THE ART OF BULLSHIT - A CLUELESS PUBLIC AND CLEVER NARRATIVES IN THE ALLIANZ-INCOME FIASCO

"If Mr. McMurphy doesn't want to take his medication orally, I'm sure we can arrange that he can have it some other way."
Nurse Ratched

This is a cold, manipulative line in the Jack Nicholson movie that shows the exertion of power by coercing patients into compliance in more than one way of taking the medicine. The analogy describes the various different narratives to sell a bullshit and control the game.

I wanted to respect neutrality in the months running up to the general election so I kept my peace on the Allianz-Income deal. Post election I am triggered that the man right smack in the centre of the storm can be elected into parliament to represent a public that he had outrageously, perhaps even criminally, pulled wool over eyes. Ah well, 'twas my first lesson on politics as a little kid some 6 decades ago when my older brother taught me the kind of people have the kind of leaders. It's ironic the constituency is called "Kayu".

It is time at least one Singaporean stand up and be brutally frank to call out all the bullshits and the stupidity in this fiasco.

The deal goes like this :

The Pre-Conditional Voluntary Cash General Offer offer:

Announced on 17 Jul 2024. Allianz to acquire 51% of Income Insurance Limited (IIL) for $2.2 billion.  NTUC Enterprise (NE) holds 72.8 % of shares in IIL and remaining 27.2% held by 16,000 minority shareholders. Depending on how many minority shareholders take up the offer, NE will sell the balance to make up the 51%. In short, Allianz buys 54,667,790 shares at $40.58 each which is at a premium of 37.3% over Net Asset Value of $29.55.
Capital Reduction Plan :

Disclosed on 14 Oct 2024 in ministerial statement in parliament. IIL will return capital of $1.85 billion to shareholders over a period of 3 years.

In the art of bullshitting, word play has great psychological impact. It distracts and influences the unwary. There were two in play throughout the fiasco. 

The one at the fore is "social mission". Professor Tommy Koh and two ex-NTUC CEOs were the first to talk of the sale as a betrayal of the social mission of IIL. The two ex-CEOs may be forgiven as they ran the precursor of IIL, which was NTUC Income, a co-operative with a social mission. They are passionate and mission-driven. Tommy Koh is a good and learned man, but unfortunately displays his naivete once too often. I blogged about him here and here. 

On 1 Sep 2022 NTUC Income corporatised into a public company IIC. It ceased to be a co-operative and became a full-fledged for-profit entity. That is the legal standing. To make it perfectly clear, IIL is now governed by The Companies Act unlike it's precursor NTUC Income which was governed under The Singapore Co-operative Societies Act. IIL's responsibility is no longer to union members but to shareholders of the company. The 'social mission' compact with union members no longer exist.

It's been said IIL/NTUC Income served the public by providing cheaper rates. This is highly questionable. Insurance is an actuarial science driven business with premiums factorised from industry established statistical models and historical data sets to calculate risks. It is unlikely that an insurer can assess the same risk materially different from another as to price it significantly different. Product pricing variance is less from risk assessment differentials but from business strategy, market dynamics, operational costs, and regulatory factors.

Traditionally, insurance was marketed through agencies structured similarly to multi-level marketing. Agents were commission-based and successful agencies with vast downline networks generated substantial earnings, sometimes in the millions, through layered commission. (MAS eventually stepped in to restrict market power of these agencies.) In the early years under CEO Tan Kim Lian, NTUC Income operated under a different marketing model from the industry norm. Tan Kim Lian adopted a different approach by employing direct sales employees on a salaried basis. This structure significantly reduced operating costs, enabling NTUC Income to offer low-value policies, a market segment that traditional insurers found less viable due to their higher cost structures associated with commission-based agency networks. This creates the image for NTUC Income as the insurer for the poor.

