THE HULLABALOO OF THE SALE OF NTUC INCOME

CNA's 4 Aug report on the joint statement by NTUC Enterprise and NTUC Income regarding the controversial sale of majority stake in the insurer to Allianz must have bruised some egos. I was not interested on the issue so I kept my peace. But I had always thought that if we believed in free market, then what shareholders want to do is nobody's business, as long as no laws or regulations were breached. The appeal to nativity sentiments has no value unless it has to do with national interests, such as the case of Neptune Orient Lines, Singapore Airlines, power generators, etc. Chung Khiaw Bank, in my opinion was not national interest, despite the infamous Lee Kuan Yew - Slater Walker showdown in years past.

All who have objected to the sale that I have read about were displeased by what they see as a priority of profits over social service to nation. To me this is pandering to virtue signaling, a zeigzeist of our times. Nevertheless, I have respect for ex-Income CEOs Tan Kim Lian and Tan Suee Chieh, and Prof Tommy Koh for voicing their opinions even though I do not agree with them.

All who agrees with the sale seems to be liberal young successful types, like the uppity character ex-NMP Calvin Cheng, whose parents, I hope for their sake, know how to keep quiet.

I am not now coming to sound smart after the erudition by the CNA article but to share some thoughts from different angles.

As a cooperative (till 2022) Income owes it's members the responsibility to perform a service at a cheaper rate to them. That is the covenant of a cooperative. But insurance is a numbers game and NTUC membership base does not provide the critical mass, Income had to extend sales to the public. At which point, it became a profit seeking enterprise, for Income cannot justify employing the cooperative's resources to benefit non-members. However, it is still not in breach of its covenant to members if profits of Income accrues to the benefit of members.

Income cannot sell its products anymore cheaper than the next insurers without making losses. It can only sell as competitively as another insurer would. Insurance is all about actuaries and risk probabilities, the math applies to all insurers equally which means a commonality to the pricing computation. But riders and coverage allows insurers vast opportunities to differentiate their products, and thus the appearance of a price difference

The truth of where Income has been of great benefit to Singaporeans is it brought micro-insurance to the small man, somewhat similar to Grameen Bank which brought microfinance to the unbankable mass of population in Bangladesh.  (Although Mohammud Yunus gained fame and Nobel Peace Prize for his microfinance model, his Grameen Bank created in 1976, was preceded by the SEWA Bank of India founded by Ela Bhatt 4 years earlier in 1972.)

Income sold small policies to the lower percentile market which other insurers at the time were unable to serve. "Micro-insurance" needed a mass marketing model which other insurers' cost structure could not support. Income, being quasi-government, had advantages in the form of special access for mass promotion. For example, I remember those days Income was the only insurer allowed to hold marketing events in army camps.

Over time technology has now lowered the cost to reach the lower end mass market and Income finds their niche eroded, CPF insurance schemes further exacerbated the situation for Income. The traditional business where Income had been strong in is the domestic personal insurance market covering life, health, auto, home owners, rental, maids, etc.  With traditional markets shrinking over the years, Income had to strike out in two directions.

Income has to move into the big-boys arena of commercial insurance market (property, public liability, workers' compensation, business interruption, professional liability, commercial auto fleets), specialty insurance market (marine, aviation, cyber attacks, events, pets, etc), Reinsurance market (Treaty reinsurance, Facultative Reinsurance), and Government and social security insurance market. For these, Income has to internationalise their business but they just do not have a presence outside of Singapore.

To play the big boys' game requires huge capitalisation and a whole new set of expertise and technology of which Income is completely out of depth. Income has to do what the big insurers do -- they need to be able to syndicate out their exposures to average out their risks. Re-insurance is still possible for small insurers like Income, but it's less cost effective such as in proportional re-insurance and there are different jurisdictional regulatory requirements for re-insurance that may be problematic.

You read chairman Lim Boon Heng mention the incident where Income's quotation was lower but they still did not win the contract. In this big boys game, price is not the winning criteria. The insured party has a risk exposure on the insurer. Thus the credit standing of the insurer becomes an issue. Income will be measured against giants and found wanting.

Basically, Income is at a cross-road. I can best explain it with this analogy.

There is a self-help financing scheme known as Rotating Savings and Credit Association (ROSCA). This is as old as anyone can recall and it exists with slight variations all over the world. Singaporeans probably know this by the term "tontines". This is strange as "tontines" is actually the term used in West Africa. In Latina America it's "cudinas", in some Arab countries it's  "jam’iyas", in India they call it "chit funds", and in China it's 'Hui' 回. Basically, a small group of say 10, come together and each contributes say $100 monthly to a pool for 10 months. Each month someone will take the pool money of $1,000. Variations are in the way they access the funds, either by fixed interest rate, or bidded for example. This is trust-based scheme and helps people save money and access lump sums for various needs. It exists in urban and rural areas for people with no access to traditional financial services.

There were traditional "tontines" in Singapore back then. Then in the 70s, they got corporatised and we had Gemini Chit Fund, Stallion Chit Fund, and others. It started out as good ideas, but easy money attracted by high interest earnings, gullible investors, and lack of regulatory oversight led to mismanagement and scams and eventual collapse. 

Leaving the financial scam of chit funds out, the analogy I try to draw is Income can remain in their "tontine" state and still serve their members. Or they evolve and outgrow their traditional small market. There is a philosophy of growth culture. All corporations must grow or they die. At least they must grow up to their maturity phase. To this extent, Income has still a long way to go.

The S$2.2b offer from Allianz for a majority 51% stake values Income shares at $40.58 per share which is 37.3% premium over net asset value per share of $29.55 as of December 31, 2023. I leave it to more qualified financial analysts to opine whether the company is unlocking good value for its members. I can only say this seems to be strangely off the standard operating procedures of Singapore Inc to build corporations and then IPO to boost the local stock exchange. Particularly when the local moribund bourse could do with some excitement given the privatisation of Great Eastern Life. Take the modus operandi of Comfortdelgro - monopolise taxi operator service, corporatise it, IPO, then go out and conquer the world. In light of this, one can be forgiven to wonder if there is something amiss.

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