Asset stripping? Capital reduction? A look at the terms arising from Allianz-Income deal saga

SINGAPORE - Few merger-and-acquisition (M&A) transactions have captured the public’s attention to the same degree as the ongoing saga surrounding German insurer Allianz’s planned offer to buy a controlling stake in Singapore’s Income Insurance.

What began as a pre-conditional voluntary cash general offer on July 17 has led to public concerns here. The transaction was

subsequently halted by the Government on Oct 14

due to concerns over the structure and Income’s ability to continue its social mission.

Allianz is now working with stakeholders to consider revisions to the transaction structure.

As the saga unfolded, various M&A terms were bandied around. ST looks at these terms.

Capital reduction

This was one of the sticking points as to why the Government halted the proposed transaction. 

Minister for Culture, Community and Youth Edwin Tong disclosed that Allianz had planned a capital reduction exercise to return $1.85 billion to shareholders within three years after completion of the deal. 

He said this ran counter to why Income was allowed to carry over some $2 billion after it changed from a cooperative to a company in 2022.

If not for the exemption, the accumulated surplus would have gone to benefit the co-op movement in Singapore.

So, what is a capital reduction exercise?

It is a corporate financial strategy where a company reduces its shareholder equity, primarily to manage its capital structure more effectively.

It can involve buying back shares, cancelling shares or returning capital, thus decreasing the total number of shares in the market.

Capital reduction can help a company improve its financial health and enhance shareholder returns. 

Companies often undertake such an exercise during restructuring, internal reorganisations, or during a merger or acquisition to optimise their financial position.

By reducing the number of shares in circulation, a company can potentially increase the value of remaining shares, benefiting shareholders.

Capital reductions can help create or enhance distributable reserves, allowing companies to pay dividends or fund share buybacks.

Capital extraction

Mr Tong said it was unclear what Income might do after the capital extraction and what impact this could have on policyholders. 

Capital extraction involves a company withdrawing funds from an investment or business. 

There are various ways to do this, including through dividends, share buybacks, or other financial means that allow stakeholders to realise value from their investments.

Capital injection

Mr Tong noted that there was growing pressure to inject capital into Income to build up its financial strength in response to regulatory requirements and market competition.

NTUC Enterprise (NE), which owns 72.8 per cent of Income, has supported the local insurer with capital injections but cannot continue to do this on its own.

Capital injections take place when funds are put into a business, project or investment plan. This can take various forms, including the use of cash, equity, assets or debt, and is typically aimed at supporting the growth or stability of the entity receiving the funds.

There are implications such as when new equity is issued as part of a capital injection, existing shareholders may experience dilution of their ownership percentage.

A successful capital injection can improve a company’s liquidity and operational capacity, potentially leading to growth and increased profitability.

Capital optimisation

In mid-July, Allianz, Income and NE submitted to the Monetary Authority of Singapore (MAS) capital optimisation plans after the transaction.

This is strategic management of a company’s capital resources to maximise returns while minimising risks and costs. 

It entails adjusting how capital is allocated, used and replenished. The goal is to ensure that capital is employed efficiently across various business operations, enhancing overall financial performance.

Capital adequacy ratio (CAR)

After the Government blocked the deal, MAS deputy chairman and Second Minister for Finance Chee Hong Tat assured Income policyholders on Oct 14 that “Income has sufficient resources to meet the necessary capital adequacy ratio (CAR), which means it has enough capital to meet its liabilities and also to pay out to policyholders”.

This is a key metric that applies to banks, insurance companies and financial institutions to ensure that they maintain sufficient capital to absorb potential losses and maintain solvency.

In the case of insurers, they must maintain a certain level of capital relative to their risk exposure, which can include underwriting risks, investment risks and operational risks.

A strong CAR helps insurers withstand adverse conditions, ensuring they can meet policyholder claims even during economic downturns.

By maintaining adequate capital levels, insurers can better manage their risk exposure and maintain confidence among policyholders and investors.

Income’s CAR is at 199 per cent as of Dec 31, 2023. This is well above the minimum regulatory level and “underscores its strong competitive position and diversified business mix”, according to its 2023 annual report.

Asset stripping

This term surfaced during the Oct 16 Parliament sitting where the Government sought to amend the Insurance Act, which will allow it to halt the transaction.

Mr Leong Mun Wai, Non-Constituency MP from the Progress Singapore Party, labelled the transaction an “asset stripping exercise”, arguing that it would prioritise shareholders’ interests over the social mission and the protection of Income’s 1.7 million policyholders.

Mr Chee rejected Mr Leong’s claim of “asset stripping”, describing it as an unfair portrayal of a routine financial practice – capital optimisation – which he noted is common among financial institutions. 

Asset stripping involves buying a company, typically one that is undervalued or underperforming, with the intent of selling off its individual assets for profit.

This practice is often associated with corporate raiders and private equity firms, which aim to extract value from the acquired company by liquidating its assets rather than continuing its operations.

The primary motivation is to generate quick profits by leveraging the disparity between the company’s market value and the value of its individual assets.

Proceeds from asset sales are often used to pay dividends to shareholders, enhancing short-term returns at the expense of long-term viability.