98/204/EC: Commission Decision of 30 July 1997 conditionally approving aid granted by France to the GAN group (Only the French text is authentic) (Text with EEA relevance)
Date: 1997-07-30
Institutions: European Commission
Subjects: France, State aid, aid for restructuring, capital increase, commercial bank, insurance company

16.3.98

EN

Official  Journal  of  the  European  Communities

L 78/1

II

(Acts  whose  publication  is  not  obligatory)

COMMISSION

COMMISSION  DECISION

of  30  July  1997

conditionally  approving  aid  granted  by  France  to  the  GAN  group

(Only  the  French  text  is  authentic)

(Text  with  EEA  relevance)

(98/204/EC)

THE  COMMISSION  OF  THE  EUROPEAN  COMMUNITIES,

Having  regard  to  the  Treaty  establishing  the  European
in  particular  Articles  92  and  93
Community,  and 
thereof,

Having  regard 
the
European  Economic  Area,  and  in  particular  Articles  61
and  62  thereof,

the  Agreement  establishing 

to 

Having  given  the  parties  concerned  the  opportunity  to
submit 
the
their  comments, 
abovementioned Articles (1),

in  accordance  with 

Whereas:

1.

INTRODUCTION

GAN is a publicly owned financial group which operates
in  the  banking  and  insurance  sectors.  It  has  been
experiencing major difficulties since 1993 following losses
on its property financing business and in insurance. These
difficulties  prompted  the  State  in  1995  to  grant  support
to GAN in the form of a FRF 2,86 billion capital increase
through  the  transfer  of  assets.

Having examined the restructuring plans for GAN and its
subsidiary  UIC  and  the  audit  report  drawn  up  by  the
the
investment  bank  Morgan  Stanley 

(advisor 

to 

(1) OJ  C  149,  17.5.1997,  p.  6.

Treasury),  the  Commission  decided  on  18  September
1996  to  regard  the  operation  as  non-notified  State  aid
(aid  No  NN  43/96)  and  to  approve  it  subject  to
implementation in full of the restructuring plan submitted
to  it.  The  plan  provided  inter  alia  for  the  sale  of  GAN’s
majority  holding  in  the  CIC  banking  group  so  as  to
ensure a return to viability and to minimise the distortive
effects  of  the  aid.

By  letters  dated  28  February  and  3  March  1997,  the
French  authorities  stated  that  the  approved  aid  was
insufficient  in  view  of  the  group’s  worsening  financial
situation in the property financing sector and in the light
of the failed attempt to privatise CIC, and that they were
therefore  notifying  some  FRF  20  billion  of  additional
aid.

On  12  March  1997  the  Commission  decided  to  reopen
the  Article  93(2)  procedure  in  respect  of  the  1995  FRF
2,86  billion  capital  increase  and  to  initiate  the  same
procedure  in  respect  of  the  new  aid  measures  notified,
namely a FRF 11 billion capital increase to be carried out
in  1997  and  a  Government  commitment  to  cover  GAN’s
estimated  losses  of  FRF  9  billion.  The  Commission’s
decision  was  notified  to  the  French  authorities  by  letter
dated  8  April  1997  (SG(97)  D/2644).

In  order  to  analyse  in  detail  the  documents  handed  over
by  the  French  authorities  concerning  the  financial
position of the GAN group, its restructuring plan and its
viability,  the  Commission  enlisted  the  help  of  an
international 
the
consultancy  sphere.

investment  bank  prominent 

in 

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As part of the present proceedings, the French authorities
collaborated  fully  with  the  Commission  by  furnishing  all
the  information  requested.  By  letter  dated  18  July  1997
the  French  Minister  for  Economic  Affairs,  Finance  and
Industry  forwarded  to  the  Commission  the  French
Government’s  undertakings  concerning  the  GAN  group.
No written comments were received from other interested
parties  within  the  period  allowed.

insurers  in  controlling  a  banking  group (3),  the  reverse
situation, namely banks controlling insurance companies,
being  much  more  common.

GAN  also  operates  abroad  (in  the  United  Kingdom  in
particular,  but  also  in  Germany,  Italy,  Spain,  Portugal,
Switzerland,  Morocco,  the  United  States  and  Canada),
which  accounts  for  about  25 %  of  its  turnover.

2. GAN  AND  THE  REASONS  FOR  ITS  COLLAPSE

GAN  is  a  financial  group  which  is  listed  on  the  stock
exchange,  is  controlled  by  the  State  (which  holds  more
than  80 %  of  the  capital  of  the  central  GAN  company,
GAN Société Centrale) and operates in the insurance and
banking  sectors.  In  insurance,  GAN  is  the  fifth  largest
group  in  France  in  terms  of  turnover  (some  FRF  53,5
billion  in  1996)  after  the  private  groups  AXA-UAP  and
AGF.  Its  other  main  competitors  are  the  private  group
Victoire  and  the  mutual  societies.  GAN’s  share  of  the
French  insurance  market  is  about  5 %.  GAN  controls
over  93 %  of  the  CIC  banking  group,  a  network  of  10
regional  banks  having  total  assets  worth  over  FRF  600
billion  and  net  banking  income  in  1996  of  some  FRF  17
billion, making it the fifth largest of the banks belonging
to  the  French  Association  of  Banks (2).  The  CIC  group,
which is particularly active in the financing of SMEs, also
operated  in  the  property  sector  through  its  subsidiary
UIC,  which  has  since  been  transferred  to  GAN.  UIC  is
now  97 %  controlled  by  the  central  GAN  company.  The
group  also  has  holdings  in  industrial  companies.

The  GAN  group  has  9 600  employees  in  the  insurance
sector  in  France  (5 150  administrators,  2 450  in-house
producers  and  2 000  agents),  4 100  employees  in  foreign
insurance,  21 350  employees  in  the  CIC  banking  group
and  560  in  UIC.

GAN’s  difficulties  relate  both  to  banking  and  to
insurance: its banking arm has been hard-hit by the crisis
in  the  property  sector  and  the  deterioration  in  the
financial  position  of  SMEs;  and  its  non-life  insurance
business  has  suffered  the  consequences  of  the  aggressive
expansion  strategy  which  accompanied  the  cyclical
upturn  in  the  market.  In  1993  the  poor  quality  of  the
approximately  FRF  19  billion-worth  of  debts  and  assets
linked  to  real-estate  projects  held  by  the  CIC  banking
group  through  its  subsidiary  UIC  and  the  specialised
company  Sofal  meant  that  GAN  had  to  intervene  to
remove  UIC  from  CIC’s  area  of  consolidation,  thereby
enabling  it  to  meet  its  regulatory  obligations  in  the
banking  sphere.  Subsequently,  the  continuing  fall  in  the
value of these commitments proved more than GAN itself
could  bear,  and  it  had  to  resort  to  two  hive-off  vehicles
(Parixel  and  Bâticrédit)  to  remove  these  risks  from  its
balance  sheet.  However,  since  the  GAN  group  was  both
guarantor  and  source  of  financing  for  these  hive-off
vehicles, instead of being settled the risks stemming from
those  vehicles  were  spread  over  time  and  distributed
among  the  various  entities  of  the  group  in  the  hope  that
the  group’s  profits  might  offset  the  vehicles’  losses.
Following  disappointing  results  on  the  insurance  side,
GAN  was  unable  to  offset  the  deficit  in  its  property
business  and  had  to  rely  on  support  from  the  State,
which  decided  to  transfer  to  it  FRF  2,86  billion  of  Elf
and  CIC  securities  in  1995  and  provide  other  assistance
worth  approximately  FRF  20  billion  in  1997.  State
support  thus  enabled  GAN  to 
losses  at
consolidated  level  to  FRF  1,8  billion  in  1995  and  FRF
5,7  billion  in  1996.

limit 

its 

GAN’s  activities  cover  all  classes  of  insurance,  including
non-life  insurance  (both  firms  and  private  individuals),
life  assurance  and  capitalisation  operations.  The  various
insurance  companies  are  grouped  together  under  the
holding  company  GAN  SA.  The  product  distribution
network  comprises  brokers,  agents  and  the  company
Socapi.  Being  a  company  which  is  jointly  owned  (50/50)
by  GAN  and  the  CIC  banking  group,  Socapi  uses  the
banking  network  of  the  CIC  group  to  distribute  life
assurance  products.  Although  the  combining  of  banking
and 
is  widespread  among  banking  and
insurance  groups,  GAN  is  almost  alone  among  French

insurance 

(2) GAN already had a minority holding in the capital of CIC as

from  1985.

The difficulties experienced by GAN and in particular by
its banking subsidiary UIC have to be viewed against the
background  of  the  crisis  in  the  French  real  estate  sector
which  occurred  following  the  speculative  boom  of  the
late  1980s  and  which  affected  a  number  of  financial
institutions,  including  publicly  owned  ones,  to  a  greater
or  lesser  degree.  Thus,  those  institutions  which  were
riding  on  the  crest  of  the  speculative  wave,  those  which
specialised  in  financing  the  real  estate  sector  and  those
which  reacted  too  late  to  the  downturn  incurred  very

(3) In order to deal with the difficulties of their minority-holding
banking  subsidiaries  or  at  the  request  of  the  State,  insurers
have  recently  taken  control  of  banking  groups:  thus,  AGP
has  taken  control  of  CDE  and  UAP  has  taken  control  of
Worms  Bank.

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losses.  Some 

institutions  — 

including  a
substantial 
number  of  publicly  owned  ones  —  such  as  Crédit
Lyonnais,  Comptoir  des  Entrepreneurs,  Crédit  Foncier,
Société Marseillaise de Crédit and GAN resorted to State
support.  Others,  such  as  the  Suez  and  Paribas  groups,
had  to  undergo  drastic  restructuring.  Others,  such  as
BRED, had access to the collective guarantee fund of the
cooperative  banking  societies.  Others  again,  such  as
Banque  La  Hénin  and  Banque  Pallas  Stern,  went  into
liquidation.

the 

from 

French  insurance  is  undergoing  a  profound  upheaval
stemming 
increasingly
transition 
competitive system, commencing in 1989 with the reform
of  the  Insurance  Code.  As  a  result,  profit  margins  have
shrunk  and,  in  the  absence  of  adequate  restructuring  at
company  and  industry  level,  profitability  has  collapsed.
Between  1984  and  1994  profitability  on  non-life

to  an 

insurance own funds fell from 14 % to 0,4 % and that of
life  assurance  from  18 %  to  8,9 %.  Non-life  insurance
saw  a  cyclical  downturn  at  the  beginning  of  the  1990s,
involving ‘business’ risks and ‘motor vehicle’ risks, with a
very  sharp  increase  in  claims  and  repair  costs.

In  non-life  insurance,  GAN  is  now  paying  the  price  for
an 
inappropriate  growth  strategy  aimed  at  gaining
market  share  at  any  cost,  which  led  it  to  take  excessive
risks.  The  mutual  societies  and  private  groups  such  as
AXA  were  relatively  less  affected,  having  remained  more
aloof from property speculation and having introduced a
more  effective  system  for  monitoring  claims.

The  following  table  shows  the  losses  incurred  by  GAN
since  1992,  as  communicated  by  the  French  authorities
(Table  1).

Table  1

GAN’s  losses  since  1992

1992

1993

1994

1995

1996

Total

(billion  FRF)

UIC  -  property  hive-off

Non-life  insurance

Loss  in  value  of  assets

—

− 1,3

− 3,4 (1)

− 1,0

− 5,7

− 1,3

− 3,5

− 0,6

− 3,0 (2)

− 14,1

− 26,7

− 0,2

− 1,0

− 4,4

− 4,0

Total

− 1,3

− 1,3

− 7,0

− 7,1

− 15,3

− 35,1

(1) Excluding  FRF  2,6  billion  in  unrealised  gains  on  property,  allocated  by  GAN  SA  to  the  hive-off.
(2) Impact  of  the  entry  into  force  of  the  new  insurance  accounting  plan.
Source:  French  authorities.

The  recent  sharp  deterioration  in  GAN’s  situation  has
been  highlighted  by  the  audits  on  the  group’s  property
subsidiaries.  According  to  the  French  authorities,  in
mid-1996  GAN  informed  its  shareholder  of  new,  and
much  worse,  forecasts  for  1996  which  showed  clearly
that  there  could  be  no  return  to  equilibrium  in  1996.  In
particular,  GAN  expected  further  losses  from  UIC,  while
the performance of insurance was worse than forecast. In
view  of 
the
increasingly  worrying  forecasts  for  1996,  the  State
decided  to  make  its  approval  of  the  half-yearly  accounts
for 1996 subject to the carrying-out of a full audit of the
property  business  before  the  closing  of  the  1996
accounts.  The  comprehensive  review  of  the  position  of
UIC  and  of  the  hive-off  vehicles  revealed  the  need  for  a
further  injection  of  FRF  14  billion  and  prompted  the
State to intervene a second time in support of GAN with
a  FRF  20  billion  aid  package.

this  deterioration  and 

the  speed  of 

3. ASSESSMENT  OF  THE  AID  CONTENT  OF  THE
FINANCIAL  SUPPORT  MEASURES  FOR  GAN

on 

In  assessing  State  aid  the  Commission  generally  applies
the  ‘market  economy  investor’  principle,  as  set  out  in  its
undertakings (4).  The
public 
communication 
communication states that there is an element of aid in a
transaction  if  a  comparable  private  investor,  operating
under  normal  market  economy  conditions,  would  not
have  carried 
it  out.  As  regards  public  authorities’
holdings  in  company  capital,  it  is  considered  that  a
private  investor  would  not  have  carried  out  such  a

(4) Commission  Communication  to  the  Member  States  on  the
application  of  Articles  92  and  93  of  the  EEC  Treaty  and  of
Article  5  of  Commission  Directive  80/723/EEC  to  public
undertakings 
in  the  manufacturing  sector  (OJ  C  307,
13.11.1993,  p.  3).

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16.3.98

transaction,  and  that  there  is  therefore  a  presumption
that  aid  is  involved,  where  the  company’s  financial
position  is  such  that  a  normal  return  (in  dividends  or
capital  gains)  on  the  capital  invested  cannot  be  expected
within  a  reasonable  period  of  time (5).  In  the  case  of  the
provision  of  public  guarantees,  there  is  a  presumption
that State aid is involved where no consideration is given
for  the  guarantee  or  where  the  consideration  cannot  be
considered  sufficient  in  view  of  the  particularly  high  or
excessively  long-drawn-out  risks  inherent  in  such  an
operation.

The  measures  which  may  contain  State  aid  components
are  the  FRF  2,86  billion  capital  increase  carried  out  in
1995  through  the  transfer  of  Elf  and  CIC  securities  (a
transaction  which  was  not  notified),  and  the  recently
notified  measures  totalling  FRF  20  billion.

The  first  transaction,  involving  an  amount  of  FRF  2,86
billion, consisted in the transfer by the State of 5 327 509
Elf Aquitaine shares (about 2 % of its capital), 2 041 428
shares  in  Compagnie  Financière  de  CIC  et  de  l’Union
Européenne  (about  7,13 %  of  its  capital)  and  1 125 724
voting  right  certificates  in  Compagnie  Financière  de  CIC
et  de  l’Union  Européenne  (about  7,13 %  of  its  voting
rights)  in  return  for  an  increase  in  the  State’s  holding  in
GAN of 10 829 505 shares in the central GAN company,
representing  18,93 %  of  its  capital  after  the  transfer.

The  second  transaction,  involving  an  amount  of  FRF  20
billion,  may  be  broken  down  as  follows:

(a) a  FRF  11  billion  capital  injection  to  restore  UIC’s
capital  base  following  the  losses  recorded  in  1996
and  to  give  the  insurance  companies  an  appropriate
financial  structure,  in  accordance  with  the  relevant
rules.  The  capital  injection  consists  of  FRF  7,1
billion for UIC and FRF 3,9 billion for the insurance
companies;

(b) a  government  commitment  to  cover  the  estimated
losses  of  FRF  9  billion  which  GAN  SA  will  incur  in
implementing  the  guarantees  it  will  have  to  provide,
as part of the restructuring plan, for loans granted to
the  hived-off  real-estate  company  Bâticrédit  Finance
et  Cie,  set  up  in  1994.

Article  92(3)(c)  despite  the  fact  that  it  had  not  been
notified.

that 

indicated 

the  business  plan 

Analysis  of 
the
transaction  would  not  produce  sufficient  results  to
demonstrate  that  the  State  had  acted  like  a  private
investor.  The  business  plan  anticipated  that  GAN  would
suffer  a  loss  of  FRF  1,785  billion  in  1995  and  achieve
profits of FRF 120 million and FRF 1,574 billion in 1996
and  1997.  Even  on  the  basis  of  the  assumptions
underlying  the  business  plan,  it  was  evident  that  future
profits  were  insufficient  to  offset  the  initial  loss  and
shortfall in earnings on investment during the early years,
either  in  absolute  terms  or  in  discounted  terms  at  a
satisfactory  internal  rate  of  return  estimated  at  12 % (6).
For the following period, applying GAN’s assumptions of
a  profitability  level  of  almost  12 %,  it  was  also  evident
that GAN could not have achieved additional profits that
could offset the previous losses and at the same time give
the  State  as  shareholder  an  adequate  return.  The
Commission also noted that the State was the only GAN
shareholder  participating  in  the  transaction,  the  other
shareholders  (notably  stock  exchange  shareholders  and
foreigners)  having  decided  to  abstain.

The  French  authorities  have  not  drawn  attention  in  the
course of the present proceedings to any new factors such
as  might  lead  the  Commission  to  draw  a  different
conclusion.  The  conclusion  which 
the  Commission
reached  at  the  time,  namely  that  the  FRF  2,86  billion
capital increase constituted aid, therefore remains entirely
valid.

