Rejection of Income-Allianz deal: Timely and in stakeholders’ interests

THE announcement in July of Allianz’s proposed deal to acquire a majority stake in Income Insurance was something of a bombshell. But now, news that the deal has been rejected by the government is an equally stunning development.

What happened?

There appears to be two main sticking points. One, there are doubts over Income’s ability to continue to fulfill its social mission.

Two, it now emerges that there is a proposal by Allianz, as revealed in Parliament, to undertake a capital reduction exercise in Income. Allianz has proposed to pay out S$1.85 billion to shareholders over three years, ostensibly to “optimise” Income’s insurance business, and run it on less capital. This proposal is deeply disturbing on a few levels.

I’ll tackle the second point first as there are implications for Income’s business if this deal had been allowed to go through.

Ministry of Culture, Community and Youth (MCCY) Minister Edwin Tong said in Parliament: “We find it difficult to reconcile the proposed substantial capital reduction, soon after the transaction is completed, with Income’s representations to MCCY during the corporatisation exercise, that it was aiming to build up capital resources and enhance its financial strength.”

Tong also noted that the government remains open to new arrangements.

Allianz proposed in July 2024 to acquire a 51 per cent majority stake in Income for S$40.58 a share, in a deal valued at around S$2.2 billion. NTUC Enterprise (NE) was to hold a 49 per cent stake post-acquisition.

The deal was positioned as a means to open up avenues for Income to raise capital and remain competitive. Income has an edge in the non-life or general insurance business. But its share in the capital-intensive life market has slipped from a high of 20.8 per cent in 2010 to around 5.7 per cent today. In contrast, Income’s share in the non-life sector is in double digits.

The big challenge for Income is to maintain its presence and competitiveness in the life business, which is notoriously capital intensive thanks to the volatility of capital markets and long-tail liabilities. In fact, the insurer needed three capital injections from NE between 2015 and 2020, to the tune of a total of S$630 million.

Business implications

What does a capital reduction exercise suggest for the future of the life business, if the Allianz deal had been approved as it is?

In an interview with The Straits Times in July to allay the public outcry, NE chairman Lim Boon Heng said: “If you want to grow the insurance business, then you need more capital. We have to ask ourselves as NTUC Enterprise whether we are able to provide Income with all the capital that it requires.

“The reason for corporatisation was to be able to tap the capital markets, not just rely on our own resources. As a steward, NTUC Enterprise has the responsibility to ensure that the amount of assets Income has is resilient over the long term.”

Based on Income’s latest consolidated accounts for the period from Jul 1, 2022, to end-December 2023, it had total assets of S$43 billion. It had net assets of S$3.17 billion.

The life business earned a total income of S$5.37 billion, far larger than the total income of S$655 million from the general insurance segment. But in terms of profitability, the general insurance business punches far above its weight in premiums.

After tax and expenses, the life business earned S$44 million, and general insurance S$111.7 million.

The life business – read: participating plans – ties up capital because of guarantees and reserving requirements. It’s also far more likely to need capital in the future, and far less likely to fulfill Allianz chief executive Oliver Baete’s stated expectation of a “double-digit return on investment over time” from the Income acquisition.

In Parliament, Tong said as much, noting that it was unclear “what Income might do after the capital extraction, for example, to adjust or trim its insurance portfolio, and what impact this could have on policyholders”.

Interestingly, former Income chief executive Tan Suee Chieh turned out to be prescient in a lengthy paper he posted publicly in August amid heated debate. He wrote: “Ironically, Allianz may very well decide to... (focus) on the more profitable non-life business rather than the capital-intensive life insurance business.

“In such a situation, the principal justification for the sale (the capital-intensive nature of the life insurance business) would not only be erroneous but would also completely fall away... Without the participating segment, Income would be well-capitalised, and with prudent management, it is unlikely to require further capital injections. It is therefore unclear why NE believes that Income will need additional capital moving forward.

“If it is true that the sale is justified by a need for more capital, can Allianz and NE commit to not extracting surplus capital from Income for the next 10 years? This is an important clarification to obtain from NE/Allianz because it would be most ironic if the sale principally justified by the need for more capital leads to capital extraction post-sale.”

Professor Mak Yuen Teen from the National University of Singapore said of the government’s objection: “My take is that it has to do with the deal not sufficiently protecting the social objectives of Income Insurance after Allianz acquires a majority stake, either because social commitments will be diluted and/or through a subsequent capital reduction, which is in effect Allianz using the capital of Income to help finance the deal (which may in turn affect Income’s ability to deliver on social objectives). This is probably why Allianz was willing to pay a high price while still expecting a good return on investment.”

Doubts over future of Income’s social mission

Now let’s get into the social-mission angle. The scrapping of the deal also has to be seen in the light of Income’s corporatisation exercise, which itself amplifies concerns over the use of the insurer’s capital.

Income was previously a cooperative, governed by the Co-operatives Societies Act. In its corporatisation exercise in 2022, it sought exemption from a section of the Act where a co-op had to pay members their original share capital plus any unpaid dividends up to a cap.

The exemption allowed Income to carry over about S$2 billion in surplus capital to the new corporate entity, on the strength of Income’s assurance to MCCY that its social mission would remain unchanged.

If not for this exemption, Tong said, the accumulated surplus of S$2 billion would have been channelled to benefit the co-op movement.

Tong noted: “MCCY has not seen any arrangement within the present transaction to account for the estimated S$2 billion surplus that was carried over to the new corporate entity, due to the exemption... There is no clarity on how this sum will be directed towards advancing Income’s social mission.”

All in all, the intense scrutiny and vigorous public debate over the deal, and the ultimate decision to reject the deal affirm how seriously the government regards Income’s role and mission, and its use of capital. That’s a good thing. But it’s also a cautionary tale to any interested entity, including Allianz should it choose to re-enter the fray.