements with respect to the REAAL sale process 16 2.3 Conditions for the return of government interests 18 2.4 Private sale via a controlled auction 18 2.5 The sale process in concrete terms 19 2.6 Sale process time schedule 20 2.7 Does the sale process comply with the European Commission’s requirements? 21 2.8 Request 23 3. Sale options for ASR with dual track approach 25 3.1 Readiness of ASR 25 3.2 Is the market ready for the sale of ASR? 27 3.3 Will the capital expenditure be recovered if a sale is achieved 27 3.4 Conclusion 28 4. The role of ASR in the REAAL sale process 30 4.1 Bidding for REAAL 30 4.2 Financing of the bid for REAAL 32 4.3 What parties could act as financier to ASR? 34 4.4 What if the acquisition of REAAL is not successful? 34 4.5 Request 35 5. NLFI’s internal operations 37 2 van 57 Annex Annex 1: background information to SNS REAAL and REAAL 39 Annex 2: analysis of the different scenarios for the sale of REAAL 41 Annex 3: conditions for the divestment of financial holdings 43 Annex 4: background information to ASR 45 Annex 5: The State’s capital expenditure 47 Annex 6: Comments SNS REAAL, ASR and participation bodies 49 3 van 57 Foreword NLFI manages the interests of the State in a number of financial institutions, including SNS REAAL and ASR Nederland. NLFI has a mandatory task to manage the shareholding in the financial institutions in a commercial rather than a political way. NLFI is also tasked with advising the Dutch Minister of Finance on strategy regarding the sale of the shares. In this letter, NLFI advises you on the options for the sale of the insurance activities of SNS REAAL and the role which ASR Nederland may play in this. The advisory memorandum also considers the (follow-up) study that you requested in respect of the sales options for ASR Nederland. This advisory memorandum is prepared in part on the basis of intensive contact with SNS REAAL and ASR Nederland. We have gratefully made use of the valuable input from the institutions and the advisory bodies associated with them. We also owe our thanks to the Ministry of Finance, De Nederlandsche Bank (Dutch Central Bank) and the Autoriteit Financiële Markten (Financial Markets Authority) for providing their opinions on earlier versions of this document. Discussions were also held with a number of investment banks and legal and financial advisers who shared their insights with us. We are very grateful to all those who helped us to come to this recommendation. NLFI Board, LL.M M. Enthoven (Chairman), LL.M L.Y. Gonçalves-Ho Kang You Jhr. Drs. D. Laman Trip. May 2014 This is a translation of the original text in Dutch. In case of divergences between the texts, the text of the Dutch version shall prevail. 5 van 57 Summary This advisory memorandum considers the options investigated by NLFI for a private sale of REAAL N.V. (REAAL), a 100% subsidiary of SNS REAAL N.V. (SNS REAAL) to which all insurance activities are assigned.1 This is closely associated with the European Commission decision of 19 December 2013 to approve rescue aid to SNS REAAL. A major condition to this approval is the sale of all SNS REAAL insurance activities within the timeframe set out in the restructuring plan approved by the European Commission. In this advisory memorandum, NLFI also considers the options for the sale of ASR to other insurance companies pursuant to the advisory memorandum regarding the sales options for ABN AMRO and ASR dated 23 August 2013. This is in accordance with your request in a letter to the Tweede Kamer (Dutch Lower House) dated 18 December 2013. Sale of REAAL As holder of 100% of the shares in REAAL, SNS REAAL shall act as the seller. As the only shareholder in SNS REAAL and indirect shareholder in REAAL, NLFI will be closely involved in and play an active role in any sale. This is in line with the framework used by the government in the sale of government holdings. NLFI is of the opinion that a private sale of REAAL should be organised as a controlled auction. This would facilitate an open and competitive tender process designed to maximise proceeds from the sale. Given the requirement for transparency, it should preferably be made a condition that only cash offers are requested. This may allow the double leverage within SNS REAAL to be reduced as required by the European Commission. Further, it will also reduce the risk to the State as a consequence of the bridge loan of EUR 1.1 billion it has made to SNS REAAL. Optimising proceeds may entail, besides direct proceeds, other relevant elements’. This includes the certainty that a bidder can in fact finance the bid, an action plan with respect to unit-linked insurance following the acquisition, legal risks with respect to the transaction, a well- founded business plan including a synergy and integration plan and the likelihood that supervisors will approve the acquisition. NLFI advises that the sale process be organised in phases so that detailed information is shared only with interested parties that have not dropped out at an earlier stage. Assuming this advisory memorandum is considered in the Tweede Kamer (Dutch 1 In this advisory memorandum, REAAL also includes SNS Asset Management. SNS REAAL intends to assign the subsidiary above to the sale of REAAL. 7 van 57 Lower House) in June 2014, and that the sale process then commences prior to publication of the semi-annual accounts of SNS REAAL, it would be December 2014 at the earliest before a definitive purchase agreement could be signed. NLFI considers it highly important that the sale of REAAL complies with the specific requirements set by the European Commission with respect to the sale of REAAL and with the general requirements set by the Commission for an open and transparent process. It is the opinion of NLFI that the recommended sale process complies with all the points of these requirements. One of the requirements of the European Commission is that the sale takes place within the timeframe of the restructuring plan. It is the opinion of NLFI that it is also in the interests of REAAL itself that the sale starts in the short-term and is completed within the foreseeable future. Among other things, long-term uncertainty as a consequence of the mandatory divestment will be damaging to the daily commercial operations of REAAL. NLFI advises you, after discussing this advisory memorandum with the Tweede Kamer (Dutch Lower House), to ask SNS REAAL to start the sale process. Sale of ASR with a dual track approach NLFI is of the opinion that ASR is currently ready for the start of a dual track exit process which may result in a private sale or a market flotation. The executive board of ASR has successfully continued to build a track record of achieving results. NLFI considers that ASR will be ready for market flotation in the autumn of 2014. NLFI notes a number of general market conditions and more structural issues at play in the insurance market that lead to the conclusion that now is not the best time to sell ASR in its entirety. NLFI also notes two important developments which considerably alter the playing field within the insurance sector: the announced flotation of Nationale Nederlanden by ING Group and the sale of REAAL by SNS REAAL. NLFI is of the opinion that it would not be desirable to float ASR on the market at the same time as Nationale Nederlanden or offer ASR for private sale in the market during the sale of REAAL. NLFI recommends putting the dual track approach for ASR on hold for the moment. ASR bid for REAAL As indicated in the exit advisory memorandum dated 23 August 2013, ASR is keen and able to play an active role if an attractive consolidation option is presented. This is the case with the sale of REAAL. NLFI advises you to permit ASR, along with other interested parties, to take part in the bidding process for REAAL. NLFI endorses the analysis by ASR that there is clear economic rationale for the acquisition of REAAL. A merger would result in a strong player in the insurance sector. ASR has indicated that cost reductions can be achieved, that there are economies of scale and that a merger with REAAL will strengthen distribution. 8 van 57 The synergistic benefits that the merger would achieve could increase proceeds from an exit from the combination at a later stage. To make an adequate bid for REAAL, ASR will need to attract additional capital, assuming that the State is not prepared to grant the necessary additional capital. NLFI considers it important that ASR attracts the financing on market terms, adopting an open and transparent process in line with the requirements set out by the European Commission. Against this background, NLFI would prefer that ASR raise the majority of the financing in the form of equity by issuing new shares, provided this can be done under acceptable terms.