3.2. Assessment  of  the  new  aid  measures

With regard to the new public measures in support of the
GAN group, which include capital increases of some FRF
11  billion  and  a  State  guarantee  estimated  to  be  worth
some  FRF  9  billion,  the  French  authorities  have  stated
that  these  measures  became  necessary  following  the
comprehensive  review  of  the  situation  of  the  subsidiary
UIC  and  of  the  hive-off  vehicles,  which  revealed  a
provisioning requirement of some FRF 14 billion, placing
the  group  —  and  some  of  its  companies  in  particular  —
in  a  situation  that  conflicts  seriously  with  the  prudential
and  regulatory  constraints  to  which  it  is  subject.

3.1. Assessment  of  the  old  aid  measures

In  particular,  these  results  reflect:

On  18  September  1996  the  Commission  took  the  view,
on  the  basis  of  the  information  available,  that  the  FRF
2,86  billion  capital  increase  constituted  State  aid  within
the  meaning  of  Article  92(1)  of  the  Treaty,  but  that  it
to
could  be 

compatible  pursuant 

regarded 

as 

(5) See  the  Commission’s  1984  Communication  in  Bulletin  of

the  European  Communities  No  9-1984.

— the  deterioration  in  the  property  market,  and  the
costs  associated  with  the  asset  appropriation  process,
which  were  substantially  higher  than  anticipated,

(6) Use  of  the  discounted  method  for  assessing  State  aid  was  set
in
in  the  Commission  communication  referred  to 
out 
footnote  4.  This  method  has  been  used  in  other  cases,
notably 
in  the  banking  sector,  where  the  same  12 %
discounting  rate  was  applied.

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— a  change  in  outlook  resulting  in  the  rapid  disposal  of
property  assets,  whose  book  values  were  re-estimated
on  the  basis  of  market  values  taking  account  of  the
yield  required  by  market  operators,

authorities  have  done.  The  fall  in  the  value  of  GAN
shares during the 25 months preceding the announcement
of  the  latest  State  aid  (from  about  FRF  280  at  the
beginning  of  1995  to  about  FRF  100  at  the  end  of
January  1997)  bears  this  out.

— changes 

in 

accounting  methods 

their
implementing  arrangements  designed 
record
immediately  in  UIC’s  accounts  future  conveyancing
costs  and  all  future  fees,  administrative,  marketing
and  liquidation  costs  and  various  charges.

and 
to 

The  provisioning  of  UIC  to  take  account  of  the  above
three  factors  thus  amounts  to  FRF  5,4  billion,  to  which
must  be  added  the  losses  for  the  1996  financial  year,
calculated  in  accordance  with  the  previous  accounting
methods,  i.e.  some  FRF  2,5  billion,  which  means  that
UIC  is  thus  in  a  negative  net  position.  For  its  part,  the
cost of the hive-off vehicles would amount to nearly FRF
6  billion.

In view of this worsening situation, the State support will
help  reduce  the  net  amounts  outstanding  of  UIC  and  the
hive-off  vehicles  by  more  than  half,  from  FRF  26,1
billion  in  1995  to  FRF  11,4  billion  in  1996,  of  which
FRF  7,7  billion  is  classed  as  doubtful  loans,  against
74,7 %  of  which  provision  has  been  made.  The  rate  of
provisioning  of  property  lending  will  amount  to  69,2 %
gross  and  73,4 %  in  the  case  of  doubtful  loans.

These measures form part of an overall restructuring plan
for  GAN,  which,  moreover,  confirms  the  undertakings
already  given  under  the  recovery  plan  approved  by  the
Commission  in  its  decision  of  18  September  1996.  The
primary  objective  of  the  arrangements  adopted  by  the
Government  is  to  allow  the  insurance  arm  GAN  SA,  the
banking  group  CIC  and  UIC  to  be  disposed  of  in  the
near  future.

Several  factors  indicate  that  these  measures  constitute
State aid. First, the measures were notified by the French
authorities, which referred to them as State aid. Secondly,
the  State  is  acting  in  all  probability  without  the  backing
of  the  other  shareholders.  Thirdly,  the  restructuring  plan
presented  by  the  French  authorities  shows  that  the  State
is  not  going  to  be  able  to  recover  its  money  in  full  and
obtain  a  return  on  it  in  proportion  to  the  risk  it  is
incurring. Consequently, the measures must be deemed to
be  State  aid.

The  Commission  also  notes  that  the  costs  to  the  State  of
the  rescue  operation  would  have  been  lower  if  an
in-depth  analysis  such  as  that  carried  out  recently  had
been  conducted  earlier.  Faced  with  the  downturn  in
business  activity,  any  private  investor  would  have  acted
sooner  and  more  radically  to  limit  the  risks  described
above  rather  than  waiting  several  years,  as  the  French

The  aid  measures  notified  have  become  necessary  to
GAN’s  survival  because  the  recovery  plan  drawn  up  in
1995  and  strengthened  in  1996  has  failed.  As  was  stated
above,  on  the  basis  of  the  recovery  plan,  GAN  should
have  achieved  profits  of  FRF  120  million  in  1996  and
FRF  1,574  billion  in  1997.  Without  State  support,  losses
in 1996 will be close to FRF 15 billion, putting the group
in  a  negative  net  position.  The  State  support  will  enable
GAN to limit its losses in 1996 to some FRF 5,7 billion.
Since  1992,  losses  will  amount  to  FRF  35  billion,
including  FRF  27  billion  due  to  UIC,  the  property
financing subsidiary, alone.

The  French  authorities  have  attributed  the  failure  of  the
plan  to  the  audits  carried  out  in  1996  on  the  property
business,  which  revealed  a  much  more  serious  financial
situation than had been apparent from earlier inspections.
The  Commission  is  of  the  opinion,  however,  that  the
reasons  for  this  failure  must  also  be  sought  in  the  fact
that  GAN’s  core  businesses,  notably  insurance,  returned
results  which  were  worse  than  expected  and  which
therefore  did  not  enable  GAN  to  offset  the  losses  and
conveyancing  costs  on  the  property  side.  Moreover,  the
suspension  of  the  privatisation  of  CIC  undoubtedly
precipitated  the  failure  of  the  first  restructuring  plan,
depriving  GAN  of  the  liquid  resources  it  needed  to
restructure.

financing.  The 

The privatisation of CIC had been decided on in 1996 so
as  to  strengthen  the  plan  drawn  up  in  1995  and  judged
over-ambitious by the merchant bank Morgan Stanley, in
that  it  would  not  help  to  resolve  the  problem  of
intra-group 
suspension  of  CIC’s
privatisation, which constitutes a failure to comply with a
Commission  decision,  is  all  the  more  serious  as  it  was
decided on, not for unavoidable technical reasons, but —
according  to  the  French  authorities  —  for  reasons  of
political  opposition  at  a  time  when  a  firm  offer  had
already  been  made  and  found  acceptable  by  the  French
Privatisation Commission.

Inasmuch  as  the  failure  of  the  first  recovery  plan  was
due, not to outside factors, but inter alia to the fall in the
value  of  the  property  assets,  less  favourable  results  than
expected  for  the  GAN  group’s  core  businesses  and  the
failure  of  CIC’s  privatisation,  it  may  be  concluded  that
the  analysis  of  the  reasons  for  the  GAN  group’s
weaknesses  was  neither  sufficiently  thorough  nor  carried
out in good time. Since the State did not act like a private
investor in a market economy, its support for GAN must
accordingly  be  considered  State  aid.

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As regards the estimate of the amount of the aid, it must
first  of  all  be  considered  that  the  capital  increase  is
intended  to  cover  losses  and  satisfy  the  capital  base
requirements  for  compliance  with  the  rules  on  banking
and insurance. Consequently, the full amount of the FRF
11  billion  capital  increase  must  be  considered  to  be  the
amount  of  the  State  aid.

GAN  may  be  estimated  at  FRF  9  billion,  a  number  of
major  imponderables  remain  which  justify  the  adoption
of  a  margin  of  error  of  – 10 %  of  the  amount  of  that
estimate.  The  Commission  accordingly 
the
maximum  amount  of  State  aid  arising  from  the  State’s
commitments  towards  the  GAN  group  at  FRF  9,9
billion.

fixes 

As regards the guarantee, the problem arises of evaluating
the aid it involves, the figure of FRF 9 billion being only
an  estimate  of  the  cost  the  State  will  ultimately  have  to
bear.  In  principle,  the  FRF  9  billion  estimate  resulting
from the recent audits should not be exceeded given that
the  approach  used  to  assess  the  amount  of  the  guarantee
is  based  on  the  assumption  of  a  rapid  disposal  of  assets
and  the  taking  into  account  of  all  other  expenses
including  conveyancing  costs.  Since  the  assets  to  be
managed  are  particularly  substantial,  numerous  and
complex,  however,  it  is  reasonable  to  be  particularly
prudent,  all  the  more  so  since  the  audits  carried  out  in
the  past  have  consistently  underestimated  the  amount  of
provision  actually  needed.  This  prudence  is  justified  by
the  scale  of  the  assets,  which  remain  potentially  outside
the  ambit  of  the  guarantee:  although  the  rate  of
provisioning  of  the  assets  was  increased  to  77,5 %  in
1996,  the  hive-off  vehicles  retain  an  unprovisioned
exposure  of  FRF  3,6  billion  as  at  31  March  1997.  It  is
also  justified  by  the  considerable  extent  to  which  assets
which  other  institutions  have  recently  placed  on  the
market have been written down compared with what has
been  considered  for  GAN,  and  by  the  fact  that  an
unscheduled delay in the sale of the assets might give rise
to  additional  conveyancing  costs.  It  should  be  pointed
out  in  this  connection  that  the  plan  provides  for  the
disposal  of  all  the  assets  over  a  maximum  period  of  two
years  and  that  until  that  time  provision  has  been  made
for  the  conveyancing  costs.  However,  an  additional
disposal period might prove very costly given that the net
conveyancing  costs  in  1996  came  to  some  FRF  1,4
billion.  Moreover,  the  availability  of  potential  buyers  for
certain  properties  remains  to  be  proven:  in  this  respect  a
one-off  provision  of  FRF  500  million  has  been  decided
on,  but  it  has  not  been  certified  by  the  accountancy  firm
KPMG,  who  consider  that  such  an  estimate  needs  to  be
analysed  in  greater  depth.

to 

In  the  course  of  the  proceedings,  it  has  also  transpired
that  the  State’s  commitment  towards  GAN  also  covers
the  possible  future  capital  requirements  of  UIC  with  a
rules.  The
complying  with  prudential 
view 
arrangements  governing  the  State’s  intervention  in  this
respect  have  yet  to  be  spelled  out  and  the  intervention
itself  remains  in  abeyance.  On  the  basis  of  information
furnished  by  the  French  authorities,  the  Commission
considers  that  this 
intervention  will  not  necessarily
increase the net amount of State aid for GAN, but at the
same  time  it  justifies  its  prudent  approach.

To  conclude,  the  Commission  is  of  the  opinion  that,  if
the  average  value  of  the  State’s  commitments  towards

3.3. The  cost  of  alternative  solutions

Before  examining  GAN’s  restructuring  plan  in  detail  in
order to verify the compatibility of the aid in question by
reference  to  the  firm’s  return  to  viability,  the  question  of
the  cost  of  State  intervention  compared  with  other
solutions  must  be  dealt  with.  There  are  two  aspects  to
this  question.  First,  it  must  be  assessed  whether  the
solution  chosen  by  the  State  is,  both  in  absolute  terms
and  compared  with  any  other  solution  including  that  of
non-intervention,  the  least  costly,  which  would  lead,  if
that  were  the  case,  to  the  conclusion  that  the  State  has
acted  like  a  private  investor.  Secondly,  it  must  be
established whether the solution chosen is the least costly
compared  with  any  other  recovery  solution  so  as  to
assess  whether  the  aid  is  limited  to  the  strict  minimum
necessary  for  the  restructuring.  The  first  aspect  concerns
the  nature  of  the  operation  as  State  aid,  and  the  second
aspect  concerns  its  compatibility.

Despite  their  having  notified  them  as  State  aid,  the
French  authorities  have  argued  that  these  measures
represent  on  the  whole  the  least  costly  solution  as  far  as
the  French  State 
is
necessary to examine here the first aspect of the question,
namely  that  of  the  cost  of  alternative  solutions.  The
second aspect will be analysed as part of the examination
as  to  compatibility.

is  concerned.  Consequently, 

it 

According  to  the  French  authorities,  the  choice  lies
between reorganising the financial structures of the GAN
group,  calling  for  the  announced  recapitalisation  and
guarantee  but  enabling  a  rapid  sale,  and  letting  matters
slide,  leading  inevitably  to  a  liquidation  which  would  be
costly  to  the  State  in  that  it  would  have  to  pay  for  the
whole  operation.  Liquidating  UIC  was  out  of  the
question  because  it  would  have  affected  the  rest  of  the
group,  thereby  giving  rise  to  a  financial  and  social  cost
which would be much higher than that brought about by
the  restructuring  plan  and  which  the  State  could  not
avoid.  The  French  authorities  have  argued  that  UIC  is
still financed to the tune of FRF 23 billion, of which FRF
1,5 billion in the form of deposits taken from the public,
FRF  15  million  in  the  form  of  funds  raised  on  the
markets  and  FRF  6,25  billion  obtained  from  CIC.  In  its
capacity  as  reference  shareholder  of  UIC,  GAN  would
have been obliged under Article 52 of the French Banking
Act  to  provide  such  support  to  UIC  as  might  prove
necessary,  even  going  beyond  its  share  in  UIC’s  capital.
GAN  would  therefore  have  had  to  bear  UIC’s  entire  loss

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estimated  at  FRF  12  billion,  of  which  FRF  6,5  billion  in
the  form  of  an  assets  shortfall,  FRF  4,2  billion  in  the
form  of  additional  depreciation,  and  FRF  1,3  billion  in
the  form  of  penalties  for  the  early  collectability  of  debts.
This  would  have  led  to  GAN  becoming  insolvent.

According  to  the  French  authorities,  with  an  eye  to
GAN’s  insolvency  CIC  had  to  make  provision  for  all  its
claims  on  the  GAN  group,  amounting  to  FRF  12,5
billion.  Moreover,  CIC  could  be  considered  by  other
creditors of UIC and by the courts as having given undue
support  to  that  company.  This  would  have  led  to  CIC’s
liquidation,  which,  in  view  of  the  scale  of  customer
deposits  (more  than  FRF  287  billion  at  the  end  of  1996)
and inter-bank refinancing lines (FRF 193 billion), would
have  caused  a  serious  shockwave  throughout  the  French
financial  market.  That  being  so,  the  State,  as  main
shareholder  of  the  reference  shareholder  of  UIC,  would
undoubtedly  have  been  called  upon  by  the  Governor  of
the  Bank  of  France  to  perform  its  duty  as  shareholder  in
accordance  with  Article  52  of  the  Banking  Act.

The  State  could  not  ignore  that  call,  as  otherwise  its
liability  might  have  been  incurred  under  two  instruments
frequently  interpreted  widely  by  the  courts,  namely
Article  180  of  the  Act  concerning  reorganisation  and
winding-up  by  the  courts,  which  makes  it  possible  to
order de jure or de facto managers or directors who have
been found guilty of mismanagement to pay all or part of
the company’s debts, and Article 1382 of the Civil Code,
according  to  which  a  person  may  be  held  liable  for  any
loss  or  injury  caused  to  another  by  his  wrongdoing.  In
these  circumstances,  the  State  would  probably  have  had
to  bear  all  of  UIC’s  uncovered  liabilities,  namely  FRF  12
billion  instead  of  the  FRF  7  billion  provided  for  in  the
recapitalisation scenario.

A scenario involving an ‘amicable’ liquidation would not,
in  the  French  authorities’  view,  have  cost  less  than  the
solution 
the  hypothesis  of
liquidation  after  recapitalisation  would,  according  to  the
investment  bank  Lazard  Frères,  have  cost  an  extra  FRF
2,6  billion  or  so.

adopted.  Ultimately, 

The  Commission  is  of  the  opinion  that  the  French
authorities’ position can be endorsed only partially. First,
the  Commission  would  stress,  as  it  has  already  done  in
point  3.2  above,  that  the  cost  to  the  State  of  the
reorganisation  operation  would  have  been  lower  if  a
detailed  analysis,  like  the  one  recently  carried  out,  had
been  made  earlier.  A  private  investor  would  normally
have  acted  much  sooner  and  would  have  insisted  on  a
less  risky  financial  and  business  strategy  which  did  not
involve  an  ill-considered  conquest  of  customers  and
highly  speculative  investments.  The  State  has,  by  its
passivity, created the need for the aid which is now being
granted.

