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

Capital adequacy ratio (CAR)

After the government blocked the deal, Chee Hong Tat, MAS vice president and second finance minister, assured Income’s policyholders on October 14 that “Income has sufficient resources to achieve the capital adequacy ratio.” (CAR) necessary, meaning it has enough capital to meet its requirements. liability and also to be paid to policyholders.

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

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

A strong CAR helps insurers withstand adverse conditions, enabling them to respond to policyholder claims even during economic downturns.

By maintaining adequate capital levels, insurers can better manage their risk exposure and maintain policyholder and investor confidence.

Income’s CAR stands at 199% as of December 31, 2023. This figure is well above the minimum regulatory level and “underlines its strong competitive position and diversified business mix,” according to its 2023 annual report.

Asset Stripping

The term surfaced during the October 16 parliamentary session, during which the government sought to amend the insurance law, which would allow it to halt the transaction.

Mr Leong Mun Wai, a non-constituency MP for the Progress Singapore Party, called the transaction an “asset stripping exercise”, arguing that it would prioritize shareholders’ interests over social mission and protection of Income’s 1.7 million policyholders.

Mr Chee rejected Mr Leong’s allegation that it was “asset stripping”, describing it as an unfair portrayal of a common financial practice – capital optimization – which he said is common among financial institutions.

Asset stripping involves purchasing a company, usually undervalued or underperforming, with the aim of selling 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 operations.

The main motivation is to generate quick profits by taking advantage of 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, thereby improving short-term returns at the expense of long-term viability.