NTUC Income thus served a great social purpose -- it brought insurance products to the lower income strata of Singapore. As a co-operative, NTUC Income serves its union members and it was able to do so by offering low value policies. However, insurance business is about the law of averages in risk taking, which means it must have volume and that means selling to non-union members as well. It cannot sell cheap even if it is able to because its responsibility is to benefit members. It therefore sells competitively, making reasonable profits for its members. Talk of NTUC Income selling cheap policies is bullshit. It has branches in Vietnam, Malaysia, and Indonesia. They are certainly not there to serve a social mission.

NTUC Enterprise faced 3 basic challenges which led it to seek alliances with a bigger name:

1. NTUC Income/NII is an established brand in the local personal insurance market such as life, health and motor insurance. It faces tough challenges with the 40 or so big boys in the other sectors - group insurance, institutional contracts, life insurance market share, overseas market. It's brand name is weak when competing in these markets.

2. NTUC Income/IIL is behind the curve in technological advancements compared to other global insurers. It's cost advantage has faced new challenges in recent years. The rise of technology-driven direct-to-consumer (D2C) online sales platforms, and strategic partnerships with banks through bancasurance agreements have introduced more cost-efficient distribution channels. These modern approaches allow insurers to bundle financial products and leverage existing customer relationships of both the insurance companies and their partner banks, thereby reducing acquisition costs and offering competitive pricing, even for low-value products. This is the quandary the co-operative found itself in modern times.

3. Size matters in insurance. But NE envisions difficulties in providing additional capital on their own to scale further.

NE announced the offer from Allianz on 17 Jul 2024 which caused a public outcry, principally centred on betrayal of selling off a Singapore icon and loss of a social service provider. This talk of social mission of selling cheap insurance is a red herring that distracts from the fact the real issue is not mission loss but the lack of financial transparency.

On 14 Oct 2024 Edwin Tong, Minister of Culture, Community and Youth (MCCY), gave a ministerial statement which clarified a lot of things, but it also raised several questions. MCCY had commenced a study into the matter sometime in August.

One point Tong revealed in parliament caused a public uproar which has been commented on by just about anybody with a cellphone. There was an undisclosed plan for a "capital reduction" to return $1.85b by IIL to shareholders within 3 years of the sale. Tong specifically called it a "capital reduction" but in the ministerial statement he referred at other times to "capital extraction". Every kaypoh in town had something to say and they all used "capital reduction" and "capital extraction" interchangeably. The two terms are different in purpose, legal complexity, accounting impact and methods with different ramifications. We need to be clear what we are talking about.

Capital reduction:
* Purpose - It is a restructuring of share capital to improve the financial health. Decreased share capital enhances its financial ratios.
* Legal complexity - Court and shareholder approval often needed.
* Accounting impact - reduces the share capital account and/or share premium account.
* Method - Share cancellation or reduction of par value.

Capital extraction:
* Purpose - To distribute surplus funds to shareholders.
* Legal complexity - Just board resolution or shareholder vote.
* Accounting impact - Reduces retained earnings or reserves.
* Method - Dividends, share buybacks, liquidation payouts.

Let's call this the "backdoor refund" at this stage since we do not know whether it is capital reduction or capital extraction.  A sales transaction with a "backdoor refund" almost always smells fishy, but in this case, let's be clear. There is no suggestion of corruption since the cash flows back to NTUC Enterprise and other minority shareholders who didn't accept the offer.

In the ministerial statement, Tong explained that right up to the parliamentary debate in August 2024, MCCY, was unaware of this backdoor refund. Tong said as MCCY was studying into the matter, the MAS shared with them additional information. Allianz, IIL, and NTUC Enterprise had approached MAS (after August, I assume) to discuss on their future plans on how to optimise the capital structure of IIL. According to Tong, MCCY then learnt about the $1.85b backdoor refund over a period of 3 years after Allianz acquisition of IIL. Tong explained MAS had no objection as they were only concerned with ownership and the viability of IIL under Allianz. MAS, however, felt MCCY might hold some different views and that's why the information was shared to the ministry.