As  the  Morgan  Stanley  report  of  late  1995  has  already
shown,  the  intra-group  financing  of  the  hive-off  vehicles,
although  defensible  from  an  accounting  point  of  view,
left  GAN  with  hardly  any  room  for  manoeuvre  in  the
event that the results achieved were worse than expected.
According  to  the  1995  plan  as  revised  in  1996,  the
group’s 
improved
following  the  sale  of  the  majority  stake  in  CIC.  This
would  then  have  made  it  possible  to  make  a  start  on
undoing  the  capital,  financing  and  guarantee  links  which
the
are  paralysing 
procedure for the privatisation of CIC was a major factor
in  the  decision  by  the  State  to  intervene  in  1997.

the  group.  The  suspension  of 

liquidity  position  was 

to  have 

Secondly,  in  order  to  determine  whether  the  government
operation is in the nature of State aid, a distinction must
be  drawn  between  the  costs  to  be  borne  by  the  State  as
shareholder and those which the State might have to bear
for  other  reasons,  such  as  in  its  capacity  as  authority
responsible  for  monetary  and  financial  stability.  The
Commission  and  the  Court  of  Justice  have  already
rejected  the  argument  extending  the  responsibility  of  the
State  as  shareholder  for  the  liabilities  arising  from  a
liquidation  beyond  its  share  in  a  company’s  capital,  on
the  ground  that  such  an  extension  of  responsibility  is
tantamount  to  confusing  the  State’s  roles  as  shareholder
and as the body responsible for social policy (7). It is only
the  costs  to  the  State  as  shareholder  that  are  relevant
when  it  comes  to  comparing  the  costs  of  the  solution
adopted  with  those  of  alternative  solutions,  as  the  aid
character  of  the  operation  stems  from  the  behaviour  of
the State compared with that of a private investor. In this
connection, it is clear that unsuitable costs such as social
costs  or  tax  costs  should  not  be 
in  the
comparison,  because  these  are  costs  which,  in  normal
circumstances,  the  company  or  its  shareholders  would
have to bear out of their own resources and for which, in
a  liquidation  situation,  the  shareholders  may  not  be  held
liable  beyond  the  value  of  the  capital  and  guarantees
provided  by  them (8).  Nor  did  the  French  authorities
furnish proof that the State shareholder could be equated
with  a  de  jure  or  de  facto  manager  of  the  company  or
that  it  had  committed  errors  of  management,  or  that  it
had engaged in any wrongdoing causing loss or injury to
others.  The  French  authorities  have  likewise  not  proven
that  the  financial  consequences  of  any  responsibility  for
mismanagement  or  wrongdoing  would  come  to  the
amounts  envisaged  by  them.  Even  if  all  these  unproven
elements  were  established,  this  would  not  enable  the
French  State  to  side-step  the  application  of  Article  92  of

included 

(7) See, 

for  example,  Commission  Decisions  94/1073/EC
concerning  Bull  (OJ  L  386,  31.12.1994,  p.  1),  95/547/EC
concerning  Crédit  Lyonnais  (OJ  L  308,  21.12.1995,  p.  92)
and the Notice regarding Efim (OJ C 349, 29.12.1993, p. 2),
and  the  judgment  of  the  Court  of  Justice  in  Joined  Cases
C-278/92,  C-279/92  and  C-280/92  Hytasa  [1994]  ECR
I-4103.

(8) Subject to there being guarantees given on commercial terms

which  do  not  constitute  State  aid.

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the Treaty without contradicting the legal principle that a
person  may  not  found  an  argument  on  his  own  mistakes
(nemo  auditur  propriam  turpitudinem  allegans).

though they are less profitable and less able to face up to
competition,  such  as  the  aid  granted  to  GAN,  may  thus
distort competition at Community level, since it makes it
more  difficult 
insurance
institutions  to  gain  access  to  domestic  markets.

financial  and 

foreign 

for 

towards  UIC  under
Thirdly,  GAN’s  responsibility 
Article  52  of  the  Banking  Act  remains  to  be  proven.
Article 52 contains an invitation and not an obligation (9).
Such  a  presumed  obligation  to  make  good  any  liabilities
could  de  facto  be  considered  a  violation  of  the  principle
of  the  limitation  of  the  liability  of  shareholders  in
proportion  to  their  holdings 
liability
company.  Moreover,  if  such  a  principle  were  valid,  it
would  constitute  from  the  point  of  view  of  the
competition  rules  discrimination  between  private  banks
and public banks inasmuch as a private investor does not
have  access  to  the  same  unlimited  resources  as  the
State.

limited 

in  a 

the 

reason  why, 

in  other  cases, 

The 
reference
shareholders decided to give their support was either that
they  wished  to  safeguard  their  financial  interest  in  other
activities  or  that  they  wished  to  ward  off  more  serious
legal consequences. But neither of these situations obtains
here.  Neither  the  first,  because  the  estimated  State
intervention  covers  the  whole  group  and  is  greater  than
the estimated value of  the  shares  held  by the  State  in the
holding  company,  the  central  GAN  company,  after  State
intervention.  Nor  the  second,  because  a  cost  would  be
involved  which  stemmed  from  the  State  shareholder’s
own  mistakes.

Consequently,  the  State  support  cannot  be  equated  with
that  of  a  private  investor  and  therefore  constitutes  State
aid.

4. DISTORTION  OF  TRADE  BETWEEN  MEMBER
STATES

trade 

sensitive 

increasingly 

the  single  currency, 

financial  markets  have 

The liberalisation of financial services and the integration
the  effect  of  making
of 
intra-Community 
to
distortions  of  competition.  This  trend  is  growing  in  the
context  of  economic  and  monetary  union.  With  the
creation  of 
the
Community will be able to develop without any exchange
risk or cost. Although in principle financial and insurance
institutions  can  operate  on  a  cross-frontier  basis,  they
encounter  obstacles  to  expanding  their  business  abroad.
Such  obstacles  are  often  due  to  the  fact  that  domestic
effects  of
shielded  against 
institutions  are 
competition,  making 
foreign
for 
competitors  to  enter  the  market.  Aid  intended  to  allow
institutions  to  survive  even
financial  and 

the 
less  attractive 

trade  within 

insurance 

it 

(9) As  can  be  seen  from  the  recent  withholding  of  support  by

private  shareholders  of  a  number  of  French  banks.

institution  as  part  of  a 

Without the aid in question, GAN would have had to be
liquidated  or  more  probably  sold  to  another,  more
judicial
financially  sound 
winding-up procedure. In that event, the institution or its
undertaking  could  have  been  purchased  by  a  foreign
competitor  wishing  to  set  up  in  business  or  expand  its
commercial  presence  in  France.  Such  a  procedure  would
have facilitated the dispersal of GAN’s assets and market
shares  among  a  large  number  of  potential  purchasers.  It
should  be  noted  that  the  current  plan  provides,  not  for
the  separate  disposal  of  each  French  and  foreign
subsidiary of GAN, but for the breaking-up of the group
into  three  businesses  which  remain  financially  linked.

In  addition,  aid  to  an  international  institution  such  as
GAN  which  provides  banking  and  insurance  products  to
firms  which  are  in  competition  on  international  markets
and which provides financial services in competition with
other  European  financial  institutions,  while  at  the  same
time  expanding  its  foreign  business  through  its  network
of  agencies  outside  France,  is  certainly  liable  to  have  a
distortionary  effect  on 
In
particular, the aid enables GAN inter alia to restructure a
number  of  its  foreign  subsidiaries,  particularly  in  the
in
United  Kingdom, 
competition  with 
financial
institutions.

Italy  and  Spain,  which  are 

intra-Community 

Community 

trade. 

other 

It should be noted that GAN’s foreign insurance business
achieved  a  total  turnover  of  FRF  14,6  billion  in  1995,
representing  some  30 %  of  its  total  insurance  turnover.
The share of Community business in GAN’s consolidated
international insurance turnover was some 78 %, or more
than  FRF  11  billion.

Consequently,  it  must  be  concluded  that  the  public
support measures in question are caught by Article 92(1)
of  the  EC  Treaty,  since  they  constitute  State  aid  that
distorts  competition  to  an  extent  that  is  liable  to  affect
intra-Community  trade.

5. ASSESSMENT  OF  THE  COMPATIBILITY  OF  THE  AID

Having determined that the measures under consideration
are  in  the  nature  of  State  aid  falling  within  the  scope  of
Article  92(1),  the  Commission  must  now  examine
whether  the  measures  are  compatible  with  the  common
market  pursuant  to  Article  92(2)  and  (3).

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First  of  all,  the  aid  in  this  case  is  neither  aid  having  a
social character, granted to individual consumers, nor aid
likely  to  (and  granted 
in  order  to)  promote  the
development  of  certain  French  regions.  Nor  is  it  aid  to
remedy a serious disturbance in the economy inasmuch as
it  seeks  to  remedy  the  difficulties  of  a  single  recipient,
GAN, and not difficulties experienced by all operators in
the  industry.  Consequently,  the  aid  granted  cannot  be
said  to  be  in  the  common  European  interest.  Only  the
exception  provided  for  in  Article  92(3)(c)  is  potentially
applicable.  By  virtue  of  this,  the  Commission  has  the
power  to  authorise  ‘aid  to  facilitate  the  development  of
certain  economic  activities  . . .  where  such  aid  does  not
adversely  affect  trading  conditions  to  an  extent  contrary
to  the  common  interest’.

According  to  the  restructuring  aid  guidelines,  such  aid
should  normally  be  necessary  only  once.  In  view  of  the
supplementary nature of the aid in question, coming as it
does  on  top  of  that  approved  in  1996,  its  scale  and  its
distortive effect, the examination as to whether the above
conditions  are  met  must  be  particularly  rigorous  and
detailed.

Compliance  with  such  principles  must  be  verified  for  all
the  aid  granted  to  GAN.  Despite  the  fact  that  on
18  September  1996  the  Commission  came  out  in  favour
of  the  FRF  2,86  billion  capital  increase  decided  in  1995,
it  must  check  whether  its  assessment  was  based  on
erroneous  or  inaccurate  information.

The  compatibility  of  such  measures  must  be  assessed  in
the light of the specific rules on restructuring aid (10). The
Commission  considers  that  aid  for  restructuring  may
contribute  to  the  development  of  economic  activities
without  affecting  trade  to  an  extent  contrary  to  the
common  interest  where  the  following  conditions  are
met:

1. comprehensive implementation of a restructuring plan
based  on  realistic  assumptions  making  it  possible  to
restore  within  a  reasonable  timescale  the  requisite
minimum  return  on  capital  invested  and  thus  to
ensure  the  long-term  viability  of  the  business;

2.

3.

the  existence  of  adequate  quid  pro  quos  to  offset  the
distortive effect of the aid on competition and thus to
make  it  possible  to  conclude  that  the  aid  is  not
contrary  to  the  common  interest;

the proportionality of the aid to the objectives sought
and  limitation  of  the  amount  of  the  aid  to  the  strict
minimum necessary for the restructuring in order that
the  recovery  effort  might  be  borne  as  much  as
possible  by  the  firm  itself;

4.

the  carrying-out  in  full  of  the  restructuring  plan  and
of  any  other  obligations  provided  for  in  the  final
Commission  decision;

5.

the  setting-up  of  a  system  for  monitoring  compliance
with  the  preceding  condition.

In  order  to  assess  the  extent  to  which  the  above
conditions  are  met  and  Article  92(3)(c)  is  complied  with,
account  must  also  be  taken  in  this  case  of  the  particular
sensitivity  of  the  financial  sector  to  the  difficulties  of  an
all-purpose  finance  group  like  GAN.

to 

the  group’s  situation  was  going 

The  Commission  notes  that,  according  to  the  French
authorities,  the  deterioration  in  GAN’s  situation  was
already evident in mid-1996 and that this trend, together
with  the  decision  to  carry  out  specialised  audits  of  the
property  business,  was  not  communicated 
the
Commission until after it took its decision to approve the
FRF  2,86  billion  in  aid  in  September  1996.  It  notes
further  that,  during  the  talks  held  between  Commission
representatives  and  the  French  authorities 
in  1996,
notably  for  the  purpose  of  discussing  the  assessment
report  drawn  up  in  1995  by  Morgan  Stanley,  the  French
authorities  informed  the  Commission  more  than  once
that 
improve
markedly,  even  though  they  were  going  to  ask  GAN  to
carry out specific audits on the property business in order
to  establish  the  additional  provisioning  requirements  and
even though they knew of the deterioration in the results
in the insurance business as compared with the forecasts.
In this connection, the French authorities have stated that
the Treasury’s decision to request specialised audits of the
property  business  was  taken  after  the  Commission’s
decision. It has been established, however, that GAN had
informed  the  Treasury  of  the  worsening  situation  well
before  the  date  of  the  Commission’s  decision.  The
Commission  therefore  has  reason  to  believe  that  the
French authorities did not provide it with all the essential
background 
that
mentioned  above,  which  could  have  prompted  it  to  take
a different decision from the one it did take in September
1996.

information,  and 

in  particular 

to 

The  details  in  the  Commission’s  possession  indicate  that
the  information  furnished  at  the  time  was  incomplete,
notably as regards the position of UIC and of the hive-off
vehicles,  and  therefore  was  not  sufficient  to  enable  it  to
examine  the  group’s  viability  properly,  and  that  the  new
State  support  measures  are  partially  attributable  to  the
fact  that  the  plan  communicated  in  1996  has  not  been
implemented  in  full,  particularly  as  regards  the  sale  of
UIC,  which  should  have  provided  GAN  with  substantial
resources  for  its  recovery.

(10) OJ  C  368,  23.12.1994,  p.  12.

The  Commission  accordingly  considers  that  the  old
decision  approving  the  FRF  2,86  billion  capital  increase

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16.3.98

must  be  revoked.  That  aid  operation  is  re-examined  as
part  of  the  present  proceeding  on  the  basis  of  all  the
information  now  available.  Moreover,  the  fact  that  the
restructuring  plan  failed  and  that  fresh  aid  seven  times
larger  than  the  initial  aid  has  been  found  necessary  to
GAN’s  survival  makes  it  all  the  more  essential  to
re-examine  the  compatibility  of  the  initial  aid  as  part  of
this  proceeding.  Consequently,  the  compatibility  of  the
old  and  the  new  aid  is  hereinafter  examined  jointly.

5.1. Examination  of  the  restructuring  plan  and  of  the
group’s viability

In  order  to  analyse  in  detail  the  documents  handed  over
by  the  French  authorities  as  regards  the  position  of  the
GAN  group,  its  restructuring  plan  and  its  viability,  the
international
Commission  enlisted 
investment  bank  with  a  solid  reputation  as  a  consultant.
The  Commission’s  analysis  set  out  below  has  therefore
benefited  from  the  consultant’s  technical  expertise  in  this
particularly  complex  field.

the  help  of  an 

In order to determine whether the proposed restructuring
plan  is  likely  to  resolve  the  company’s  difficulties,
eliminates the causes of its failure, guarantees a return to
viability  and  avoids  future  recourse  to  State  support,  the
first  step  is  to  understand  the  reasons  for  GAN’s  failure.
failure  are  properly
Unless 
understood,  suitable,  lasting  solutions  cannot  be  found.

the  causes  of  GAN’s 

As  indicated  above,  the  State  aid  for  GAN  stems  from  a
number of factors: an excessive, uncontrolled exposure to
the  property  sector,  an  imprudent  policy  of  expansion  in
non-life insurance, and an ineffective system of checks on
the  part  of  its  shareholder  [. . .] (*).  In  other  words,  the
overall  system  of  checks  on  the  way  the  group  was  run,
consisting of the rules and institutions which are relevant
to  the  financing  of,  and  exercise  of  control  over,  a
company  (‘corporate  governance’),  proved  inadequate.

definitively with the property problem), it is clear that the
colossal  amount  of  aid  granted  in  1997  reflected  the
confidence  which  GAN’s  top  management  placed  in  the
State  as  shareholder  inasmuch  as  they  felt  that  it  would
in  any  event  have  been  obliged  to  erase  their  past
mistakes,  as  witnessed  by  the  arguments  put  forward  by
the  French  authorities  concerning  the  cost  of  alternative
solutions.  GAN  was,  of  course,  not  the  only  group  to
have  pursued  a  highly  speculative  policy,  other  publicly
owned  institutions  such  as  Crédit  Lyonnais  or  private
ones  such  as  Suez  or  Banque  Pallas  having  followed  the
market,  but  only  the  public  institutions  could  count  on
State aid, the private ones being forced by the markets to
restructure  drastically  or  enter 
into  some  sort  of
composition arrangement. There is reason to believe that,
if  GAN  had  not  had  the  implicit  or  explicit  support  of
the  State, 
it  would  not  have  embarked  upon  the
hazardous policy it did embark upon, or that at all events
it  would  have  restructured  earlier  and  with  greater
determination.

Such  State  support,  which  is  ultimately  tantamount  to
‘survival insurance’ for failing institutions, as Information
Report  No  52  of  the  French  Senate  remarks (11), also has
the  effect  of  protecting 
their  creditors.  But  such
protection  removes  the  incentive  for  creditors  to  monitor
the  behaviour  of  their  debtors.  Institutions  are  no  longer
subject  to  control  by,  and  punishment  at  the  hands  of,
the  markets.  Not  only  is  such  protection  unwarranted
and  excessive,  but  it  also  has  the  effect  of  ‘encouraging
the  unsound  management  of  credit  institutions’  —  as  the
European  Parliament  and  the  Council  of  the  European
Union  state  in  Directive  94/19/EC  of  30  May  1994  on
deposit-guarantee  schemes (12).  This  is  borne  out  by  the
fact that UIC continues to be financed by the markets to
the  tune  of  more  than  FRF  15  billion  despite  its
catastrophic  situation.  The  support  of  the  shareholder,
which  in  turn  has  permitted  the  support  of  the  markets,
has  had  the  effect  of  delaying  the  necessary  corrective
action  and  increasing  the  final  amount  of  State  aid.
Consequently,  and  in  keeping  with  the  statements  made
by  the  Council  and  the  European  Parliament,  the
Commission  fully  endorses  this  argument,  which  was
developed  scientifically  and  in  the  light  of  banking  crises
in  a  number  of  countries,  stressing  as  it  does  the
importance of this moral hazard as a means of explaining
the  GAN  crisis.

