An open letter to the Board of Income

by Gerard L Pennefather, Chairman of Huntington Investments

There is growing public discomfort with this deal. You have 2 million Singaporeans who have entrusted their lives/possessions with you for 50 over years and have every right to be concerned with this sale. It does not make economic nor strategic sense.

Let’s try to understand why:

Summary

• Average combined ratio (COR) from 2021-2023 of Income’s non-life Business was 91%. Average combined ratio of Allianz Insurance Singapore Pte Ltd from 2021-2023 was 234%¹. Allianz has cumulatively lost c.S$63 million over the past 3 years. Not quite what you would expect from an acquirer with supposedly “a superior offering”.
• To translate the dismal performance of Allianz in Singapore – it spends $2.34 for every $1 dollar in premium compared to Income, which retains 9 cents of every $1 of premium.

• Income on average makes c.S$400 million except for the past 2 years with its restructure. With a sale price of 51% at S$2 billion – on straight line basis this amounts to a 10% yield for Allianz, this means that policyholders margins are used to pay the purchaser. You can argue the math but that is the outcome in the wash. 2 million Singaporean policyholders are subsiding this deal.

• In addition, Allianz will inevitably have access to the management of S$ 43 billion of assets that Income has and yes, the management fees that will go with that makes this deal for Allianz even sweeter.

• Income has had 3 Senior local CEOs over the past 30 years- Tan Kin Lian, Tan Swee Chia and currently Andrew Yeo, all Singaporeans who have presided over a strong business.

• Allianz re-entered the Singapore market in 2019 with a CEO that has no Singapore experience. The results speak for themselves, with cumulative losses of c.S$63 million¹ over the past 3 years.

• Allianz does not have a life business in Singapore – Income has been in the life business since its establishment in 1970. So, what exactly will Allianz bring to the table?

• If one of the drivers behind this deal is to use Allianz to springboard Income into the region, that in and of itself is folly.

• Allianz has been present in 11 countries in Asia for some 30 years, and in the main, they are insignificant players in each country except for Malaysia and Laos. Allianz exited Korea in 2016 for just about USD 3 million after investing over USD 1 billion since 1999 (link). Allianz exited the Philippines in 2003 and re-entered in 2015 by acquiring a 51% share in PNB Life Insurance. They exited Vietnam in 2005 and re-entered in 2019. This reflects on their capricious commitment to markets as long as it suits their corporate objectives. Income is part of the Singapore fabric, and we hope will remain so.

• S&P Global Ratings have also put Income on Creditwatch status with negative implications due to “Material changes in the shareholding structure could ultimately weaken the likelihood of support from the Singapore government” (link).

As a byline – if Income wants to spread their wings, it will make more sense in expanding your product offering in Singapore – there are enough local skill sets to help you do that and if you need to go into the region then do tie ups with local trade unions and offer your unique insights.

However, if logic does not prevail and the Board in its infinite wisdom is bound on doing this deal then consider these guardrails:

Embed in your Shareholder’s Agreement (SHA) / Sales & Purchase Agreement (SPA) with Allianz the following:

1. Any staff redundancies over the next five years will include one month for each year of employment – this will be via new capital funded 51% by Allianz.
2. There will no reduction of compensation agreements with agents, brokers, and other intermediaries for the next 3 years
3. all products that are up for renewal over the next 3 years will be renewed on expiring terms and price.
4. A call option granted to Income shareholders for 5 years to acquire the 51% stake sold to Allianz at the same price Allianz purchased the stake.
5. The Chairman of the board will be appointed by Income shareholders with veto rights on all reserved matters such as dividends to be paid, Munich head office/ regional head office intercompany charges, investment fees, and reinsurance programs for starters.

It was interesting to note Allianz Group CEO Oliver Bäte’s comments in the Business Times on 22 July 2024. Let us decipher what he means:

1. “While investing in growth is important, Bäte said that he is always making sure the investments do not have an impact on the insurer’s ability to generate free cash flows, which he expects is the better way to grow business in the long term.”

This translates to further investments will be done via cash flow the business generates hence do not expect us to invest new capital.

2. We are not in the business of selling products that don’t provide what we call minimum value to clients,” Bäte said.

Really? Would you not want to sell products that provide a fair value to consumers, not minimum value?

3. The insurer also needs to balance the interests of distributors, to whom most of the costs go typically, he noted. He also sees a huge opportunity to change the dynamics in the life insurance industry, particularly for the average person to have access to lower cost distribution and higher-value products.

This translates into: we are moving into direct distribution, and we will reduce the compensation paid to agents and other intermediaries and if possible do away with the intermediation channel.

4. Meanwhile, shareholders want to see real cash returns over time. Amid a recent trend of insurance stock repricing, Bate said that a large contributor is that investors are increasingly looking for real returns from dividends and cash flows.

This translates into: we want good dividend flows, to boost Allianz’s share price. This cannot and should not be the mantra of the Income we know whose focus should always be on the protection of the lives and possessions of the Singapore worker.

Our nation celebrates its 59th birthday in several weeks and you have chosen this special time for our nation to make this announcement of the sale of a national treasure. Guess your new owners are not cognisant of what National Day means to all Singaporeans.

Income – stay home, remain local and serve all Singaporeans, to do otherwise is to betray the trust that our nation has placed with you for more than 50 years.

1. Monetary Authority of Singapore filings