The recently blocked acquisition of a majority stake in Income Insurance by German-insurer Allianz has drawn sharp criticism from retired Singaporean banker Chris Kuan, who has been dissecting the deal’s structure and financial implications since its announcement.

Kuan, who initially supported the acquisition from a value perspective, now questions the proposed capital reduction and NTUC Enterprise’s motivations, which he refers to as NTUC in his posts.

The deal, announced in July 2024, would have seen German insurer Allianz acquire a 51% stake in Income.

However, on 14 October 2024, the Singapore government intervened, citing concerns over Income’s ability to maintain its social mission and the significant capital extraction proposed in the deal.

In a series of detailed Facebook posts, Kuan criticised the undisclosed S$2 billion capital reduction, which would have allowed shareholders, primarily NE, to extract funds from Income soon after the transaction. Contrary to popular belief, Kuan argued that Allianz, despite reducing its acquisition cost, was not the real winner in this arrangement.

“There are many comments out there saying Allianz is getting back a heck of a lot of money from the capital reduction and therefore it is the bigger winner,” Kuan wrote. “This is completely wrong.”

Kuan explained that under the deal’s structure, Allianz was set to pay S$2.2 billion for a 51% stake in Income, whose total equity stood at S$3.2 billion as of its last financial statement.

After the acquisition, the $2 billion capital reduction would kick in, with Allianz receiving about $1 billion, which would reduce its total outlay to S$1.2 billion. However, Kuan highlighted the downside: Allianz would end up owning 51% of a significantly smaller entity, with Income’s capital base dropping from S$3.2 billion to just S$1.2 billion.

“In effect, Allianz’s total outlay is S$1.2 billion for a company whose total capital is now just S$1.2 billion, after having S$2 billion extracted from its capital base,” Kuan pointed out. He argued that this left Allianz paying a substantial premium for what would be a much smaller insurer post-acquisition. This revelation flipped the narrative, showing that Allianz was not benefiting as much as it might seem from the capital reduction.

Kuan contrasted Allianz’s position with that of NTUC, which stood to gain significantly from the deal. “NTUC gets S$2.2 billion from Allianz and another S$1 billion from the capital reduction—altogether S$3.2 billion,” he noted.

Kuan underscored that NTUC was the real beneficiary of the deal, extracting value not just from the sale but from the capital extraction as well. He further suggested that this might explain why no other insurers submitted competing bids, with NTUC’s asking price seen as too high by others in the industry.

“This is why IPO [initial public offering] is not an option,” Kuan added. “The German solution is much better for NTUC. With the disclosure of the S$2 billion capital reduction, it now appears the Germans were paying an even bigger premium.”

Kuan criticised NTUC’s eagerness to push the deal through and alluded to potential conflicts of interest, particularly with senior executives possibly having roles in both NTUC and Income.

“You can fully understand why NTUC die die wanna do this deal… the price NTUC is getting is too high,” Kuan commented. He also questioned the appropriateness of such a significant capital reduction in an era of higher capital adequacy requirements for banks and insurers.

Despite Allianz reducing its outlay through the capital extraction, Kuan argued that this didn’t make the German company the ultimate winner. Allianz would be left with a majority stake in a much-reduced Income, whose future capital base would be slashed.

Kuan speculated that NTUC might have been trying to “extract as much as it can possibly get away with” through the capital reduction, leaving Allianz with a diminished company.

As Kuan delved deeper into the financials, he pointed out that the deal contradicted former NTUC Income CEO Tan Suee Chieh’s earlier advice.

Tan had previously suggested that Income should exit capital-heavy insurance products, like annuities and savings products, to avoid the need to raise additional capital.

Kuan highlighted the irony that this strategy was now being implemented as part of the Income-Allianz deal.

“The irony is that Allianz’s business plan goes along the lines of what Tan had suggested Income to do… exiting capital-heavy product lines,” Kuan said.

In his Wednesday (16 Oct) post, Kuan elaborated further on the mechanics of the proposed capital reduction. He explained that for Income to execute the S$1.85 billion reduction within the next three years, the insurer would likely have to exit its capital-intensive product lines such as annuities and savings products.

By doing so, Income’s risk exposure would shrink, allowing it to reduce the amount of capital needed and freeing up funds to be returned to shareholders. However, this would also mean that Income would become a much smaller insurer after the deal.

Kuan highlighted that while NTUC and Allianz would benefit from this reduction, the latter would be left owning a majority stake in a significantly downsized company.

“Allianz is left owning 51% of a company whose capital base is reduced by more than half,” Kuan remarked. He emphasised that this deal structure was more advantageous for NTUC, allowing them to extract both the acquisition proceeds and capital reduction gains, while Allianz was stuck with a smaller and less capitalised company.

Addressing public misconceptions, Kuan cautioned against interpreting the government’s ruling as a win for those who had opposed the deal on ideological grounds.

Many of the arguments about Income’s social mission, he stated, were not the basis for the government’s decision.

“The plebs… are cheering the deal getting blocked by the government by reading the headlines only or reading only what they want to read,” Kuan wrote.

“None of those favoured arguments formed the basis of the government’s objection, which is based almost entirely on the previously non-disclosed capital reduction.”

In the end, Kuan suggested that the deal could return in a revised form. He speculated that Allianz and NTUC might re-negotiate the terms, potentially removing the capital reduction or redirecting the extracted funds to the Co-operative Societies Law Association (CSLA).

“I can see a revised deal in which S$2 billion is extracted before the sale to Allianz, and paid to the CSLA,” Kuan wrote.

This scenario, however, would require NTUC to accept that it could no longer benefit from the capital extraction.

Kuan’s in-depth analysis of the deal highlights his shift from initial support to strong criticism, particularly over NTUC’s disproportionate gains and the questionable capital reduction.

While the government’s intervention has blocked the deal for now, Kuan believes this may not be the final chapter, with Allianz likely to return with a revised proposal.