In  view  of,  first,  GAN’s  slowness  in  reacting  to  the
cyclical downturn and to the onset of its difficulties (rents
and property prices have been falling steadily since 1990)
and,  secondly,  the  slowness  of  the  recovery  process  (it
has  taken  GAN  four  years,  from  1993  to  1997,  to  deal

(*) In  the  published  version  of  this  Decision,  some  information

It  is  clear  that  any  lasting  solution  for  GAN  must
therefore include a reform of the corporate governance of

(11) See  Senate  of  the  French  Republic,  Banques:  votre  santé
nous  intéresse,  Information  Report  by  Mr  Alain  Lambert
(Senator,  General  Rapporteur),  on  behalf  of  the  Committee
on  financial  affairs,  budgetary  control  and  the  economic
accounts of the nation, on the situation in and prospects for
the  French  banking  system,  No  52,  1996—97.

has  been  omitted  for  reasons  of  confidentiality.

(12) OJ  L  135,  31.5.1994,  p.  5.

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the group and of its subsidiaries, coupled with a solution
to  the  moral  hazard  problem.  There  are  a  number  of
possible  solutions.  The  solution  proposed  by  the  French
authorities  involves  obtaining  backing  for  the  two  core
businesses,  banking  and  insurance,  from  independent
partners  more  directly  subject  to  market  forces.  The
Commission  considers  this  solution  to  be  appropriate  as
it  makes  it  possible  to  reconstitute  a  more  effective

system  of  checks  based  on  the  undistorted  action  of  the
markets.

The  following  table  compares  the  old  and  the  new  plan
concerning  the  development  of  GAN’s  results  and  the
its  capital  between  1995  and  1998,  as
return  on 
presented  by  the  French  authorities  in  1996  and  1997
(Table  2).

Table  2

GAN’s  business  plan  as  presented  by  the  French  authorities

Results

Insurance  France (1)

of  which  GAN  IA

of  which  GAN  Vie

Insurance  International

1995
actual

632

− 612

785

496

1996

1997

96  plan

actual

96  plan

97  plan

906

399

603

− 196

312

121

1 160

505

[. . .]

[. . .]

[. . .]

[. . .]

(million  FRF)

1998
97  plan

[. . .]

[. . .]

[. . .]

[. . .]

Subtotal  insurance

1 128

1 305

724

1 665

[. . .]

[. . .]

CF-CIC-UE

732

683

700

868

[. . .]

[. . .]

Other  banking  subsidiaries
(excluding  UIC)

− 145

155

− 642

171

[. . .]

[. . .]

Subtotal  all  banking

587

838

58

1 039

[. . .]

[. . .]

Total  GAN  (excluding  UIC
and  restructuring  plan)

1 715

2 143

782

2 704

[. . .]

[. . .]

UIC

− 1 848

− 873

− 7 985

Restructuring  plan  (GAN  SA)

− 1 652

− 1 150

1 520

− 183

− 950

[. . .]

[. . .]

[. . .]

[. . .]

Subtotal  UIC  and
restructuring  plan

Total  consolidated  result
group  share

− 3 500

− 2 023

− 6 465

− 1 133

[. . .]

[. . .]

− 1 785

120

− 5 683

1 574

1 068

1 874

(1) Including  GAN’s  holding  company,  Société  Centrale.

The  plan  presented  is  based  primarily  on  restructuring
measures which have already been in place for a number
of  years  and  which  are  now  starting  to  bear  fruit.  These
include  measures  to  reorganise  the  non-life  insurance
portfolio  which  have  already  helped  reduce  significantly
the gap between GAN and its competitors. To these must
be  added  other  measures  to  reduce  operating  costs,  such
as the announcement of a thousand redundancies (670 in
insurance  and  330  in  banking)  in  1995.  In  1996  there
were more job losses, totalling some 400 in insurance and
300  in  banking.  GAN  has  also  sold  a  number  of
subsidiaries  and  withdrawn  from  certain  non-strategic

businesses  (CFJPE,  CTR,  SCOR,  GAN  Belgium,  HNL,
etc.).

The new plan presented in the spring of 1997 introduces
additional  measures.  It  provides 
inter  alia  for  the
reorganisation  of  the  group  into  three  separate  units
under the central GAN company, the holding company at
the  head  of  the  group:  an  insurance  unit,  under  the
holding  company  GAN  SA,  a  banking  unit,  represented
by the CIC group, and a property unit, consisting of UIC
and the two hive-off vehicles, Parixel and Bâticrédit. The

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16.3.98

new  French  Government  recently  confirmed  the  thrust
and  content  of  the  plan  presented  in  April.

A number of pieces of information have been sent to the
Commission,  including  the  conclusions  of  the  audit
reports  by  Arthur  Andersen  and  the  cross-check  by
KPMG, various documents drawn up by experts working
independently  of  GAN  and  the  Treasury  (namely  a
memorandum by SBC Warburg on the restructuring plan,
two  memoranda  by  JP  Morgan  and  Goldman  Sachs  on
the  viability  of  CIC  and  of  GAN’s  insurance  unit,  and  a
memorandum  by  Lazard  Frères  on  UIC),  and
correspondence  between  UIC 
the  Banking
Commission  and  between  the  Insurance  Supervision
Commission  and  GAN.

and 

In  insurance,  it  is  envisaged  that  GAN  will  withdraw
from  credit  insurance  (by  selling  Sacren)  and  from
insurance  broking;  operating  costs  should  diminish  as  a
result  of  the  implementation  of  a  workforce  adjustment
plan  which  should  generate  a  saving  of  FRF  400  million
in a full year (− FRF 153 million in operating costs, − FRF
105 million in production costs and − FRF 142 million in
personnel  costs).  As  regards  production  costs,  some  [. . .]
in-house  producer  posts  will  be  cut  between  1997  and
1998,  representing  [. . .]  of  total  staff  as  at  31  January
1996.  Personnel  costs  will  be  cut  as  a  result  of  431  job
losses  over  12  months,  representing  8 %  of  the  staff
concerned.  A  provision  of  FRF  100  million  has  been
made  at  the  level  of  GAN  SA  to  cover  the  costs  of  the
adjustment  plan.  Local  branches  will  also  be  downsized.

the  property 

financing  business 

In order to resolve the intra-group financing problem, the
restructuring  plan  presented  by  the  French  authorities
provides  for  the  —  probably  separate  —  sale  of  the
insurance business (GAN SA), the banking business (CIC)
and 
(UIC).  The
immovable  property  assets  (claims  and  buildings)  which
have  been  placed  in  the  two  hive-off  vehicles  (Bâticrédit
and Parixel) are to be managed on a liquidation basis by
the  group  holding  company  (GAN  SC),  which  will
remain  in  the  hands  of  the  State  but  whose  size  is  to  be
reduced  as  and  when  the  disposals  take  place.  Since  the
GAN  group  is  particularly  complex  and  the  consolidated
accounts do not make it possible to examine the viability
question  properly,  each  main  area  of  activity  must  be
examined separately.

5.1.1. The  two  hive-off  vehicles

The  hive-off  vehicles  do  not  pose  any  problems  in  terms
of  viability  given  that  they  will  be  managed  on  a
liquidation basis. The problem of quantifying the aid has
already  been  dealt  with  in  point  3.  The  question  of  quid
pro  quos  must  be  examined  at  the  level  of  the  structures
which  have  transferred  the  poorly  performing  assets  to

the 

that 

transparent  and 

the  hive-off  vehicles.  It  is  important,  however,  that  the
management  of  the  assets  of  the  hive-off  vehicles  should
be 
transfers  should  be
sufficiently  rapid.  The  Commission  also  considers  that
the  hive-off  vehicles  and  GAN’s  banking  and  insurance
arms  should  be  clearly  separated.  It  will  thus  have  to  be
ensured  that,  until  such  time  as  CIC  and  GAN  SA  are
disposed  of,  they  cannot  repurchase  assets  placed  in  the
hive-off vehicles.

In  this  connection,  the  Commission  takes  note  of  the
French authorities’ undertaking that they will confirm the
current  process  of  disposing  of  the  assets  of  Bâticrédit
and Parixel, a process which should be largely completed
by the end of 1998, without there being any possibility of
these  assets  being  acquired  by  CIC  or  by  GAN  up  until
the  time  of  their  disposal.

5.1.2. The  bank  specialising  in  the  property  sector:

UIC

The  French  authorities  plan  to  maintain  this  bank
specialised  in  the  property  sector  as  a  going  concern
pending  its  sale  to  a  potential  buyer  who  might  be
interested 
its
controlling  interest  in  the  leasing  subsidiary  UIS.  As  the
French  authorities  acknowledge,  however,  a  number  of
problems  connected  with  the  institution’s  viability  need
to  be  resolved.

its  goodwill  and/or 

taking  over 

in 

The  French  authorities  have  stated  that  they  seriously
considered  liquidating  UIC  in  view  of  the  gravity  of  its
condition,  but  that  in  the  end  they  decided  not  to  do  so
because  it  would  have  cost  more  than  the  option  chosen
owing  to  the  knock-on  effect  on  the  other  entities  of  the
group (primarily CIC, which had provided it with FRF 6
billion of financing) and on the market (FRF 15 billion of
refinancing).  According  to  Lazard  Frères,  the  solution  of
controlled  liquidation  spread  over  five  years,  although
possible, would likewise have cost more than the solution
adopted — approximately FRF 2,6 billion more than the
recapitalisation  solution  (which  works  out  at  FRF  7,1
billion).

The  recapitalisation  comes  on  top  of  restructuring
measures  which  theoretically  should  make  UIC  attractive
to  a  buyer.  In  particular,  a  social  plan 
is  being
implemented involving a 50 % reduction in staff numbers
to  280  within  the  space  of  a  year.  The  plan  should
include  a  reduction  in  overheads  from  FRF  361  million
to  FRF  222  million.  Once 
levels  off,  the  new
production  of  the  banking  arm  should  be  worth  some
FRF  1,6  billion  a  year.  The  poorly  performing  property
assets  should  be  disposed  of  within  two  years  and
doubtful  assets  should  be  reduced  by  half.  As 
is
acknowledged  by  the  French  authorities,  however,  a  big

it 

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question  mark  hangs  over  the  liquidation  of  these  assets
as  regards  both  timescale  and  value.  Receipts  and  sales
may  have  to  be  further  discounted.

Two  scenarios  have  been  presented,  that  of  UIC’s
management  and  that  revised  [. . .]  on  the  basis  of  more
pessimistic  assumptions.

Table  3

UIC’s  business  plan  as  presented  by  the  French  authorities

Net  banking  income

Operating  costs

Appropriations  to  provisions

Net  result

Scenario  1

Scenario  2

(million  FRF)

1997

[. . .]

[. . .]

[. . .]

[. . .]

1998

[. . .]

[. . .]

[. . .]

[. . .]

1997

[. . .]

[. . .]

[. . .]

[. . .]

1998

[. . .]

[. . .]

[. . .]

[. . .]

Cumulative  result  1997-2001

Cumulative  result  on  doubtful  assets
1997-2001

Recapitalisation  period

Cumulative  total  1997-2001

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

Following  analysis  of  the  information  furnished  by  the
French authorities, the following comments can be made.
First of all, although the provisioning ratio was raised to
71 % in 1996, a sufficient level in theory, UIC still has on
its  books  more  than  FRF  7  billion  of  property  assets
subject  to  considerable  price  fluctuations.  The  auditors
that  additional  provisions  might  be
acknowledged 
necessary  in  the  event  of  the  asset  selling  prices  being
lower  than  estimated  or  if  the  disposals  are  delayed.  It
should  be  noted  in  this  connection  that  a  three-month
delay in the disposal programme coupled with a 15 % fall
in  the  selling  price  would  result  in  a  loss  of  FRF  400
million.  According  to  KPMG,  who  revised  the  work  of
auditors  Arthur  Andersen,  certain  major  risks  should  be
more  precisely  evaluated  in  order  to  determine  the
validity of the provisions (failure of partners in SNC and
SCI,  calls  to  make  good  deficiencies  in  the  assets,  rate
risk  due  to  the  imbalance  between  assets  and  liabilities).

More  generally,  when  a  credit  institution  shows  a  ratio
between doubtful assets and total assets of around 80 %,
it is questionable whether it can carry on its core business
and  hence  survive.  At  such  ratio  levels,  it  is  not  only  the
cyclical downturn or the taking of excessive risks or some
bad lending that causes the institution to fail, but it is the
whole  process  of  selecting  and  monitoring  risks  that  has
gone  wrong.  In  order  to  gain  a  better  understanding  of
this aspect, it must be remembered that nearly half of all

UIC’s  assets  had  already  formed  the  subject  matter  of
cantonment in the two hive-off vehicles. If these items are
included  as  well,  almost  all  of  UIC’s  assets  can  be
qualified  as  doubtful.  In  other  words,  the  new  estimates
of those of UIC’s assets which had not formed the subject
matter  of  cantonment  have  shown  that  those  assets  were
of  no  better  quality  than  those  transferred  to  the  two
hive-off  vehicles.  This  being  so,  the  few  good-quality
assets remaining on the books are due more to good luck
than  to  good  management.

The business plan presented stops far short of showing a
return  to  viability  for  UIC  without  any  backing.
According  to  scenario  two,  which  the  Commission
considers  to  be  more  valid  than  scenario  one  given  the
plan’s  many  imponderables,  UIC  will  continue  to  record
losses  up  until  the  end  of  1998.  At  the  same  time,  after
deduction  of  the  minority 
leasing
subsidiary  UIS,  the  capitalisation  of  UIC  as  a  separate
entity  is  particularly  weak  in  view  of  the  risks  on  the
books, and below the average for banks specialised in the
property  sector.  The  group’s 
liquidity  also  poses
problems  as  any  stretching  of  liquidity  is  likely  to
generate  substantial  losses  for  UIC.

interests  of  the 

In short, UIC’s situation is critical. The bank cannot even
reach break-even point. Since the bank is not viable, it is

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16.3.98

highly  likely  that  the  Treasury  will  have  to  recapitalise  it
prior to disposal if it is not to be sold at a loss. The State
has already given the financial markets an undertaking to
this effect. According to the French authorities, such State
support should not exceed the losses under scenario two,
namely  FRF  [. . .]  million.

to 

the 

fact 

that  profitability 

In  conclusion,  on  the  basis  of  the  above  analysis  and
owing 
is  negative,
capitalisation  weak  and  the  imponderables  linked  to  the
risks  remaining  on  the  books  too  numerous,  the
Commission is of the opinion that UIC’s viability may be
ensured  only  by  securing  for  the  institution  the  backing
of  a  stronger,  more  highly  capitalised  banking  group
capable  of  carrying  out  with  its  own  administrative  staff
a thorough restructuring of the institution. In view of the
fact that any delay in restructuring gives rise to additional
costs, this disposal will have to occur as soon as possible
and  in  any  event  before  the  end  of  1998.

In  this  connection,  the  Commission  takes  note  of  the
undertaking  given  by  the  French  Government  to  the
effect that it will continue the process now under way of
disposing  of  UIC  and  its  subsidiary  UIS,  including  the
shares  in  UIS  held  by  GAN  SA,  a  process  which  should
be  completed  by  the  end  of  1998  [. . .].

5.1.3. The  network  bank:  CIC

CIC  is  a  banking  group  composed  of  10  regional  banks
with a balance-sheet total of some FRF 600 billion at the
end  of  1996,  making  it  the  fifth  largest  of  the  banks
belonging to the French Association of Banks. The group
manages  deposits  of  some  FRF  215  billion  and  assets  of
nearly FRF 240 billion. Well-established as it is in France
with the resulting possibility of maintaining close contact
with its customers, CIC enjoys a good net interest margin
(4,67 %  in  1996  for  the  regional  banks)  and  regular,
stable  income.  The  worsening  of  margins  linked  to  the
fall  in  interest  rates  and  the  competitive  environment
affects  CIC  less  than  the  large  network  banks.  The
reduction  in  interest  income  has  been  offset  by  the
increase  in  commissions,  which  in  1996  accounted  for
almost  31 %  of  net  banking  income.  Through  Socapi,
which  it  holds  jointly  with  GAN,  CIC  occupies  a  choice
position  in  the  all-purpose  finance  market  in  France.  As
investment  bankers  JP  Morgan,
was  confirmed  by 
consultant  to  GAN,  after  the  transfer  to  GAN  of  UIC,
CIC  will  have  a  healthy  balance-sheet  structure,
good-quality  assets  and  a  high  level  of  provisioning.

The  following  table  shows  the  main  results  of  CIC
according  to  the  business  plan  presented  by  the  French
authorities.

Table  4

CIC’s  business  plan  as  presented  by  the  French  authorities

1995

1996

1997  est.

1998  est.

(million  FRF)

Net  operating  receipts

16 561

17 131

17 229

17 539

Operating  costs

Provisions

− 12 896

− 13 109

− 2 520

− 2 249

[. . .]

[. . .]

[. . .]

[. . .]

