Income-Allianz deal off, S'pore govt assesses it to be not in public interest

The proposed deal between Allianz and NTUC Income has been called off after the government assessed that it "would not be in the public interest."

The deal, which would have seen Allianz acquiring a majority stake in Income, was first announced on Jul. 17, 2024.

"The government has assessed the proposed transaction and has decided that it would not be in the public interest for the transaction, in its current form, to proceed," said Minister for Culture, Community and Youth Edwin Tong in a ministerial statement on Oct. 14.

He explained how the decision came to be and outlined alternative steps that the government is proposing.

Background on Income

Income, which was formerly a co-operative society, was corporatised in 2022.

Since its establishment in 1970, Income has played a crucial role in providing affordable insurance for workers and Singaporeans at large, Tong noted.

In 2022, Income began a corporatization exercise to change its legal structure from a co-operative to a company.

Tong explained that the Ministry of Culture, Community and Youth (MCCY) met with Income to understand its rationale, which included achieving "operational flexibility" and gaining "better access to capital" to pursue strategic growth options, compete effectively in the market, and succeed in the long run.

Income also assured that its focus on social mission would remain unchanged.

Following discussions, Income was granted an exemption from Section 88 of the Co-operative Societies Act as part of its corporatization, allowing it to carry over approximately S$2 billion in surplus to the new corporate entity.

The corporatisation exercise was completed on Apr. 6, 2023.

MCCY did not know about deal before it was publicly announced

NTUC Enterprise and Income stated that the proposed transaction was necessary to strengthen Income’s ability to fulfil its social mission.

They explained that insurance is a "long-tail business" and noted that Income’s capital buffers have "repeatedly come under pressure" over the years.

While NTUC Enterprise has supported Income with capital injections, they emphasised that this support could not continue indefinitely.

Consequently, Income proposed a deal with Allianz to find a strong partner who could complement NTUC Enterprise and strengthen Income's capacity to sustain its social mission.

However, Tong stated that MCCY had no prior knowledge of the proposed transaction before it was publicly announced.

"When we first saw the announcements, we accepted the intent of the transaction, which is to strengthen Income," Tong said.

"We saw that Income would be engaged in a strategic partnership with a major reputable player in the industry. This would strengthen Income’s capital base and allow it to have more access to capital.

This is consistent with the representation that Income had made to MCCY at the point of corporatisation."

Minister of State for Culture, Community and Youth Alvin Tan also spoke in August's parliament session on the transaction and explained that MCCY appreciated the competitive landscape that Income was operating in and understood how the transaction with Allianz would help Income achieve longer-term financial sustainability.

Subsequently, MCCY continued to do its due diligence and inquire further into the proposed transaction, including the various public queries that had been raised, Tong said.

Further details on deal

In the course of this review, the Monetary Authority of Singapore (MAS) provided MCCY with further details on the proposed transaction, including information that Allianz, Income and NE had submitted to MAS in respect of initiatives to optimise the capital of Income post-transaction, Tong said.

MCCY had not seen this information prior to this, he added.

The additional information includes:

• The parties intended to implement a number of initiatives to optimise Income’s insurance business after completion of the acquisition.
• The plan was for Income to run its insurance business more efficiently, without the need to hold as much capital as it presently does.
• As such, post-transaction, Allianz contemplates that Income could reduce its existing share capital, and return this capital to its shareholders.
• Allianz projects that Income would return some S$1.85 billion in cash to its shareholders within the first three years after the transaction's completion.

These projections were submitted to MAS in mid-July 2024, around the time the proposed transaction was announced.

At that time, MAS reviewed the information based on "prudential grounds," focusing on whether Allianz was a fit and proper institution and on Allianz’s financial strength and track record, to safeguard the interests of Income’s policyholders, Tong explained.

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

However, after the Aug. 6 parliamentary sitting, MAS saw that Income’s planned capital optimisation "could be relevant" to MCCY’s views on the proposed transaction.

MAS then shared the information with MCCY, including the terms of the proposed transaction.

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

"We decided that there was sufficient basis for the Government to intervene in the proposed transaction, to protect the public interest, notwithstanding that the financial prudential requirements had been satisfied."

Why intervention was needed

While MCCY acknowledges that capital optimisation measures to free up capital for shareholders are not uncommon practices from "a narrow commercial or even prudential perspective", it does not believe the proposed transaction would allow Income to continue fulfilling its social mission.

"First, 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," he said.

The proposed capital reduction runs counter to the premise on which the exemption to allow it to carry over a surplus of S$2 billion to the new corporate entity was given.

"If not for the Ministerial exemption in 2023, Income Co-op’s accumulated surplus of some S$2 billion would have gone to the CSLA after being wound up, to benefit the Co-op movement in Singapore as a whole."

Tong further noted that MCCY has not seen any arrangements within the current transaction to address the surplus, and there is no clarity on how these funds will support Income’s social mission.

Secondly, MCCY is not satisfied that Income will be able to continue fulfilling its social mission after the proposed transaction, Tong said.

Their plans had "no clear binding provisions or structural protections" to ensure that Income’s social mission will be discharged, he said.

"It is also not clear 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," he said.

The proposed transaction would also 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, Tong noted.

While these factors would not have caused MCCY to object to the transaction on their own, 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, they pose a risk that MCCY "judges not to be acceptable".

"As such, it is the Government’s view that it is not in the public interest for the transaction, in its current form, to proceed."

Tong, however, maintained that the government understands and accepts the strategic purpose behind Income’s corporatisation exercise and its subsequent decision to form a partnership with Allianz.

"Our concern is only over the terms and structure of this specific transaction, particularly in the context of the preceding corporatisation exercise," he explained.

He said that given Income's history as a co-operative, their assessment of the transaction's viability must "go beyond prudential considerations alone."

Nonetheless, he said, they are open to any new arrangement Income may wish to pursue, whether with Allianz or any other partners, so long as the concerns highlighted are fully addressed.

Steps government will take

As Income is now a corporate entity, it is no longer subject to the jurisdiction of the Registrar of Co-ops, Tong explained.

The approval or otherwise of the proposed transaction now rests with the MAS under the Insurance Act (IA).

However, there is currently no provision in the IA for MAS to consider the views of MCCY, in the case of an application relating to an insurer that is either a Co-op or linked to a Co-op, Tong said.

As such, the government intends to amend the IA to provide "a clear statutory basis for MCCY’s views to be considered" in any approval involving such applications.

Second Minister for Finance Chee Hong Tat tabled an amendment bill on the IA after Tong's speech, with the president's approval.

The second reading and third reading of the bill will happen on Oct. 16.

Top photo from MDDI, Google Maps, and Allianz's website.