Income should walk away from Allianz

THE bombshell announcement last week that the government would block the proposed purchase of a majority stake in Income Insurance by Allianz has raised a number of questions.

Many of these relate to projections by the German insurer that Income could return S$1.85 billion in cash to its shareholders within three years of the transaction.

This, in turn, has raised questions about whether the deal – if that left Income with a much lower capital base – is consistent with Income’s social mission of providing accessible and inclusive insurance.

It could be time for Income to come up with a more credible plan to do good by doing well.

On Jul 17, Allianz unveiled its now-scuppered offer to acquire a 51 per cent stake in Income for more than S$2.2 billion.

NTUC Enterprise, which holds a 72.8 per cent stake in Income, would have seen its interest in the insurer shrink to between 49 and 21.8 per cent, depending on the level of acceptances from minority shareholders.

There was no doubt that Allianz stood to profit from the deal.

The offer announcement said that the German insurer planned to merge its existing Singapore-based insurance operations with Income following the deal.

It also stated that Allianz planned to undertake a strategic and operational review of Income with a view to enhancing the value of its businesses, and operating the company in a more capital-efficient manner.

The offer announcement added that Allianz was aiming to achieve a double-digit return from its investment in Income over the medium term.

So, why did the plan for Income to return S$1.85 billion to its shareholders within three years cause a ruckus?

Income is no ordinary acquisition target. When it was corporatised, it received an exemption from a law that caps the amount of money a cooperative society may return to its members when it is wound up.

Any surplus funds beyond that cap would ordinarily be transferred to the Co-operative Societies Liquidation Account, for the benefit of the co-op sector.

The exemption was granted on the basis that Income was not shuttering its business, but changing its legal form in order to gain better access to capital.

The insurer had also assured the government as well as its members that its purpose and values would not change.

With the exemption in hand, Income carried over approximately S$2 billion in surplus to its new corporate form. The corporatisation exercise was completed in April last year.

‘Difficult to reconcile’

Ministry of Culture, Community and Youth (MCCY) Minister Edwin Tong said in Parliament on Oct 14 that the plan for Income to return S$1.85 billion to its shareholders was “difficult to reconcile” with its earlier representations to MCCY that it was aiming to boost its capital resources.

The minister added that the capital-extraction plan left MCCY doubting that Income would be able to fulfil its social mission following the sale to Allianz, especially in light of all the other questions that had already been raised about the deal.

“We had known earlier that the proposed transaction would leave NTUC Enterprise as the minority shareholder in the new entity, with a minority of board positions and no ability to nominate the chairman of the new Income entity. On their own, these factors would not have caused MCCY to object to the transaction,” he said.

“However, taken together with the proposed capital extraction and the lack of structural protections in the deal to ensure the continuation of Income’s social mission, cumulatively, they pose a risk that MCCY judges not to be acceptable.”

To block the deal, a Bill was passed last week to amend the Insurance Act.

The amendments will allow the minister in charge of the Monetary Authority of Singapore (MAS) to consider the views of the minister responsible for administering the Co-operative Societies Act when assessing applications relating to an insurer that is either a cooperative or linked to one.

Capital-optimisation surprise

Tong said in Parliament that MAS had known about the plan for Income to return S$1.85 billion to its shareholders since mid-July, around the time the offer from Allianz was announced.

At that point, however, MAS had reviewed the matter only from a prudential perspective, in accordance with its regulatory mandate.

“Based on the plans submitted, MAS did not have reason for concern as Income was projected to continue to meet regulatory capital requirements with a healthy margin even with the capital reduction,” the minister noted.

It was only after the Allianz-Income deal was raised in Parliament in August that MAS saw the wider implications of the transaction and shared the information it had with MCCY.

“It was at this point, after MCCY reviewed the information on the proposed transaction, that we became concerned,” Tong said.

Not surprisingly, the government faced some brickbats last week for not seeing the problem with the capital-optimisation plan sooner.

Yet, Allianz and NTUC Enterprise could have been more proactive too, in my view.

Given the provenance of Income, and its narrative about needing better access to capital in order to fulfil its social mission, Allianz and its advisers ought to have handled more carefully the manner in which Income was to deliver shareholder value.

They ought to have realised that extracting S$1.85 billion from Income, even if that information had come to light only after the offer closed, would have caused public uproar.

What could they have done differently? Allianz and NTUC Enterprise should perhaps have considered putting a portion of the excess capital towards widening Income’s social mission; and engaged various stakeholders – including the NTUC Central Committee and MCCY – on how that could best be achieved.

Concerns tough to address

The big question now is whether this whole episode has made Income a less attractive acquisition target for Allianz.

“Whilst we will not allow the proposed transaction to proceed, we are nonetheless open to any new arrangement which Income may wish to pursue, whether with Allianz or any other partners, so long as the concerns highlighted are fully addressed,” Tong said in Parliament last week.

Meeting the government’s expectations might be a tall order for a purely commercially driven foreign insurer, though.

The minister noted in his speech that the deal put forward did not account for the S$2 billion surplus carried over to Income’s corporate form. “There is no clarity on how this sum will be directed towards advancing Income’s social mission.”

He also pointed out that it was not clear how Income would have adjusted its insurance portfolio following the proposed capital extraction, and what impact that might have had on its policyholders.

The way I see it, Income might be better off walking away from a deal with Allianz and coming up with its own programme to improve its profitability and expand at home and abroad, perhaps with the strategic backing of a local financial institution.

While this may result in Income taking longer to achieve the valuation Allianz offered, it would raise fewer questions about its ability to keep its promise of retaining the spirit of its cooperative roots.