Tong presented with great clarity their concerns for this backdoor refund. When NTUC Enterprise corporatised in 2022, there was a surplus of $2b which had to be transferred to Union's  Co-operative Societies Liquidation Account (CSLA) in compliance with the Co-operative Societies Act Section 88. The CSLA is to be used for the general benefit of the co-operative movement in Singapore. MCCY has the authority to grant exemption to this requirement. An exemption was requested and granted, and the $2b surplus was carried into IIL, presumably predicated on the assumption it will be similarly utilised for benefit of the co-operative movement. Tong said he could not see clarity in IIL how this surplus was to be used. The backdoor refund runs counter to the principle on which the Section 88 exemption was granted. This, and the loss of social mission, was the basis for MCCY to disapprove the deal.

Tong's ministerial statement is extremely damaging, perhaps even criminally, to NTUC. Mr Desmond Tan, who is senior minister of state in the Prime Minister's Office, is also a Deputy Secretary General of NTUC, had the opportunity to clarify in parliament following Tong's statement. He said this was the first time he has heard of the capital reduction plan and that the NTUC Central Executive Committee is not in the loop in this development. Thus the Secretary General of NTUC, now the MP for the Jalan Kayu constituency, Mr Ng Chee Meng, can say he too is in the dark. We don't know if Desmond Tan was speaking on behalf of the Prime Minister, of NTUC, or as a concerned MP.  I asked Bozo my pet chimpanzee what he thinks of all this and he scratched his head.

The MCCY has said they are not against the deal from a commercial perspective, they are only against the structure of the deal in its present form. This leaves the field open for Allianz, or any other potential insurers, to make proposals to NTUC Enterprise in the future.

Now that the government has scuttled the deal, should every thing just go away?  That depends on whether you believe in all the bullshit. The mission loss, all the dust swirled up by the talk of capital reduction or capital extraction and the breach of exemption of Section 88 Co-Operative Societies Act, is a clusterfuck discombobulation of the whole saga that distracts from the real issue -- transparency of the deal. It also depends on whether you believe nobody is above the law.

The fact that the back door refund plan was not publicised in the Offer document means willful concealment which could mean misrepresentation and conspiracy to defraud. This is a big problem and many state agencies ought to be looking into this. Before I explain the legal ramifications, let's look at some real numbers.

IIL financial statement y/e 31. Dec 2023 (2024 statement is unavailable) has share capital account showing $3,203,821,000. Total shares issued is 107,191,745 with nominal value of $10 each. That means there is a premia of $2,131,903,528 in the share capital account.

NTUC Income financial statement y/e 2021 Notes 28 to the Account says of the surplus of $2,651, 927,000, only $952, 089,000 is distributable. $1,697,840,000 is non-distributable in compliance with regulatory capital adequacy guidelines and statutory requirements. 

It does look like Tong is correct in that it would be capital reduction. The $1.85b is likely to come from the capital account. But MAS needs to explain why when the 2021 account says $1,697, 840,000 is non-distributable, they find no problem with the capital reduction plan.

When the time comes for IIL to release the cash outflow from capital account to shareholders, and there is insufficient cash balance, IIL would have to monetise some assets.  Actually NCMP Leong Mun Wai had enquired if there was "asset stripping" but was shut down by Tong who said "No" but did not explain how the cashflow is to be funded. To that extent, Leong Munwai is correct that there may be asset stripping.

Back door refunds are troublesome because it hides the true cost of an acquisition.  The capital reduction means of the $1.85b,  51% ($943,500,000) will go to Allianz, 49% ($906,500,000) will go to NTUC Enterprise/minority shareholders. This means Allianz's acquisition cost only $1,256,600,000 and not $2,200,000,000 as stated in the Offer document. That effectively means Allianz acquisition of 54,667,790 shares was priced at only $22.99, not $40.58 as stated in the Offer document. The actual price of $22.99 is very close to the NAV (net asset value) of $22.55. There is thus no premium of 37.5% over NAV as declared in the Offer doc.

