On Aug 2, Tan Suee Chieh, a former CEO of NTUC Income and NTUC Enterprise, sent an open letter to the Monetary Authority of Singapore (MAS) to put his point of view across on Allianz's offer for Income Insurance.
The gist of the letter is about Income Insurance's capital, more to the point its common equity tier 1 (CET-1) capital.
NTUC Enterprise had already explained on July 30 the difference between Income Insurance's redeemable shares and irredeemable shares, which were issued to shore up capital during a period when global insurance companies had to enhance their capital requirements.
When Income Insurance (it was corporatised in 2022) was a cooperative, its shareholders were offered redeemable shares which shareholders could redeem for $10. These are sometimes known as preference shares, where the company provides a form of capital protection for investors but allows management to retain control.
According to a press release by NTUC Enterprise, it issued a letter of responsibility to the MAS in 2012, indicating that it would ensure that Income Insurance (then a cooperative society) always maintained a sound liquidity and financial position by supporting Income Insurance to meet its present and future obligations and liabilities, including any liquidity shortfall.
In 2012, NTUC Enterprise proposed to the government to amend the Co-operative Societies Act to enable Income Insurance to create a class of irredeemable shares, and when this was implemented, converted its shares to irredeemable shares so that it could be classified as Tier 1 capital to count towards its capital adequacy.
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Irredeemable shares are equity-like except that they have a fixed dividend. The best form of capital is ordinary equity and retained earnings.
The insurance backdrop to this was the Monetary Authority of Singapore's enhanced valuation and capital framework for insurers also known as the revised Risk-Based Capital Framework or RBC 2 which came into effect on March 31, 2020. Building on RBC 1, the purpose of RBC 2 is not to raise regulatory capital requirements but to ensure that the assessment of capital adequacy better reflects the insurer's activities and risk profile. RBC 2 introduced features such as Matching Adjustment and Illiquidity Premium which created a more conducive environment for insurers to invest in long-term dated bonds and offer long-term insurance products for policyholders.
Just as the Basel requirement (Basel IV started to be implemented in July this year and the transition period is five years) for banks governs their capital requirements, RBC2 had greater capital requirements for insurers than Solvency 1. In Singapore insurers were required to move from a 2004 risk-based capital (RBC) iteration (RBC 1) to RBC 2 which requires more capital resources.
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The July 30 press release on SGXnet explains that redeemable shares are classified as contingent liabilities and the then-NTUC Income needed equity. The NTUC Enterprise release goes on to detail its capital injections into Income Insurance, which include $630 million between 2015 and 2020 to ensure Income was adequately capitalised, presumably to ensure it is Solvency II-compliant.
The release says that the capital injection includes $100 million during Covid in 2020 "which was particularly important for the solvency of Income Insurance at that time".
In addition to capital injections, Income Insurance also issued $600 million subordinated bonds in 2012 (fully redeemed in 2022) and another $800 million in 2020 to shore up its capital strength so that it can meet its obligations and grow its business, the press release says.
According to the NTUC Enterprise's July 30 announcement, a class of irredeemable shares was created; they were equity-like for NTUC Enterprise. Minority shareholders could still redeem their shares, and were not offered the opportunity to subscribe to the additional capital injection. At the time, there wouldn't have been sufficient liquidity as NTUC Income, and Income Insurance thereafter, were not listed.
Tan's open letter confirms the capital injection: "NTUC Enterprise injected $630 million into NTUC Income from 2015 to 2020 in return for shares at a par value of $10 per share. The consequence of those capital injections was that NTUC minority shareholders at the time had their shares diluted. Indeed, as a result of those capital injections, NTUC Enterpise’s shareholding in NTUC Income increased very significantly from 30% in 2015 to 70% in 2020."
Tan also claims that NTUC Enterprise "did not pay the true market or economic value for those shares". "In other words, NTUC Enterprise obtained shares worth far more than the $630 million it had injected into NTUC Income. Indeed, today, NTUC Enterprise can sell the shares at $40.58 each."
The understanding usually is that redeemable shares are unlikely to be diluted based on a capital injection as they are redeemable. However, Allianz is offering to buy these redeemable shares at $40.58 per share.
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In his open letter, Tan acknowledges that the rationale for the capital injection was to improve NTUC Income's financial position in scenarios where "NTUC Enterprise had to underwrite Income's financial position in adverse financial scenarios whereas minority shareholders were not obliged to".
Questions on the sale of Income Insurance to Allianz are set to be tabled in Parliament, which has its next sitting on Aug 6.
Follow The Edge Singapore’s coverage of Allianz and Income Insurance:
- May 23: Singapore’s Income Insurance considering partnerships or stake sale
- June 14: Income Insurance and Allianz hold 'transaction' talks, latest possible Singapore insurance M&A
- July 17: Allianz offers $40.58 per Income share, representing premium of 37.3% over NAV
- July 25: NTUC Enterprise says it remains ‘fully committed’ to Income Insurance in clarification statement
- July 30: NTUC Enterprise issues further clarification statement, stresses its commitment to Income Insurance
- Aug 4: NTUC Enterprise explains the difference between redeemable and irredeemable shares to former CEO
- Aug 5: Former NTUC Income and NTUC Enterprise CEO rebuts NTUC Enterprise’s points
- Aug 6: Income-Allianz deal saga: From a minority shareholder’s perspective
