On Dec 5, Bloomberg reported that Allianz Global Investors (AGI) and Amundi are in talks for the latter to acquire the former. AGI is an Allianz unit. A few short months ago, Allianz made a pre-conditional offer to acquire 51% of Income Insurance. Income Insurance does not publish its risk-based capital ratios. The RBC ratio measures available capital divided by required capital.
Available capital comprises shareholders funds, retained earnings, reserves, debt instruments, other comprehensive income, policyholders’ funds and such like. Required capital is the minimum capital that the insurer is required to hold based on the risks it undertakes.
As at end-Dec 2023, Income Insurance’s shareholders' funds stood at $3.17 billion, and its tier-1 capital was at $2.7 billion based on data available. Income Insurance’s participating (par) funds stood at $10.4 billion. Hence, total capital worked out as $14.09 billion, compared to a total risk requirement of $7.08 billion giving a capital adequacy ratio of 199%.
As part of the Income acquisition, Allianz planned to “extract $1.85 billion” from Income Insurance via a capital reduction exercise in a “planned capital optimisation”.
According to market watchers, on the capital front, based on the RBC ratio, an extraction of $1.85 billion would have reduced Income Insurance’s CAR to 173%, leaving the ratio well above the MAS’s minimum required for domestic systemically important insurers (D-SII).
However, the planned capital reduction would have depleted Income Insurance’s shareholders’ funds of $3.17 billion significantly, and its tier-1 capital would have fallen to below $1 billion.
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Some market-watchers have said that may not have been an issue in the grand scheme of things because amounts from the par funds could have been moved to the shareholder funds. However, based on the Insurance Act, this would not have had much of an impact. According to the Insurance Act the par fund must be segregated from the shareholders' fund, therefore insurers cannot freely move money from the par fund to the shareholders' fund. The par fund must maintain sufficient funds to meet two requirements: i) Projected bonus for policyholders, and ii) Fund Solvency Ratio of at least 100% under RBC 2 capital framework.
If the par fund has a surplus beyond these two requirements, the insurer can transfer the surplus out of the par fund, but for every $100 transferred out, $90 must go to par policyholders (in the form of a special bonus) and $10 can go to shareholders' fund. Income Insurance has around 1.5 million policyholders compared to 15,000 individual shareholders.
Whether Allianz walks away from Income remains to be seen, but if it does, it would not be able to make an offer for a period of 12 months.
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Government steps in
In July, Allianz made a pre-conditional offer to acquire 51% of Income Insurance at $40.58 per share. Income Insurance has 107.19 million shares, and the offer values 51% of Income at $2.2 billion. Income has 15,835 individual shareholders. NTUC Enterprise owns 72% of Income Insurance.
On Oct 14, Ministry of Culture Community and Youth (MCCY) minister Edwin Tong told parliament: "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." During the ministerial statement, it emerged that Allianz planned to “extract $1.85 billion” from Income Insurance via a capital reduction exercise in a “planned capital optimisation”.
Minister Tong said: “MAS considered the planned capital optimisation from a prudential point of view in accordance with its regulatory mandate.”
“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. As part of that exercise, Income had sought and obtained an exemption to allow it to carry over a surplus of $2 billion to the new corporate entity. The proposed capital reduction runs counter to the premise on which the exemption was given. If not for the Ministerial exemption in 2023, Income Co-op’s accumulated surplus of some $2 billion would have gone to the Cooperative Societies Liquidation Account (CSLA) after being wound up, to benefit the Co-op movement in Singapore as a whole,” Minister Tong said.
Based on Allianz's Financial and Solvency Report 2023, its Solvency II ratio is 229%. No price has been mentioned for the AGI transaction in the Bloomberg report. A very rough rule of thumb is for asset managers to be valued at around 3% to 4% of assets under management. AGI has EUR555 million in AUM as at end-June.
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