Silver lining in the scrapping of Allianz’s offer for Income Insurance

ALLIANZ has scrapped its pre-conditional offer for a majority stake in Income Insurance. This is not a surprise. In fact, it presents a silver lining in three respects.

First, the events that unfolded following the German insurer’s initial announcement of its offer for Income in July have made the playing field much clearer for any other party that may contemplate a bid for Income.

Even though Income was corporatised in 2022, to better enable it to tap capital markets in the future, it is quite unlike any other corporation. Clearly, its heritage as an insurance cooperative with a social mission sets it apart.

But, equally important is the fact that its single largest shareholder and capital provider is NTUC Enterprise, which itself has a social mission to help workers live better lives.

There is therefore a greater onus on any potential acquirer to account for how Income’s capital is deployed, whether to fund business growth, shore up reserves, or to distribute to shareholders.

Second, Income’s special status was cemented when Parliament passed an urgent Bill to amend the Insurance Act in October, to block Allianz’s offer.

Going forward, deals involving insurers that are cooperatives or linked to them must be approved by the Monetary Authority of Singapore, which in turn will consider the views of the Ministry of Culture, Community and Youth (MCCY).

Third, Income has a special place in Singaporeans’ hearts.

This was amply demonstrated by the public outcry and debate that ensued when news broke of Allianz’s offer. Public reaction was further amplified when it was revealed that Allianz had proposed a capital reduction plan for Income, which would pay out S$1.85 billion to shareholders over three years.

The proposed transaction

To recap, Allianz made an offer to acquire 51 per cent of Income in July, in a S$2.2 billion cash deal valuing the shares at S$40.58 apiece. Assurances were given that Income’s social mission would remain intact.

The deal was justified by the argument that Income needed to be financially sustainable to better serve customers and fulfil its social mission. A partnership with a global name like Allianz would help ensure sustainability and enhance its competitiveness.

But in August, it was revealed in a debate in Parliament that Allianz’s proposed “capital optimisation” plan for Income involved a capital reduction, information that MCCY had not known.

The government halted the deal in October. Just this week, Allianz withdrew its offer, putting an end to weeks of speculation on whether it would re-table a deal.

Allianz said that in light of the changes to the Insurance Act and after discussion with stakeholders, more time would be needed to consult with regulators. It would also have to renegotiate and restructure the terms of its offer.

In a statement, Income said it acted in good faith, and information on the offer would have been publicly disclosed had it been launched. “The proposed transaction by Allianz... would have further enhanced Income Insurance’s financial resilience, as the backing of two institutional shareholders would enable Income Insurance to call on additional capital support in the future, in the event of any future financial crises.”

It also said: “Income Insurance first needs to be competitive and earn its risk-adjusted cost of capital and secondly, needs to meet regulatory capital adequacy requirements, especially during unforeseen shocks and crises...

“This is critical to protect the interests of Income Insurance’s policyholders over the longer term, and is also in line with Income Insurance’s purpose.”

Multiple stakeholders

What is the way forward for Income? The developments so far change the calculus for any potential acquirer, who will have to take into account the interests of multiple stakeholders – such as the regulator, MCCY, more than two million policyholders, and the wider Singapore public which holds Income in high regard and expects it to continue to serve the needs of the less privileged.

All these are on top of the challenge of ensuring Income’s business remains competitive and profitable.

As explained in Parliament in August, the Singapore insurance market features more than 50 direct insurers catering to individuals and businesses. Income’s market share in both life and general insurance is less than 10 per cent in terms of written premium.

“For many insurance products, Income does not always offer the lowest prices compared to other insurers,” said Minister for Transport and Second Minister for Finance Chee Hong Tat in Parliament.

A case in point is Income’s Integrated Shield Plan (IP) portfolio. Income stood out when it raised premiums earlier this year across its IPs, even though it achieved strong underwriting profits in 2023. Most other insurers’ premium adjustments focused on their private hospital plans.

Based on Income’s latest consolidated accounts for the period from Jul 1, 2022, to end-December 2023, total income from the life business is many times larger than for general insurance. But the general insurance business is far more profitable: it earned S$111.7 million in the period after tax and expenses, compared to S$44 million from the life business.

Life policies, however, are arguably more integral to policyholders’ lives, as they help to support and enhance people’s long-term savings, retirement and health. Unlike general insurance, a life policy requires a long-term commitment by both the insurer and the insured. And it is typically not easy to switch between life insurers.

For now, in the absence of a strategic partner, Income will have to hunker down and focus on gaining competitiveness in its core business – on its own steam. Already, it is expanding by offering services to financial advisory (FA) firms in the areas of administration, technology and compliance, among others.

Unlike other large insurers, Income has always been open to the FA distribution channel, and this has paid off. The FA market has a growing share of life insurance’s new premiums, as Life Insurance Association data shows.

But Income shareholders are worse off. Allianz’s withdrawal of its offer has deprived them of a liquidity and exit avenue. Even though they can sell their shares in the open market, they are unlikely to realise a price similar to Allianz’s offer of S$40.58 per share.

For most other stakeholders, however, business as usual may be the best news yet.