A Leveraged Buy Out (LBO) is where the buyer makes use of the assets of target company to help finance the acquisition. For example the 2005 GBP790m acquisition of Manchester United FC by the Glazer family with very little of their own money with the deal financed by loans secured against the club's assets. Is the Allianz-Income deal an LBO? If Allianz intended to use IIL's own reserves (thus liquid assets) to finance the acquisition or subsequent returns, it resembles an LBO. The concern is whether the capital reduction structured to benefit Allianz is at the expense of Income's stability. MAS holds the view IIL's capital adequacy won't be affected.

Fraudulent conveyancing happens when assets are disposed to some preferred parties at the expense of creditors. This is a felony that usually happens in a corporate liquidation scenario. In the Allianz-Income deal, the capital reduction plan was not disclosed to minority shareholders. Those that take up the offer are disadvantaged as they do not benefit from the refund. Although they are shareholders, they are similarly situated as creditors in losses similar in a fraudulent conveyancing situation.

The question Singaporeans ought to be asking is, is there anything actionable by regulators?  Since the deal has been blocked, regulatory action would depend on whether there was misconduct or regulatory breach during the process. There seems to be prima facie evidence of concealment of intent, misinformation, breach of fiduciary duties, and conspiracy to defraud. These are the various regulatory agencies who should be concerned:

MAS:
Their jurisdiction is financial stability and integrity. According to Tong, MAS was satisfied with capital adequacy part of things. However it should investigate if misleading information was circulated or material facts were deliberately omitted and compliance with securities laws (Securities and Futures Act.

ACRA:
Its jurisdiction is corporate governance and compliance with Companies Act.  It should investigate director misconduct or breach of fiduciary duties, It should scrutinise whether there was improper motive behind capital reduction plans, whether company officers acted in a way that disadvantaged certain shareholders.

Securities Industry Council:
Its jurisdiction is regulation of takeovers and mergers. It should investigate whether the takeover rules were breached, including non disclosure of critical elements, misinformation, or unfair treatment of minority shareholders. It should examine whether the offer terms were fair and transparent.

Commercial Affairs Dept:
Its jurisdiction is financial crimes and serious fraud. It should investigate criminal conspiracy if there was intent to deceive or defraud shareholders or the public. It should review whether the backdoor refund involved fraudulent intent.

In the hustle and bustle of the election rallies, Mr. Lee Hsien Loong made a statement to the effect the PAP government blocked the Allianz-Income deal to protect the social mission of Income Insurance. He was basically gloating we the PAP did it, protected the interest of Singaporeans! Lee took all credit for PAP and ignored the public outcry, particularly the protests of the two ex-CEOs of NTUC Income, without which, the deal would have gone unchallenged. I asked Bozo my pet chimpanzee if this was fair and he pointed to his skin. I think he was trying to say it's pachydermic.

Lee further reiterated "If it had been left to the Worker's Party as government, the deal would have gone through because they didn't oppose it, right?" This is an underhand comment -
* The Union would never have gone into the deal with Allianz without prior greenlight from the government.
* The government was forced to re-assess under intense public pressure.
* The attack on Worker's Party and Pritam was meant to manipulate public perception by implying guilt or poor judgement without concrete evidence. This is called a counterfactual criticism. It is criticising on a "what would have happened if" scenario. It shifts the focus from the government/union actual decisions and accountability to "what-ifs" onto another party making the accused unable to defend against speculation. This is a common dirty trick in debates.

The whole fiasco boils down to one question - why should the deal makers conceal the capital reduction plan? It is obvious the scheme is in conflict with their concern for future capitalisation needs of IIL. It is a paradoxical reasoning to ensure more capital, go for a capital reduction. Of course they knew the deal cannot pass scrutiny if the capital reduction plan was disclosed. No one can accept this bullshit.

The movie One Flew Over The Cuckoo's Nest explores themes of individuality, authority, and the oppressive nature of institutional systems. Should Singaporeans be like institutionalised cuckoos and accept everything without exercising critical thinking. This episode has demonstrated that when the situation requires it, one should speak out. Without the public outcry, this one would have flown over the cuckoo's nest.

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