Ordinary  result  before  tax  and  FGBR

1 145

1 773

1 847

2 009

Other  charges  and  FGBR

Tax

Minority  interests

− 157

− 275

− 88

− 574

− 275

− 77

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

Company  result

625

847

1 110

1 220

Capital  at  end  of  period

Return  on  average  capital

13 682

4,7 %

14 358

6,0 %

15 257

7,5 %

16 199

7,8 %

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L 78/15

The  plan  is  based  on  the  following  assumptions:

— annual  growth  of  approximately  5 %  in  the  number
of  target  customers  (private  individuals,  professional
people,  SMEs)  and  average  annual  increase  in  assets
and  income  of  6 %  a  year  at  regional  bank  level  and
of  4 %  and  5 %  respectively  at  overall  group  level,

— the  interest  margin  is  expected  to  fall  from  4,93 %  in

1996  to  4,09 %  in  1998,

— continuation  at  regional  level  of  the  growth  of  the
share  of  net  bank  output  accounted 
for  by
commissions from 32,9 % in 1996 to 36,9 % in 1998;
this  growth  will  then  slow  down  as  a  result  of
commissions on banking transactions diminishing due
to  the  introduction  of  the  euro,

— overheads  are  slightly  up,  owing  to  the  higher  costs
associated with the introduction of the euro (FRF 100
million  a  year  for  1997  and  1998);  more  specifically,
staff  costs  will  remain  fairly  stable  despite  cuts  in  the
workforce  of  1,4 %  in  1997  and  1,2 %  in  1998,

— the  rate  of  net  allocation  to  the  provisions  for  the
regional  banks’  lendings  should  fall  from  0,91 %  in
1996  to  0,86 %  in  1998,  the  1996  level  being  due  to
an  increase  in  the  provisions  for  non-recurring  items.

Those  assumptions  appear  realistic.  However,  the  group
suffers  from  a  few  weaknesses,  such  as  particularly  high
operating  costs,  sizeable  exposure  to  other  companies  in
the  GAN  group,  and  a  meagre  level  of  profitability  as
regards  both  the  current  level  and  future  prospects.

On  the  issue  of  operating  costs,  the  ratio  between
overheads  and  net  banking  income  is  still  too  high
(75,5 %  at  the  end  of  1998),  being  above  the  current
average for French banks and the targeted level for Crédit
Lyonnais  (70 %).  In  the  long  term,  in  a  context  of  free
competition  at  European  level  and  of  technological
innovation,  the  reduction  in  the  interest  margin  can  be
offset only by a reduction in overheads, in particular staff
costs.  British  banks,  which  are  nowadays  the  most
efficient  in  Europe  with  rates  of  return  of  up  to  36 %,
have  much  lower  operating  ratios  (measured  in  terms  of
the ratio between overheads and net banking income). In
a  context  of  increasing  competitive  pressure  due  to  the
integration  of  markets  and  the  single  currency,  it  is  clear
that  banks  with  excessively  high  operating  ratios  will  be
unable  to  survive.

With  regard  to  the  second  weakness,  CIC  has  on  its
books more than FRF 12 billion of commitments vis-à-vis
other  entities  in  the  GAN  group,  including  FRF  6  billion
vis-à-vis  UIC,  FRF  3  billion  vis-à-vis  GAN  SA,  and
approximately  FRF  3  billion  vis-à-vis  the  hive-off  vehicle
Bâticrédit. The plan provides for the conversion of half of
the  loan  to  UIC  into  a  loan  to  Bâticrédit,  which  will
therefore be exposed to CIC to the tune of FRF 6 billion,
a  loan  the  nominal  value  of  which  is  covered  by  the
explicit  guarantee  of  the  State  to  make  good  any  losses

incurred  by  the  two  hive-off  vehicles.  The  loan  to  GAN
SA will have to be repaid out of the proceeds from CIC’s
privatisation.  The  loan  to  UIC  is  covered  by  the  State’s
undertaking  to  meet  the  property  subsidiary’s  capital
requirements.  However,  following  the  recapitalisation
and sale of UIC, CIC’s loan will no longer be covered by
the  guarantee.  CIC 
therefore  retains  a  substantial
exposure towards the GAN group, whose coverage of the
risk  remains  subject  to  the  disposal  of  CIC  and  to  the
recapitalisation  and  disposal  of  UIC.  The  successful
conclusion of these transactions is vital to CIC’s solvency
[. . .].

Lastly,  the  CIC  banking  group  enjoys  a  positive  but  low
level  of  profitability  compared  with  the  average  for
European banks. The plan provides, through a strategy of
sustained  expansion,  for  a  return  on  capital  of  7,8 %  by
the  end  of  1998  (at  company  level),  which  is  below  the
minimum  level  laid  down  by  the  Commission  in  other
banking  cases  and  adopted  by  the  CIC  even  at  the  time
of  the  Commission’s  1996  decision  (10 %).  The  main
difficulty  is  the  scale  of  the  overheads,  in  particular  staff
costs.  In  the  context  of  the  sell-off,  however,  it  may  be
presumed that a prudent private investor will be prepared
to  pay  a  price  compatible  with  a  return  on  capital  of
between  10  and  12 %.  That  is  to  say,  after  allowing  for
any  synergies  and  such  additional  restructuring  costs  as
may  be  necessary,  the  buyer  will  be  prepared  to  pay  a
price which will include a discount on the capital so as to
obtain a profitability ratio of at least 10 %, to which may
be  added  a  strategic  premium.

Faced  with  very  severe  competition  in  the  banking  field,
where  margins  are  becoming  increasingly  narrow  even  in
regional  markets,  CIC  would  probably  need  to  carry  out
further  restructuring  in  order  to  improve  its  profitability.
However,  the  proposal  to  dispose  of  CIC,  which  already
formed  part  of  the  conditions  of  the  old  Commission
decision  and  which  was  recently  confirmed  by  the
undertaking  given  by  the  new  Government  to  sell,  either
together  or  separately,  CIC  and  GAN  to  buyers  in  a
position  to  ensure  their  future  viability  and  long-term
development,  leading  to  the  majority  involvement  of
private  investors,  may  secure  the  provision  of  additional
funds  and  expertise  and  bring  new  pressure  to  bear  in
order  that  the  restructuring  drive  might  be  stepped  up,
notably  in  the  area  of  the  reduction  of  overheads.  The
French  Government  has  also  undertaken  to  ensure  that
the  operations  aimed  at  finding  potential  buyers  and
transferring  ownership  start  as  soon  as  possible  and  in
any  event  no  later  than  30  June  1998,  and  they  are
carried out in accordance with the principles of openness
and  equal  treatment  of  candidates.

5.1.4.

Insurance:  GAN

The  restructuring  plan  provides  that  the 
insurance
business  is  to  be  separated  from  the  rest  of  the  group,

L 78/16

EN

Official  Journal  of  the  European  Communities

16.3.98

notably  the  hive-off  vehicles  and  UIC,  which  remain
under  the  control  of  the  central  GAN  company  (GAN
SC). The holding company GAN SA will retain control of
GAN 
(Incendie  Accidents),  GAN  Vie,  Gan
Capitalisation  and  Socapi.  The  viability  of  the  insurance
business  may  be  analysed  in  terms  of  these  various
entities.

IA 

(a) N o n - l i f e   i n s u r a n c e

GAN  IA  carries  on  the  business  of  non-life  insurance
mainly  through  a  general  agents  network  composed  of
1 400  agencies.  In  the  early  1990s  GAN  IA  pursued  a
policy  of  growth  and  of  conquering  market  shares,  as  a
result  of  which  it  became  the  fourth  largest  non-life
insurer  in  terms  of  direct  gross  premiums.  However,  this
policy of growth at any cost has been pursued at too fast
a  rate  compared  with  the  company’s  capacity  to  select
risks,  as  can  be  seen  from  the  following  table  for  the
motor  vehicle  class.  As  a  result,  GAN  IA  has  run  up
increasingly  heavy 
its
capital.

losses  which  have  exhausted 

Number  of  contracts  and  technical  results  (million)  in  motor
insurance

Technical results

Number of contracts

1 200

700

200

–300

–800

–1 300

90

91

92

93

94

95

96

Attempts  have  been  made  since  1994  to  achieve  a
turnaround  by  increasing  premiums  and  excesses  and
terminating  a  number  of  contracts.  Agents  are  being
more  closely  supervised  to  induce  them  to  increase  their
productivity  with  a  view  to  reducing  overheads  and
reorganising  distribution;  the  system  for  paying  agents
has  been  remodelled  along  the  lines  of  the  one  used  by
AXA,  involving  a  gradual  replacement  of  commission
based on turnover, the conventional payment method, by
a  share  in  the  technical  result  of  business  brought  in.
Agents’  numbers  are  to  be  cut.

The  business  plan  presented  by  the  French  authorities
provides  for  a  significant  reduction  in  turnover  (9 %)
between  1995  and  1997,  followed  by  its  stabilisation
around  FRF  12,8  billion.  The  claims/premiums  ratio  in
France  should  continue  to  improve  from  79,8 %  in  1995
to 71,3 % in 1998. Operating costs should fall from FRF
4 148  million  in  1995  to  FRF  3 748  million  in  1998,  a
9,6 % reduction over three years. Lastly, income is set to
fall owing inter alia to the reduction in capital gains from
FRF  1 340  million  to  FRF  1 160 million.

Out  of  premiums  received  insurance  companies  form
technical  reserves  to  cover  their  commitments  towards
policyholders.  The  amount  of  these  technical  reserves
gives  an  idea  of  the  size  of  an  insurance  company’s
indebtedness  towards  policyholders  or  insured  persons.
The  improvement  in  the  results  of  GAN  IA  is  also  based
on  the  assumption  that  the  company  has  now  made  up
for  lost  time  in  creating  technical  provisions  and  that  it
has  sufficient  reserves  to  meet  any  increase  in  claims
outstanding.

16.3.98

EN

Official  Journal  of  the  European  Communities

L 78/17

Table  5

GAN  IA’s  business  plan  as  presented  by  the  French  authorities

Premiums

Claims paid

Income  from  disposals

(million  FRF)

1995

1996

1997  est.

1998  est.

14 010

13 546

− 12 054

− 10 940

− 17

− 221

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

Net  technical  margin

2 326

2 543

2 891

2 886

Operating  costs:

of  which  commissions

of  which  overheads

Investment  income:

of  which  financial  revenue

of  which  realised  capital  gains

Exceptional  result

− 4 148

− 2 131

− 2 017

1 340

877

463

38

− 3 955

− 1 935

− 2 020

1 803

844

959 (1)

− 32

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

Net  result

− 444

359 (2)

236 (4)

278

Technical provisions

Capital

Return  on  capital

26 023

2 949

27 369

3 418

− 17,3 %

11,3 % (3)

27 099

5 954

5 % (5)

27 043

6 173

4,6 %

(1) Of  which  FRF  591  million  on  the  exchange  of  CIC  securities.
(2) Without  the  CIC  capital  gain,  the  net  result  comes  to  FRF  − 232  million.
(3) Without  the  CIC  capital  gain,  the  return  comes  to  − 7,3  %.
(4) FRF 102 million without the share of the exceptional dividend of GAN International (FRF 134 million out of a total of

FRF  420  million).

(5) 2,9 %  without  the  effect  of  the  exceptional  dividend  of  GAN  International  and  the  increase  in  capital.

Despite  the  return  to  profit,  the  plan  presented  remains
subject  to  a  number  of  imponderables  as  a  result  of
which  it  is  not  possible  to  conclude  that  there  will  be  a
return  to  solid  viability  without  any  backing.  There  are
two  problems:  a  first  problem  of  ability  to  maintain  a
technical margin which is stable and high enough to limit
the negative result after operating costs, having regard to
the  level  of  capitalisation;  and  a  second  problem  of
liquidity  and  performance  of  the  assets  portfolio.

With  regard  to  the  first  problem,  a  number  of  aspects
must be underscored. First of all, the return to profit was
speeded up by the release of FRF 386 million of reserves
in 1995 and 1996 and by the exceptional income of FRF
591  million  from  the  transfer  of  CIC  securities  to  GAN
SA.  For  1997  and  1998,  GAN  IA  considers  that  it  will
achieve  substantial  surpluses  which  will  enable  it  to
release FRF 769 million of reserves, which corresponds to
150 %  of  the  aggregate  company  result.  Even  if  the  level
of  the  surpluses  achieved  in  1995  and  1996  were  to
confirm  GAN’s  ability  to  continue  to  release  reserves  in
the  years  ahead,  only  time  will  tell  whether  the  current
level of reserves is adequate. In other words, the fact that

the  return  to  profit  depends  to  a  large  extent  on  the
releasing  of  provisions  made  in  the  past  casts  doubt  on
the  strength  of  the  prospect  of  recovery.

Secondly,  GAN  IA  is  still  far  behind  its  competitors  in
terms  of  technical  factors.  Although  the  company  has
made very significant progress in reducing the number of
claims,  the  overall  ratio  between  operating  costs  and
claims  on  the  one  hand  and  premiums  on  the  other  will
at  the  end  of  1998  still  be  too  high  (105,6 %), especially
when  compared  with 
the  ratio  of  GAN’s  main
competitors,  who,  on  average  now  have  lower  ratios.

throughout 

It  would  appear  that  the  reduction  in  the  number  of
claims  is  not  accompanied  by  a  sufficient  reduction  in
operating  costs.  Even  if  the  comparison  must  be  made
with  care  owing  to  the  considerable  fluctuation  in
premiums 
in
accounting  method  and  the  different  cost  allocation
policies  pursued  by  the  various  competitors,  it  may  be
observed  that,  compared  with  premiums,  operating  costs
have  throughout  the  restructuring  period  remained
almost  unchanged  at  a  level  in  excess  of  29 %,  which  is
particularly high.

the  period, 

the  change 

L 78/18

EN

Official  Journal  of  the  European  Communities

16.3.98

Table  6

Projected  trend  in  technical  ratios  in  non-life  insurance

GAN  IA  (non-life  insurance)

Claims/premiums

Operating  costs/premiums

1995

86,0

29,6

1996

80,8

29,2

1997

76,9

30,1

(%)

1998

76,2

29,3

(Claims  +  Costs)/premiums

115,6

110,0

107,0

105,6

GAN  intends  to  deal  with  this  problem  by  launching  a
new  system  for  distributing  non-life  insurance  products
via CIC’s banking network, as it has already done in the
case  of  life  assurance  products;  GAN  is  not,  however,
alone in doing so, other competitors being in the process
of implementing the same policy. Moreover, according to
the  business  plan,  the  new  subsidiary  with  responsibility
in this area (Progress) will not be in a position to return a
profit  for  a  number  of  years.  If  one  also  takes  into
account  the  other  non-life  insurance  subsidiaries,  the
income  from  this  business  in  France  for  1998  should  be
reduced  from  FRF  278  million  to  FRF  261  million.

With  the  low  level  of  capitalisation,  these  uncertainties,
which  may  affect  GAN  IA’s  technical  results,  invite
caution  about  the  company’s  ability  to  return  to
viability.

said 

It  can 

therefore  be 

As  regards  the  second  problem,  GAN  IA’s  portfolio  of
investments  suffers  from  illiquidity  and  an  inadequate
return  compared  with  its  competitors.  Out  of  a  total
portfolio  worth  approximately  FRF  20  billion,  almost
FRF  3  billion  is  accounted  for  by  immovable  assets
(14 %),  more  than  FRF  5  billion  is  accounted  for  by
shareholdings  in  other  entities  of  the  group  (26 %)  and
approximately FRF 1 billion is in the form of intra-group
debt  (5 %).  On  the  other  hand,  the  proportion  of
high-yield  and  long-term  securities  in  the  portfolio  is
relatively  modest. 
that
approximately  45 %  of  the  portfolio  is  composed  of
illiquid  assets.  The  profitability  of  this  portfolio  is,
moreover,  very  modest.  In  particular,  the  portfolio  has
generated  a  profitability  well  below  that  of  the  French
stock  and  bond  markets.  In  1996  the  rate  of  return  on
assets  was  3,4 %  excluding  capital  gains  and  8,3 %
including  capital  gains,  whereas  the  French  stock  and
(with
bond  markets  gained  approximately  25 % 
dividends reinvested) and 12 % respectively. In 1998 it is
expected  that  the  portfolio  will  have  a  yield  of  4,2 %
excluding capital gains and 4,9 % including capital gains.
Lastly,  unrealised  gains  account  for  only  9 %  of  the
portfolio,  which  is  particularly  low,  in  view  of  the  fact
that  more  than  a  quarter  of  the  unrealised  gains  derives
from  immovable  assets.  It  should  also  be  noted  that  the
strategic  assets  are  entered  in  the  books  with  high,
notably  international,  values,  which  exposes  GAN  IA  to
losses  in  the  event  of  their  being  sold  at  less  than  book
value.  Lastly,  the  sensitivity  analysis,  which  makes  it
possible  to  assess  the  trend  of  the  company’s  results  in

the  event  of  variations  in  the  basic  assumptions  made,
shows that GAN IA remains exposed to certain risks of a
less  favourable  development  of  the  business  cycle.  With
competitors  recording  a  much  better  performance,  GAN
will  inevitably  be  faced  with  very  competitive  rates,
which  will  have  the  effect  of  reducing  its  margin  of
manoeuvre.

GAN  intends  to  tackle  this  problem  by  reducing  the
strategic  assets  in  its  portfolio,  notably  UIS  and  BIF,  and
by  paying  part  of  the  intra-group  debts,  which  will  be
made  possible  by  the  disposal  of  CIC.  However,  these
measures,  though  necessary,  do  not  seem  sufficient
because  they  account  for  only  some  10 %  of  the
portfolio.

In  conclusion,  in  view  of  the  increasingly  low  level  of
projected  profitability  (4,6 %)  and  of  capitalisation  and
having  regard  to  the  problems  described  above,  the
Commission  considers  that  the  viability  of  GAN  IA
remains particularly fragile.

(b) L i f e   a s s u r a n c e

The  life  assurance  activity  of  the  GAN  group  is  carried
on by three main companies: Gan Vie, Gan Capitalisation
and  Socapi.  These  are  examined  separately  below.

Gan Vie sells mainly pension products through a network
of  450  special  assistants  and  200  exclusive  agents  for
‘collective’  insurance  and  through  a  network  of  1 800
salaried  salespersons  for  individual  cover.

The business plan presented by the French authorities for
GAN  Vie  forecasts  a  6 %  reduction  in  turnover  between
1995 and 1997 followed by a levelling-off at around FRF
10  billion.  Technical  expenses  should  fall  from  FRF  8,4
billion  to  FRF  7,7  billion,  which  would  enable  the  gross
technical  margin  to  improve  slightly.  Operating  costs  are
falling  slowly,  while  investment  income  is  set  to  increase
by  about  5 %  in  1997  and  to  stabilise  thereafter  at
in
around  FRF  4,4  billion.  However,  the 

increase 

16.3.98

EN

Official  Journal  of  the  European  Communities

L 78/19

appropriations to profit-sharing funds for insured persons
will  help  to  reduce  the  financial  margin  to  FRF  386
million  in  1998.  Consequently  the  new  result,  after  the

1996  increase  due  to  substantial  realised  capital  gains,  is
FRF  260  million  in  1998,  which  corresponds  to  a  return
on  capital  of  5,8 %.

Table  7

GAN  Vie’s  business  plan  as  presented  by  the  French  authorities

Turnover

Technical charges

Result  of  disposals

(million  FRF)

1995

1996

1997  est.

1998  est.

10 628

− 8 379

− 311

10 566

− 8 359

− 262

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

Net  technical  margin

1 938

1 946

2 022

2 074

Operating  costs:

of  which  production  expenses

of  which  overheads

Investment  income:

of  which  financial  revenue

of  which  realised  capital  gains

Interest  credited

Profit-sharing  appropriation

Financial margin

− 2 231

− 1 617

− 614

4 117

3 068

1 049

− 1 496

− 2 137

484

Exceptional  result  and  corporation  tax

− 182

Technical provisions

Capital

Return  on  capital

Net  result

10

68 274

3 728

0,2 %

− 2 153

− 1 522

− 631

4 246

3 180

1 066

− 1 464

− 2 155

627

− 28

392

70 890

4 118

10,0 %

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

418 (1)

260

73 884

4 438

9,8 % (2)

77 100

4 593

5,8 %

(1) FRF 214 million without the share of the exceptional dividend of GAN International (FRF 240 million out of a total of

FRF  420  million).

(2) 5,1 %  without  the  effect  of  the  exceptional  dividend  of  GAN  International.

The following comments may be made regarding the plan
presented.  First,  the  gradual  reduction  in  turnover  bears
witness  to  the  loss  of  market  share  by  GAN  Vie,
especially in the ‘individual’ and ‘collective’ classes, which
account  for  most  of  the  turnover,  whereas  the  family
welfare class should maintain its market share (10 %) and
its  high  technical  margin.  However,  the  extent  to  which
the latter class will be able to offset the fall in the relative
level  of  activity  of  the  other  classes  remains  the  toughest
challenge  facing  GAN  Vie.

improvement 

Secondly,  the 
in  the  technical  margin
compared with turnover depends to a large extent on the
contract  termination  rate,  which  according  to  GAN
should  fall  in  1997,  notably  for  the  ‘individual’  class.
However,  contracts  in  the  latter  class  still  produce
modest  technical  results  compared  with  other  products,
which  leaves  them  exposed  to  a  high  surrender  risk.  If

this were to materialise, the improvement in the technical
margin  would  have  to  be  revised  downwards.

Thirdly,  operating  costs  are  particularly  high  at  almost
21 %  of  turnover.  This  level  is  unsustainable  in  the  long
run  compared  with  the  much  lower  levels  of  the  market
(approximately 10 %) and in particular of the all-purpose
finance institutions (approximately 5 %). From this point
of  view,  the  ability  of  GAN  Vie  to  face  up  to  the
competitive  pressure  from  all-purpose  financiers  and
other  competitors  is  uncertain.

Moreover,  the  distribution  of  insurance  products  by
financial  institutions,  the  Post  Office  and  the  Treasury  is
continuing  to  develop.  Their  market  share  has  grown
steadily,  increasing  in  ten  years  from  25 %  in  1985  to
56 %  in  1995.  That  of  the  insurance  networks  fell  to

L 78/20

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Official  Journal  of  the  European  Communities

16.3.98

38 %  in  1995,  whereas  direct  selling  and  other  means  of
distribution  rose  to  6 %  that  year.

for 

and 

come 

(14 %) 

liabilities  and 

intra-group  debts 

reportedly  asked 
for  current 

The  problem  is  made  worse  by  the  fact  that,  like  GAN
IA,  GAN  Vie  suffers  from  a  problem  of  an  insufficient
that  which
return  on  assets  held  compared  with 
policyholders were promised. This problem induced GAN
SA  to  repurchase  part  of  the  portfolio  of  GAN  Vie,
substantial  additional
which 
financial
for 
provisions 
contingencies. Despite this operation, GAN Vie still has a
large  number  of  illiquid  assets,  of  the  order  to  40 %  of
the  portfolio.  In  particular,  of  a  total  portfolio  worth
approximately  FRF  72  billion,  almost  FRF  13  billion  are
immovable  assets  (18 %),  more  than  FRF  10  billion  is
accounted  for  by  shareholdings  in  other  entities  of  the
group 
to
approximately  FRF  5  billion  (7 %).  Moreover,  the
profitability of this portfolio is very modest. In particular,
the  portfolio  has  yielded  a  profit  well  below  that  of  the
French  stock  and  bond  markets.  In  1996  the  rate  of
return  on  assets  was  4,2 %  excluding  capital  gains  and
5,6 %  including  capital  gains,  whereas  the  French  stock
and  bond  markets  gained  approximately  25 %  (with
dividends  reinvested)  and  12 %  respectively.  In  1998  the
portfolio  should  have  a  yield  of  4,3 %  excluding  capital
gains and 5,7 % including capital gains. Lastly, unrealised
gains  account  for  only  11 %  of  the  portfolio,  which  is
particularly  low,  in  view  of  the  fact  that  more  than  a
quarter of the unrealised gains derives from shareholdings
in other group entities and that the property portfolio has
negative  unrealised  gains.  Consequently,  without  a
restructuring  of  the  assets  portfolio,  which  is  something
that only a sufficiently strong buyer could ensure, there is
a  risk  that  its  low  profitability  will  lead  to  insufficiently
competitive rates on the part of GAN and hence to a loss
of  interest  by  GAN’s  customers  in  its  products  and
ultimately  to  loss  of  market  share.

Lastly,  GAN  Vie,  like  the  rest  of  the  group,  suffers  from
a problem of balance between assets and liabilities which
lays  it  open  to  a  major  interest  rate  risk.  The  ‘duration’
of  the  capital,  which  measures  the  variation  in  the  value
of the capital compared with the variation in the interest
rate,  having  regard  to  the  maturity  of  the  assets  held (13),
seems  to  be  particularly  high  and  well  above  that  of  the
main  competitors.

To  conclude,  in  view  of  the  increasingly  low  level  of
projected  profitability  (5,8 %)  and  of  capitalisation  and
having  regard  to  the  problems  described  above,  the
Commission  considers  that  the  viability  of  GAN  Vie  will
remain  particularly  fragile  without  any  backing.

Gan  Capitalisation  (Gan  Capi)  sells  mainly  individual
retirement  savings  products  through  a  network  of  1 700
agents.  The  business  plan  for  this  company  submitted  to
the  Commission  includes  a  capital  injection  of  FRF  200
million  which  the  State  will  make  at  the  end  of  1997  at
the  request  of  the  supervisory  authorities.  Given  the
contraction of the market for capitalisation products, the
aim  is  to  increase  production  by  almost  15 %  compared
with 1995 by developing life assurance products and thus
balancing  the  two  activities  Capitalisation  and  Vie,  the
present  breakdown  being  weighted  heavily  in  favour  of
Capitalisation.  Technical  expenses  are  rising  from  FRF
2,9  billion  to  almost  FRF  3,4  billion  and  the  technical
margin  remains  below  6 %.  Operating  costs  are  up  in
absolute terms but down compared with turnover owing,
among 
of
to 
single-premium  products  as  opposed  to  those  involving
the  payment  of  a  periodic  premium.  However,  the
reduction  in  the  financial  margin  is  contributing  to  the
contraction  in  results  from  FRF  100  million  in  1995  to
FRF  60  million  in  1998.  Consequently,  the  return  on
capital  will  be  5,6 %  in  1998,  a  fall  of  more  than  half
compared  with  1995.

development 

things, 

other 

the 

(13) ‘Duration’  is  a  mathematical  concept  of  the  risk  of  an
investment  which  describes  the  number  of  years  needed  to
receive the present value of future flows of income from that
investment  (capital  plus  interest).

16.3.98

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L 78/21

Table  8

GAN  Capitalisation’s  business  plan  as  presented  by  the  French  authorities

Turnover

Technical charges

3 280

− 2 908

− 3 100

[. . .]

[. . .]

[. . .]

[. . .]

1996

1997  est.

1998  est.

(million  FRF)

1995

3 136

Technical margin

228

180

189

206

Operating  costs

Investment  income:

of  which  financial  revenue

of  which  realized  capital  gains

− 445

1 688

1 471

217

− 423

1 767

1 519

248

Interest  credited

− 1 143

− 1 180

Profit-sharing  appropriation

− 184

− 249

Financial margin

Exceptional  result  and  corporation  tax

Net  result

361

− 40

104

338

− 29

67

Mathematical provisions

19 883

21 646

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

64

60

Capital

Return  on  capital

758

795

13,0 %

8,6 %

6,9 % (1)

23 297

1 058

24 571

1 103

5,6 %

(1) After injection by the State of FRF 200 million of new capital on 31 December 1997; without this element, the return

comes  to  7,7 %.

GAN Capitalisation suffers from two main problems: the
collapse of the market for capitalisation products and the
insufficient  return  on  the  assets  it  holds.  With  regard  to
the  first  problem,  as  noted  by  the  report  of  the  French
Conseil  National  du  Crédit,  the  fall  in  demand  for
capitalisation  bonds  (− 2 %  in  1995)  is  a  continuation  of
the  trend  which  started  in  1991  owing  to  the  arrival  on
the  market  of  more  flexible  and  more  profitable
products, the marketing of contracts expressed in units of
account  and  competition  from  unit  trusts.  GAN  Capi
proposes  to  redeploy  itself  in  the  life  assurance  sector.
Such a redeployment might, however, prove difficult. In a
market  such  as  that  for  life  assurance  where  the  growth
rate  is  falling,  competition  is  constantly  increasing  and  it
remains  to  be  seen  whether  GAN  Capi  can  compete
head-on  with  the  all-purpose  finance  institutions  or  the
mutuals  without  a  ‘franchise’  network  as  profitable  as
that  in  the  family  welfare  class.

to  cover 

is  unable 

the
appreciation,  GAN  Capi 
guaranteed  rates.  Although  the  portfolio  of  assets,  being
composed  largely  of  bonds,  is  much  more  liquid  than
those of the other insurance entities, as in the case of the
other group entities the return on the bonds and shares is
lower  than  that  of  the  market.  Equally,  unrealised  gains
account  for  only  11 %  of  the  portfolio.  Consequently,
GAN Capi’s prospects are not good. Lastly, the exposure
to  the  risk  of  interest  rate  movements  is  substantial  in
view  of  the  company’s  low  capitalisation.

To  conclude,  in  view  of  the  increasingly  low  level  of
projected  profitability  (5,6 %)  and  of  capitalisation  and
having  regard  to  the  problems  described  above,  the
the  viability  of  GAN
that 
Commission  considers 
Capitalisation will remain particularly fragile without any
backing.

The  problem  of  the  inadequate  return  on  assets  must  be
assessed  in  the  light  of  the  minimum  rates  policyholders
receive.  Without  any  capital
are  guaranteed 

to 

Socapi  is  a  50/50  joint  venture  between  CIC  and  GAN
SA  which  sells  savings  products  through  CIC’s  banking
network.  With  a  market  share  of  3,5 %  it  is  the  sixth

L 78/22

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Official  Journal  of  the  European  Communities

16.3.98

finance 

institution.  The
largest  French  all-purpose 
objective is to have a rate of turnover growth broadly the
same as that estimated for all-purpose finance companies
as a whole, i.e. 4 % in 1997 and 5 % in 1998. The assets
stock  should  grow  by  15 %  a  year  to  FRF  70  billion  by
the  end  of  1998.  Overheads  should  increase  more  slowly

and  hence  make  it  possible  to  reduce  slightly  the
operating ratio. The plan also provides for an increase in
the  percentage  of  products  with  periodic  premiums
compared  with 
products,  which
single-premium 
nowadays  account  for  more  than  90 %  of  premium
income.

Table  9

Socapi’s  business  plan  as  presented  by  the  French  authorities

Turnover

8 622

10 614

[. . .]

[. . .]

1995

1996

1997  est.

1998  est.

(million  FRF)

Technical margin

Overheads

Operating  result

Financial margin

32

− 559

− 140

462

230

6

8

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

[. . .]

228

241

Net  result

110

Capital

Return  on  capital

1 444

7,6 %

1 761

13,0 %

2 210

10,3 %

2 448

9,8 %

It 

Socapi does not have the same difficulties as GAN’s other
insurance  companies. 
is  an  efficient,  profitable
company.  The  only  problem  is  the  prolongation  of  the
all-purpose  finance  agreements  in  the  context  of  CIC’s
privatisation  and  the  level  of  the  commissions  which
Socapi  must  pay  to  CIC  under  those  agreements
inasmuch  as  this  might  affect  its  profitability.

Against the background of the separate disposal of GAN
and  CIC,  the  question  arises  of  the  commercial  and
capital  links  between  the  two  entities.  GAN  has  stated
that  all-purpose  finance  is  essential  to  its  viability  and
that  it  therefore  wishes  to  maintain  strong  commercial
agreements  with  CIC.  The  all-purpose  finance  agreement
in  force  between  CIC  and  GAN  provides  that  CIC  is  to
receive (. . .) of the loadings in respect of net cancellation
premiums  on  new  business  and  (. . .)  of  the  loadings
applicable  to  the  mathematical  provisions  on  amounts
outstanding.  The  contract,  which  has  a  duration  of  eight
years  and 
is  renewable,  permits  termination  upon
payment  of  a  penalty  of  some  FRF  700  million  coupled
with  an  obligation  on  the  part  of  CIC  to  buy  back  the
50 %  stake  held  by  GAN  Vie  in  Socapi.  As  part  of  a
disposal  which  might  be  separated  from  CIC  and  GAN,
is  under  review.  According  to  the
this  agreement 

In  view  of 

information  transmitted  by  the  French  authorities,  CIC
will  have  to  increase  its  stake  in  Socapi  to  55 %,  while
commissions  on  amounts  outstanding  will  have  to  be
increased to approximately [. . .] and the penalty for early
withdrawal  should  be  abolished. 
the
maintenance  of  a  holding  by  GAN  in  CIC  of  20 %  or
more,  GAN  will  be  able  to  consolidate,  using  the  equity
method, CIC’s results and at the same time, thanks to the
holding  in  CIC,  retain  control  over  Socapi (14)  and  thus
consolidate 
its  accounts.  GAN  would
accordingly  like  the  all-purpose  finance  agreements  to
cover non-life assurance as well, via the creation of a new
company  (Progress)  of  which  GAN  would  be  the
majority shareholder.

it  fully 

into 

It  should  be  pointed  out  in  this  connection  that  the
all-purpose  finance  agreements  are  important  in  three
respects:  for  GAN’s  viability,  for  CIC’s  selling  price,  and
for  Socapi’s  profitability.  A  balanced  solution  should
enable  GAN  to  count  on  a  substantial,  stable  source  of
revenue  and  at  the  same  time  not  induce  CIC’s  buyer,

(14) GAN would hold directly 45 % of the capital of Socapi and
indirectly,  via  its  20 %  holding  in  CIC,  another  percentage
of  approximately  10 %,  which  would  give  it  control.

16.3.98

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Official  Journal  of  the  European  Communities

L 78/23

deprived  of  the  possibility  of  using  freely  the  banking
network to distribute its own insurance products, to seek
a quid pro quo in the form of a discount on CIC’s price.
It  is  in  Socapi’s  interests  that  it  should  not  be  obliged  to
pay  too  much  in  the  way  of  commission  to  CIC  as  this
would  reduce  its  profitability.  In  view  of  the  fact  that
these  agreements  might  affect  the  viability  of  GAN  and
Socapi  and  the  net  cost  of  the  State  aid  operation,  the
Commission  must  ensure  that  the  agreements  satisfy  the
dual  requirement  of  minimising  the  net  cost  to  the  State
and  ensuring  viability.  In  this  respect,  the  Commission  is
of  the  opinion  that  the  courses  of  action  proposed  meet
this  dual  requirement.

(c) G A N   I n t e r n a t i o n a l

company 

International. 

GAN  SA  still  maintains  a  significant  presence  abroad
through  the  subsidiaries  grouped  together  under  the
holding 
GAN
GAN 
International’s turnover at the end of 1996 came to more
than FRF 14 billion, or approximately 25 % of the GAN
group’s  insurance  turnover.  The  predominant  activity  is
in non-life insurance (62 % of turnover). Almost 46 %  of
GAN  International’s  turnover  is  achieved  in  the  United
Kingdom;  Italy  accounts  for  13 %,  Spain  6 %,  and
Canada  and  Morocco  approximately  5 %  each.  Other
companies  are  present  in  the  United  States,  Germany,
Switzerland,  Portugal  and  Luxembourg.  All 
the
subsidiaries  are  profitable  apart  from  GAN  Canada,
albeit  with  a  low  level  of  return  on  capital,  save  in
Morocco  which  is  the  only  case  where  GAN’s  market
share  abroad  is  significantly  greater  than  1 %.

result 

The  plan  presented  initially  provides  for  a  reduction  in
GAN  International’s  turnover  from  FRF  14  billion  to
FRF 12 billion in 1997, inter alia as a result of the sale in
1996 of GAN Belgium and CTR, which still appeared in
the accounts for the first half of 1996 (15), followed by its
recovery  to  almost  FRF  13  billion.  GAN  International’s
net 
tune  of
approximately  FRF  [. . .]  million  in  1997  and  become
positive  again  in  1998.  The  rate  of  return  on  capital  at
consolidated level remains, even for 1998, below 1 %.  In
view  of  this,  GAN  International  constitutes  a  group  of
subsidiaries some of which are profitable and viable as in
Morocco,  whereas  others  have  a  negative  impact  on  the
viability  of  GAN  International  as  a  whole.

should  be  negative 

the 

to 

(d) C o n c l u s i o n s   c o n c e r n i n g   t h e   v i a b i l i t y   o f

G A N ’ s   i n s u r a n c e   a c t i v i t i e s

To  conclude,  in  the  light  of  the  considerations  set  out
the  projected
recovery  measures  and 
above, 

the 

the  assets 

consists  of 

the  various 

commitments 

profitability  of  GAN  for  1998  leave  precarious  the
viability  of 
insurance  companies  as
independent  entities.  In  particular,  for  the  subsidiaries
GAN  Vie  and  GAN  Capitalisation  there  is  a  problem  of
insufficiency of the income from the assets held compared
with  the  minimum  returns  guaranteed  to  policyholders.
share  following  the  termination  of  contracts  in  the  years
ahead  by  policyholders.  What  is  more,  a  substantial  part
of 
towards
subsidiaries of the group the value of which is uncertain.
Lastly,  the  sensitivity  analysis  shows  a  very  heavy
exposure  to  interest  rate  changes.  In  the  case  of  non-life
insurance,  a  major  restructuring  drive  has  been  carried
out  in  the  past,  but  the  business  is  still  loss-making
owing, among other things, to excessively high operating
costs.  The  profitability  expected  in  1998  is  of  the  order
of  5 %  for  the  three  areas  of  insurance  activity  (non-life:
4,6 %, life: 5,8 %, capitalisation: 5,6 %) [. . .]. Given their
weaknesses 
position,
capitalisation  and  investment  portfolio,  these  companies’
viability  would  be  particularly 
fragile  without  a
sufficiently strong and capitalised partner. Socapi alone is
more  profitable,  although  it  will  be  less  so  in  the  years
ahead.  However,  in  1998  Socapi  will  account  for  only
some 20 % of GAN’s total premiums and as a result will
be  unable 
the  other  companies’  poor
profitability.

competitive 

to  offset 

terms 

of 

in 

from 

The  Commission’s  analysis  of  GAN  is  also  based  on  the
consideration  that  the  French  insurance  market  is  on  the
whole  a  mature  market,  the  expansion  of  which  in  an
unfavourable economic environment should be limited by
the  poor  growth  recorded  by  potential  purchasers  of
non-life  insurance,  while  the  calling  into  question  of  tax
breaks,  the  reduction  in  households’  propensity  to  save
and  sharpening  competition  mean  that  it  will  no  longer
be  possible  to  make  the  strong  advances  observed  in  the
insurance  of  persons  during  the  past  decade.  Moreover,
competition 
the  networks  of  mutuals  and
all-purpose finance institutions, whose operating costs are
lower  owing  to  the  low  cost  of  distributing  insurance
products,  will  affect  the  traditional  networks  of  agents
and  brokers.  The  brand  new  channel  of  distributing
insurance  products  by  telephone  will  probably  have  the
effect  of  further  reducing  margins  for  standard  products.
From  this  point  of  view,  GAN  is  in  an  intermediate
position  because,  on  the  one  hand,  it  has  already  been
able  to  profit  from  its  links  with  CIC’s  banking  network
for  the  distribution  of  life  assurance  products,  while,  on
the  other,  it  continues  to  bear,  like  other  conventional
insurers,  operating  costs  that  are  on  average  higher  for
the  distribution  of  other  insurance  products.  Looked  at
from  this  angle,  GAN’s  objective  of  maintaining  the
partnership  with  CIC,  even  in  the  event  of  a  transfer  of
control over the latter, is understandable because it is the
group’s  best  trump  card.

(15) According  to  the  annexes  to  the  1996  balance  sheet,  the
turnover  of  GAN  Belgium  and  CTR  was  FRF  550  million
and  FRF  1 880  million  respectively.

Consequently,  in  view  of  the  context  in  which  GAN’s
insurance entities operate, the Commission considers that

L 78/24

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16.3.98

the viability of these entities may be assured only as part
of a transfer to partners having the economic and human
resources to complete in-depth the necessary restructuring
of  GAN’s  various  insurance  businesses.

In particular, the Commission considers that one or more
financially stronger and more capitalised investors will be
able  to  enhance  the  viability  of  the  GAN  group
companies by providing them with additional capital, and
will  thus  be  able  to  meet  the  regulatory  obligations  with
a  wider  safety  margin.  Such  backing  is,  moreover,  likely
to generate synergies at several levels. Economies of scale
may  be  achieved,  notably  by  increasing  the  productivity
of  employees  and  reducing  both  their  unit  cost  and  per
capita  overheads.  Given  the  concentration  of  GAN’s
activities compared with those of other leading insurance
groups,  a  financially  strong  buyer  may  be  able  to
diversify  more  GAN’s  sources  of  profit.  In  view  of  the
concentration  of  the  assets  portfolio  in  the  property
sector  and  in  intra-group  shareholdings  and  of  its  low
profitability,  a  buyer  with  a  sufficiently  broad  and  liquid
its
portfolio  of  assets  will  be  able 
diversification and profitability. The backing process will
also  enable  a  start  to  be  made  on  undoing  the  capital,
financing  and  guarantee  links  that  are  affecting  the
group’s 
liquidity  and  profitability.  The  Commission
considers lastly that the planned disposals will reduce the
moral hazard which has been at the root of such a major
collapse  and  will  strengthen  the  group’s  corporate
governance by stepping up monitoring without distorting
the  market.

increase 

to 

The  Commission  takes  note  in  this  respect  of  the  French
authorities’  undertakings  to  sell,  either  together  or
separately,  CIC  and  GAN  to  buyers  in  a  position  to
ensure  their  future  viability  and  long-term  development,
and  to  conduct  the  operations  aimed  at  finding  potential
buyers  and  transferring  ownership,  which  will  start
officially  as  soon  as  possible  and  no  later  than  30  June
1998,  in  accordance  with  the  Act  of  6  August  1986  and
the  principles  of  openness  and  equal  treatment  of
candidates.

5.2. The  quid  pro  quos

A number of factors suggest that the question of quid pro
quos  should  be  examined  by  the  Commission  with
increased vigilance. First, the scale of the aid in question,
totalling  as  it  does  almost  FRF  24  billion.  Secondly,  the
supplementary nature of the new aid compared with that
approved  by  the  Commission  in  1996,  something  which

is  not  normally  provided  for  by  the  guidelines  on  rescue
and  restructuring  aid.  In  this  context,  it  should  be  noted
that the new aid was notified just a few months after the
Commission’s  1996  decision  as  part  of  a  restructuring
plan  which  has  not  been  carried  out,  a  fact  which  raises
serious  doubts  as  to  whether  all  the  factors  the
Commission  needed  to  take  into  account  in  reaching  its
decision in the autumn of 1996 were communicated to it.
Thirdly,  the  fact  that  the  obligation  to  dispose  of  the
majority  stake  in  CIC,  the  main  concession  in  return  for
the  old  decision,  has  not  yet  been  complied  with.  And
lastly,  the  sizeable  distortions  of  competition  caused  by
the  aid.

It  should  be  noted  in  this  connection  that,  with  the
explicit  or  implicit  support  of  the  State,  the  GAN  group
has  engaged  in  the  past  in  price  and  rate  competition
with  a  view  to  increasing  its  market  share,  expecially  in
property  financing  and  non-life  insurance,  and  that  this
incurring  particularly
subsequently 
substantial 
is  particularly
unfortunate,  for  two  reasons.

in 
losses.  This 

its 
conduct 

resulted 

First, because the breakdown of the corporate governance
system  has  had  the  effect  of  increasing  considerably  the
final amount of aid now necessary, given the passivity of
the State, and this in turn has had the effect of creating a
moral  hazard  problem.

And,  second,  because  in  the  banking  and  insurance
sectors  the  consequences  of  mistaken  or  imprudent
conduct  show  up  only  after  a  while  given  the  greater
length of time it takes for the running of inordinate risks
to  translate  into  financial  losses,  which  makes  it  possible
to pursue risky policies for longer and thus has the effect
of  creating  greater  distortions.

As  regards  the  property  sector,  suffice  it  to  say  that
GAN’s  banking  subsidiary  specialised  in  this  sector  more
than  doubled  its  assets  between  1988  and  1992  from
FRF 19 billion to more than FRF 50 billion, on which it
has  already  incurred  losses  of  almost  FRF  27  billion.  In
particular  UIC  has  become  one  of  the  leading  players  in
the  property  market.  Although  UIC  and  the  other  GAN
group  entities  active  in  the  property  market  are  not  the
only ones to have indulged in speculation, GAN, together
with  Crédit  Lyonnais,  is  the  group  for  which  the  bill  for
the period 1992 to 1996 is the steepest (16) owing notably
to  an  excessive,  uncontrolled  exposure.

(16) According  to  a  study  which  recently  appeared  in  ‘Les

Echos’,  cited  by  the  French  authorities.

16.3.98

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L 78/25

Total  assets  of  UIC  and  of  the  hive-off  vehicles  (billions)

Cost  of  the  provisions  of  the  UIC  and  of  the  hive-off  vehicles
(billions)

60
50
40
30
20
10

0

88

89

90

91

92

93

94

95

96

Hive-off vehicles

UIC

92

93

94

95

96

Hive-off vehicles

UIC

0

–5

–10

–15

–20

As indicated above, in non-life insurance growth was also
sustained at too fast a rate compared with the capacity to
select  risks.  In  view  of  the  size  of  the  GAN  group  in  the
areas  of  insurance,  banking  and  property  financing,  its
conduct in terms of business expansion and pricing policy
has  had  the  effect  of  harming  competitors,  including
more  prudent  operators  who  have  decided  to  remain
more  aloof  from  speculation,  the  price  war  and  the
untrammelled  conquest  of  market  shares.  Being  designed
to  offset 
ill-controlled
expansion  of  past  years,  the  aid  in  question  accordingly
results  in  substantial  distortions  of  competition  in  that  it
precludes  the  normal  consequence  of  such  conduct  in  a
free, competitive market, namely the disappearance of the
ailing  firm  from  the  market.  Without  aid,  GAN  should
have  been  liquidated  and  its  dispersed  assets  could  have
been  bought  by  its  competitors.

stemming 

losses 

from 

the 

In  view  of  this,  GAN’s  contribution  to  minimising  the
distortive  effects  of  the  aid  on  competition  must  be
directed  at  the  overall  competitive  situation  of  the  group
in  its  various  banking  and  insurance  activities  in  France
and abroad. Given the GAN group’s integrated activity of
all-purpose finance, the quid pro quos must concern both
the  banking  and  the  insurance  business.

With  regard  to  the  old  aid,  the  French  authorities  have
first  of  all  undertaken  to  comply  with  the  obligation
stemming  from  the  1996  decision,  namely  the  reduction
of  GAN’s  commercial  presence  by  disposing  of  the
majority  stake  in  the  CIC  group.  Such  a  disposal  must
take  place  within  a  short  space  of  time  given  that  it  also
constitutes  a  precondition  for  the  viability  of  the  other
group  entities  inasmuch  as  it  enables  a  start  to  be  made
on  the  process  of  undoing  the  capital,  financing  and
guarantee  links  between  the  different  entities,  affording
them  greater  flexibility.  This  disposal,  which  may  be
carried  out  together  with  or  separately  from  that  of
GAN, will start as soon as possible and by 30 June 1998
at  the  latest.

With  regard  to  the  new  aid,  the  French  authorities  have
stated that the disposal of CIC comes on top of a number

of  disposals  which  GAN  has  carried  out  during  the  last
two  years  with  a  view  to  restructuring 
itself  and
withdrawing from activities which are not essential to the
group’s core business and which include both subsidiaries
—  such  as  GAN  Belgium,  GAN  Canada  (Elite),  CFJPE,
HNL  and  CTR  —  and  industrial  and  financial  holdings
—  in,  for  example,  Total  and  Société  Générale,  together
with  Gan  Avenir  holdings.  These  disposals  totalled  more
than  FRF  5  billion  in  terms  of  net  book  value  to  GAN
and  approximately  FRF  4,6  billion  in  terms  of  selling
price.  In  the  international  sphere,  the  disposals  carried
out  during  the  last  two  years  account  for  approximately
19 % of all business abroad. The French authorities have
also  pointed  out  that,  as  a  result  of  the  restructuring
embarked  upon,  GAN  is  set  to  lose  significant  market
shares, returning to the early-1990 level. Its overall share
of the life and non-life insurance market in France should
fall  to  4,6 %  by  the  end  of  1998.  In  particular,  GAN  IA
should  see  its  market  share  fall  from  5,4 %  in  1993  to
4,3 %  in  1998.  They  argue,  lastly,  that  the  separate  sale
of GAN SA, CIC and UIC, which constitutes a controlled
dismantling  of  the  GAN  group,  should  be  considered  a
quid  pro  quo  in  itself.

to 

These  disposals,  albeit  necessary 
the  group’s
restructuring  and  hence  to  its  viability,  cannot,  however,
be  considered  veritable  quid  pro  quos  for  the  new  aid,
which  is  seven  times  greater  than  the  old  aid,  given  that
they  already  formed  part  of  the  first  plan  and  that  new
quid  pro  quos  may  be  offered  without  calling  into
question  GAN’s  viability,  having  instead  the  potential
even  to  strengthen  it.  The  mere  reduction  of  market
shares  cannot  be  considered  sufficient  in  view  of  the
volume  of  the  aid  and  its  repetitive  nature,  all  the  more
so  since  such  reductions  are  simply  the  effect  of  a
voluntary  reduction  of  non-performing  contracts  aimed
at  reducing  losses  and  increasing  productivity.  Because,
firstly,  the  group  and  its  various  component  parts  have
not  been  liquidated  and  their  assets  and  market  shares
broken  up,  and,  secondly,  the  main  entities  within  the
group  are  still  almost  intact  and  continue  to  operate,
maintaining  substantial  links  with  one  another,  the
separate  disposal  of  GAN,  CIC  and  UIC  likewise  cannot
be  considered  an  adequate  quid  pro  quo, especially since
such  disposals  are  essential  to  the  group’s  viability.

L 78/26

EN

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16.3.98

Moreover, the disposal of an entity cannot be considered
a  quid  pro  quo  when  it  is  made  possible  by  State  aid.

insurance
off,  the  turnover  of  GAN’s 
business  by  50 %  as  compared  with  the  level  entered  in
the  accounts  for  31  December  1996  (FRF  14  billion).

international 

Consequently,  the  Commission  is  of  the  opinion  that  the
disposal of the insurance activities abroad, which account
for  approximately  25 %  of  GAN’s  turnover,  may  be
taken  into  consideration  as  it  is  not  likely  to  pose  any
problems  as  far  as  GAN’s  viability  is  concerned.

In this connection, the French authorities have stated that
GAN  International  constitutes  an  important  resource  for
GAN  owing  to  three  main  factors:  first,  because  it
enables GAN to serve customers abroad; second, because
it constitutes a source of countercyclical profits compared
with  the  French  market;  third,  because  the  disposal  of
GAN  International  might  delay,  or  even  render  more
difficult,  the  sale  of  GAN  SA.

The Commission is of the opinion that, in the light of the
considerations  set  out  above,  these  arguments  are  not
sufficiently compelling for it to be concluded that GAN’s
international  network  must  necessarily  be  maintained  in
its  present  form.  The  Commission  considers  that  serving
GAN’s customers abroad does not necessarily require the
presence  of  a  subsidiary  on  the  spot,  but  that  this  can
also  be  achieved  through  partnership  agreements  with
other  French  or  international  institutions.  Secondly,  the
proportion of the group’s turnover accounted for by each
of  GAN’s 
international  businesses  being  small,  the
countercyclical  function  which  these  subsidiaries  can
perform  is  very  limited.  Thirdly,  inasmuch  as,  with  one
or  two  exceptions,  it  has  small  market  shares,  GAN  is
not  a  leader  in  the  various  international  insurance
markets,  and  hence  does  not  have  any  strong  strategic
positions 
the
international side of its business is not essential to GAN’s
viability;  on  the  contrary,  GAN  must  refocus  itself  by
disposing of everything that is not absolutely necessary to
the  reconstitution  of  its  core  business,  namely  insurance
in  France.  Being  peripheral  to  GAN’s  viability,  the
international  side  of  its  business  may  constitute  a  quid
pro  quo  for  the  distortive  effects  of  the  aid.  In  this
respect,  the  Commission  considers  that  a  50 %  reduction
in  the 
in  terms  of  turnover
measured at the end of 1996 constitutes a valid quid pro
quo.  So  as  not  to  hinder  the  process  of  GAN’s  sale,  the
choice  as  to  which  of  these  disposals  should  be  carried
out  with  a  view  to  attaining  the  objective  set  by  the
Commission  may  be  left  to  the  buyer.

foreign  markets.  Fourthly, 

international  network 

those 

in 

In  this  connection,  the  Commission  takes  note  of  the
French  Government’s  undertaking,  contained  in  a  letter
dated  18  July  1997  from  the  Minister  for  Economic
Affairs  and  Finance,  to  the  effect  that,  by  disposing  of
assets  to  third  parties,  GAN  or,  after  its  sale,  its  buyer,
will  reduce,  no  later  than  12  months  after  GAN  is  sold

As  regards  more  particularly 
the  group’s  banking
activities,  the  Commission  considers  that  quid  pro  quos
are also necessary given that UIC (the source of the main
problems)  was  a  subsidiary  of  CIC  before  being
transferred  to  GAN  and  that  the  aid  to  UIC  is  of  direct
benefit to CIC inasmuch as it is a creditor of UIC. In this
respect,  account  must  be  taken  of  the  fact  that  major
disposals are already planned, namely CIC, in accordance
with  the  Commission’s  1996  decision,  UIC  and  UIS,
UIC’s  leasing  subsidiary.  It  should  be  noted  in  particular
that  UIS  is  a  profitable  establishment  with  an  average
rate  of  return  on  capital  of  approximately  12 %  over  the
last 
capitalisation  of
approximately  FRF  3  billion,  and  therefore  constitutes  a
substantial quid pro quo. In this respect, the Commission
takes  note  of  the  French  Government’s  undertaking  to
the effect that it will dispose, by the end of 1998, of UIC
and  all  holdings  in  UIS  held  by  the  various  GAN  group
companies.

six  years  and  a  market 

No  other  significant  quid  pro  quos  can  be  identified  in
the more specifically banking field in view of the fact that
CIC 
is  a  banking  group  without  any  significant
international presence and that a reduction in its national
network  might  put  its  viability  more  at  risk.  Moreover,
owing  to  its  residual  exposure  to  other  GAN  group
structures, CIC’s solvency ratio, although higher than the
regulatory  minimum  level,  is  not  especially  strong  (9 %
with  a  hard-core  of  5 %)  compared  with  other  European
credit  institutions.  It  can  therefore  be  concluded  that  the
aid is limited to the strict minimum for CIC as well. This
is also important from a quid pro quo point of view as it
does  not  enable  CIC  to  pursue  an  aggressive  strategy
without  the  injection  of  fresh  capital  by  a  new  private
shareholder.  Thus,  in  the  event  of  new  risks  arising,  CIC
will  be  obliged  to  find  in  the  restructuring  of  its  balance
sheet  the  elements  of  flexibility  needed  to  absorb  the
shock.

On the other hand, in view of the shareholding lines held
by  GAN,  the  Commission  considers  that  it  is  possible
and appropriate that other assets might be furnished as a
quid  pro  quo.  In  this  respect,  it  takes  note  of  the  French
Government’s  undertaking  to  the  effect  that  GAN  will
also  dispose  of  certain  strategic  shareholdings  worth  a
total  of  some  FRF  2,4  billion.  These  assets  may  be
regarded  as  no  longer  forming  part,  in  the  new  business
plan,  of  GAN’s  core  business  and  may  be  disposed  of
without  affecting  GAN’s  viability.  The  Commission
considers  that  such  disposals  will  have  to  be  carried  out
by  the  end  of  1998,  and  that  in  order  to  evaluate
compliance  with  this  undertaking  reference  will  have  to
be made to the net book value as entered in the accounts
for  31  December  1996.

16.3.98

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L 78/27

5.3. Other  conditions

do  not  call  into  question  its  evaluation  of  their  capacity
to  do  business  up  until  the  date  of  their  disposal.

The  Commission  also  considers  it  necessary  that  other
in  accordance  with  the
conditions  be  adhered  to 
restructuring  aid  guidelines.

In  order  to  ensure  that  the  action  of  the  aid  does  not
have  the  effect  of  restoring  to  the  market  excessively
strong companies which might lead once more to unduly
aggressive  policies,  the  aided  company  must  finance  out
of  its  own  resources  a  significant  part  of  the  costs  of  its
in  markets  suffering  from
restructuring  and  accept 
overcapacity  reductions  in  its  market  shares.  Attention
should  be  drawn  in  this  connection  to  the  principle
contained  in  the  restructuring  aid  guidelines  to  the  effect
that  the  aided  company  must  not  simply  dispose  of
subsidiaries  and  businesses  which  affect  its  bottom  line,
such  as  the  property  businesses  in  the  case  of  GAN,  but
that  it  should  instead  dispose  also  of  good-quality  assets
and  businesses  so  as  to  provide  the  company  with  the
resources it needs in order to finance its restructuring and
minimise  recourse  to  public  resources,  thereby  reducing
the  amount  of  the  new  aid  to  a  strict  minimum  and
obliging  the  company  to  contribute  significantly  to  the
costs  of  its  restructuring.

In view of the considerations set out above as part of the
assessment of the viability of the companies of the group
and of the quid pro quos required, the Commission is of
the  opinion  that  this  condition 
in  the
restructuring  aid  guidelines  is  met.

laid  down 

The  principle  of  the  limitation  of  aid  to  the  strict
minimum  means  that  it  must  be  ensured,  on  the  one
hand,  that  GAN  has  a  sufficient  amount  of  capital  to
fulfil  its  regulatory  obligations  and  prepare  the  ground
for its sale and, on the other, that it does not have a level
of  capital  which  goes  beyond  that  which  is  strictly
necessary.  Generally  speaking,  in  the  event  of  a  rapid
disposal,  it  might  be  imagined,  as  has  already  been  the
case  in  other  comparable  situations,  that  the  satisfaction
of regulatory obligations will be ensured by the buyer. In
this connection, the Commission would point out first of
all  that,  following  the  State  aid  operation,  the  level  of
capitalisation  of  the  group  is  barely  above  the  regulatory
limit  and  is  therefore  not  liable  to  strengthen  GAN
beyond 
its
restructuring.  The  Commission  also  considers  that  the
amount of the aid is not excessively high bearing in mind
both  the  possible  consequences  in  terms  of  cost  and
distortion  of  competition  which  a  liquidation  of  the
group  might  have  for  GAN’s  competitors  and  the  other
possible  restructuring  options.

strictly  necessary 

that  which 

for 

is 

The  Commission  considers  that  the  remaining  doubts
about the viability of the various companies of the group

In  accordance  with  the  restructuring  aid  guidelines,  the
possibility for the GAN group companies in receipt of the
State  aid  in  question  to  benefit  from  a  carry-over  of  tax
losses  in  respect  of  the  tax  losses  covered  by  the  capital
increases  should  be  abolished.

indicated 

in  point  5.1.1, 

As  already 
likewise
inadmissible from a competition point of view that GAN
or  CIC  should  be  able  to  buy  back  assets  transferred  to
the  hive-off  vehicles.  This  possibility  will  therefore  have
to  be  ruled  out  pending  the  sale  of  GAN  and  CIC.

is 

it 

The Commission considers that GAN, CIC, UIC and UIS
should  be  offered  for  sale  to  any  potential  French  or
foreign  buyer  by  transparent,  open  procedures;  the
conditions  will  not  have  to  include  any  clauses  which
might  impose  unacceptable  limitations  on  the  number  of
potential  buyers  or  target  any  particular  potential  buyer;
buyers  will  have  to  be  selected  with  a  view  both  to
maximising  receipts  from  the  sales  and  to  guaranteeing
that  the  new  shareholders  are  indeed  in  a  position  to
ensure  the  future  viability  and  long-term  development  of
the companies sold. To this end, the conditions will have
to  be  submitted  to  the  Commission  in  advance.

It  goes  without  saying  that,  in  accordance  with  the
restructuring  aid  guidelines,  the  companies  of  the  GAN
group  will  have  to  use  the  proceeds  from  the  sales  to
restructure their intra-group relationships so as to reduce
the  capital,  financing  and  guarantee  links  between  the
different  group  entities.

Lastly,  the  proper  implementation  of  the  restructuring
plan  and  of  the  conditions  imposed  by  the  Commission
will have to be monitored. To this end, regular reports by
the  French  authorities  will  have  to  be  submitted  to  the
Commission  every  six  months  from  the  date  of  the
Commission’s  decision  until  the  date  of  fulfilment  of  the
undertakings and conditions set forth in Articles 2 and 3
of  this  Decision.  Moreover,  the  annual  and  half-yearly
reports  of  the  principal  companies  will  have  to  be
submitted immediately after their approval by the boards
of  directors  up  until  the  date  of  their  privatisation.  The
details  of  this  obligation  are  set  forth  in  Article  4  of  this
Decision.

6. CONCLUSIONS

In  conclusion,  both  the  FRF  2,86  billion  capital  increase
carried  out  in  1995,  those  totalling  FRF  11  billion
planned  for  1997,  and  the  commitment  entered  into  by
the State to cover the losses up to an amount estimated at
FRF  9  billion  which  GAN  will  determine  when  the

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16.3.98

guarantees  on  the  hive-off  vehicles  are  invoked  contain
substantial  State  aid  components  within  the  meaning  of
Article  92(1)  of  the  Treaty.  In  view  of  the  uncertainty
surrounding  certain  elements  of  the  plan,  a  margin  of
error  of  – 10 %  needs  to  be  incorporated  in  the  value  of
the  State’s  commitment  towards  the  GAN  group.  The
maximum amount of the aid can therefore be put at FRF
23,76  billion.

These measures have been carefully examined in the light
of Article 92(3)(c) of the Treaty to establish whether they
can  be  considered  compatible  with  the  common  market.
In  the  light  of  the  considerations  set  out  above,  the  aid
granted  to  the  GAN  group  would  seem  to  meet  the
conditions laid down in the guidelines on aid for rescuing
and  restructuring  firms  in  difficulty  provided  that  a
number  of  conditions  are  complied  with,  some  of  which
constitute  essential  preconditions  for  viability  while
in  return  for
others  are  necessary  quid  pro  quos 
concluding  that  such  substantial  aid  is  in  the  common
interest.  In  particular,  the  Commission  is  of  the  opinion
that  backing  for  GAN  and  UIC  is  a  sine  qua  non  as  far
as their viability is concerned. Under such conditions, the
aid  in  question  can  therefore  be  exempted  from  the
prohibition  in  Article  92(1)  of  the  EC  Treaty  and  in
Article  61(1)  of  the  EEA  Agreement  inasmuch  as  it  may
be  considered  compatible  with  the  common  market  in
accordance  with  Article  92(3)(c)  of  the  EC  Treaty  and
Article  61(3)(c)  of  the  EEA  Agreement,

(a)

(b)

(c)

(d)

(e)

(f)

it  shall  sell,  either  together  or  separately,  CIC  and
GAN  to  buyers  in  a  position  to  ensure  their  future
viability  and  long-term  development;

it  shall  ensure  that  the  operations  aimed  at  finding
potential  buyers  and  selling  the  companies  start  as
soon  as  possible  and  in  any  event  no  later  than
30  June  1998  and  that  they  are  carried  out  in
accordance with the principles of openness and equal
treatment  of  candidates;

it  shall,  by  the  end  of  1998,  dispose  of  UIC  and  all
holdings in UIS held by the various companies in the
GAN  group;

it  shall  ensure  that  GAN  sells  other  strategic
shareholdings  worth  a  total  of  some  FRF  2,4
billion;

it shall underwrite the current process of the disposal
of  the  assets  of  Bâticrédit  and  Parixel,  a  process
which  for  the  most  part  shall  have  been  completed
by  the  end  of  1998,  without  its  being  possible  for
these  assets  to  be  acquired  by  CIC  or  GAN  up  until
the  time  of  their  sale;

it must ensure, by disposing of assets to third parties,
that  GAN  or,  after  its  sale,  its  buyer,  reduces,  no
later  than  12  months  after  GAN  is  sold  off,  the
turnover  of  GAN’s  international  insurance  business
by  50 %  as  compared  with  the  level  entered  in  the
accounts  for  31  December  1996.

HAS  ADOPTED  THIS  DECISION:

Article  3

Article  1

The  authorisation  of  the  aid  referred  to  in  Article  1  is
also  subject  to  France’s  observance  of  the  following
conditions:

The  measures  contained  in  GAN’s  restructuring  plan  in
the  form  of  a  FRF  2,86  billion  capital  increase  carried
out  in  1995,  other  capital  increases  planned  for  1997
totalling  FRF  11  billion,  and  the  commitment  entered
into  by  the  State  to  cover  the  losses  up  to  an  amount
estimated  at  FRF  9  billion  which  GAN  will  determine
when the guarantees on the hive-off vehicles are invoked,
are  State  aid  within  the  meaning  of  Article  92(1),  but
they  are  hereby  declared  compatible  with  the  common
market  and  with  the  EEA  Agreement  pursuant  to
Article  92(3)(c)  of  the  EC  Treaty  and  Article  61(3)(c)  of
the  uncertainty
the  EEA  Agreement. 
surrounding  certain  elements  of  the  plan,  a  margin  of
error  of  – 10 %  is  to  be  incorporated  in  the  value  of  the
State’s  commitment  towards  the  GAN  group  and  the  aid
shall  be  limited  to  FRF  23,76  billion.

In  view  of 

(a)

(b)

(c)

(d)

Article  2

it  shall  ensure  that  all  the  recovery  measures  and  all
the  arrangements  provided  for  under  the  scheme
described 
the
restructuring  plan  presented  to  the  Commission  are
implemented;

in  Article  1  and  contained 

in 

it  shall  not  amend  the  conditions  laid  down  in  the
restructuring  plan,  after  taking  into  account  the
conditions  imposed  by  this  Decision,  without  the
Commission’s  prior  consent;

it  shall  prevent  the  companies  of  the  GAN  group  in
receipt  of  the  State  aid  in  question  from  benefiting
from  a  carry-over  of  tax  losses  in  respect  of  the  tax
losses  covered  by  the  capital  increases;

it  shall  earmark  the  proceeds  of  sales  to  restructure
intra-group  relationships  so  as  to  reduce  the  capital,
financing  and  guarantee  links  between  the  different
entities  of  the  group;

The  aid  referred  to  in  Article  1  is  authorised  subject  to
France’s  complying  with  the  following  undertakings:

(e)

it  shall  ensure  that  the  conditions  of  the  sell-offs  of
GAN,  CIC,  UIC  and  UIS  do  not  include  any  clauses

16.3.98

EN

Official  Journal  of  the  European  Communities

L 78/29

which  might  impose  unacceptable  limitations  on  the
number  of  potential  candidates  or 
target  any
particular  potential  candidate,  and  shall  further
ensure  that  buyers  are  selected  with  a  view  both  to
maximising 
to
from 
guaranteeing that the new shareholders are indeed in
a  position  to  ensure  the  future  viability  and
long-term  development  of  the  companies  sold;

sales  and 

receipts 

the 

(f)

it  shall  ensure  that  the  sales  of  other  strategic
shareholdings  as  referred  to  in  point  (d)  of  Article  2
take  place  by  the  end  of  1998  and  are  evaluated  on
the  basis  of  net  book  value  as  entered  in  the
accounts  for  31  December  1996.

Article  4

The French authorities shall cooperate fully in monitoring
compliance  with  this  Decision  and  shall  submit  to  the
Commission  the  following  documents:

(a) a  detailed  report  by  the  French  authorities  on  the
implementation  of  the  Commission  Decision  and  of
the  restructuring  plan.  This  report  shall:

— examine the viability of the various entities of the
group 
control  by
presenting  detailed  results  compared  with  the
estimates  contained  in  the  plan,

remaining  under  State 

— detail  any  State  intervention  in  favour  of  those
same  entities  (in  the  form  of  recapitalisation,
financing,  guarantees,  waiver  of  debts,  etc.),

— analyse  in  detail  the  undoing  of  the  capital,
the

links  between 

financing  and  guarantee 
different  entities  of  the  group,

— describe the extent to which the undertakings and
conditions set forth in Articles 2 and 3 have been
complied  with.

Such  a  document  shall  be  submitted  every  six
months  from  the  date  of  the  Commission  Decision
until  the  date  of  fulfilment  of  the  undertakings  and
conditions  set  forth  in  Articles  2  and  3;

(b)

the  balance  sheets,  accounts  and  reports  (both
annual  and  half-yearly)  drawn  up  by 
the
management  of  the  companies  forming  part  of  the
GAN group (namely GAN, SC, GAN SA, GAN Vie,
GAN  IA,  GAN  Capitalisation,  SOCAPI,  Progress,
CIC,  UIC,  UIS  and  BIF)  and  of  the  hive-off  vehicles
until the date of their privatisation. These documents
shall  be  submitted  to  the  Commission  as  soon  as
they  are  approved  by  the  boards  of  directors  of  the
entities  in  question.

Submission  of  the  documents  provided  for  in  point
(b)  shall  not  exempt  the  French  authorities  from
having to include in the report provided for in point
(a)  detailed  and  even  provisional  accounts  and
balance  sheets  of  the  various  entities  of  the  group;

(c)

the  conditions  of  the  planned  sell-offs  of  UIC,  UIS,
CIC  and  GAN.

These  documents 
Commission  in  advance.

shall  be 

submitted 

to 

the

The  Commission  may  ask  for  these  documents  and  the
implementation  of  the  plan  to  be  assessed  by  means  of
special audits.

Article  5

The  Commission  Decision  of  18  September  1996
approving  FRF  2,86  billion  of  State  aid  for  GAN,
notified  to  France  on  3  October  1996, 
is  hereby
revoked.

Article  6

This  Decision  is  addressed  to  the  French  Republic.

Done  at  Brussels,  30  July  1997.

For  the  Commission

Karel  VAN  MIERT

Member  of  the  Commission