What now, Philam?

So the US government is taking over American International Group. What now, asks one reader. Lines of clients at Philamlife branches, and similar scenes in other Asian countries have many people asking: Is my insurance policy now worthless? What happens to all the money I have paid? Should I withdraw my investments?

I asked several insurance and investments experts and found that there are only five things you need to know:

1. AIG is not directly responsible for the contract that you hold. The responsibility for that lies in the subsidiary whose contracts will have to be respected even by the Fed. It is thus perfectly possible for AIG to be taken over or even to file for bankruptcy, and your policy to be fine. Now even if Philamlife, being one of AIG’s profitable businesses, is sold, the Insurance Commission will require anybody who buys Philamlife to service claims now, or when the contract matures.

“The mother company can’t just get the assets of Philamlife and the company cannot be sold to anybody that is not approved by the local regulator. The Insurance Commission will make sure that every policy that is in force will be serviced,” Vida Chiong, deputy commissioner at the Commission, told MoneySmarts.

Imagine a bank and its branch in the province, say, Davao. When the main bank in Manila closes shop, it can easily pull out the branch in Davao. Not so with a subsidiary. It has its own capital, independent board and its own regulator whose rules even the parent company has to respect.

2. The assets that back up insurance companies, especially the life business, are said to have the best quality, even compared with those of banks, investment houses, securities companies, or industrial firms. This is because the nature of the business requires insurance companies to live virtually forever. Even AIG is considered to still have the best assets. Its problems stem from liquidity issue because of their exposure to subprime loans.

Audited figures from the Commission shows that Philamlife has:
P108 billion — total assets (insurance business)
P170 billion — consolidated assets (including affiliate businesses)
P1.65 billion — paid-up capital (versus P50 million minimum requirement by the Commission)
P23 billion — net worth (all assets minus liabilities)
P76.4 billion — reserves
P98 billion — invested assets, around 95 percent of which are invested locally
Last year, it paid out P6.6 billion in benefit payments.

While its total life insurance in force is P391.8 billion as of end-2007, Chiong says this will not mature all at the same time and can be serviced by the company, as shown by its financial standing.

3. How tight is the regulation in the insurance industry and how conservative is conservative when it comes to investments? Chiong says an insurer should be very well diversified to ensure it does not get hit badly when markets go bust.

“Even if certain stocks are good for example, we limit their exposure to these stocks to make sure they are very well diversified. There are very strict limits in their investments, like only 10 percent of assets that can be converted to cash. We require them to match their assets with their liabilities and make sure they adhere to the principles of safety, liquidity and yield,” says Chiong.

Then of course, AIG got away with its credit default swaps and its regulators didn’t have a clue. I mean, nobody had a clue.

4. In worst-case scenarios, any insurance company that goes belly up will go through receivership and liquidation, and a third party assigned to service claims by policyholders. In Philippine history, there has been little news of life insurance companies going bankrupt. Sold, yes, but not liquidated. In the event of liquidation, if the life insurance company has ample assets, it is possible to get 100 percent of your policy depending on the quality of assets.

For non-life policy holders, it’s different. Assets in this industry is mostly short-term in nature. Policyholders may get 100 percent or less than their claims, and delays like one or two years in getting their payments. Oh and by the way, investment-type insurance contracts like VULs have more embedded risk than pure life insurance. It’s not hard to see why.

If you want to know if your insurance company is in good standing, check whether its name is on the Commission’s list. If its not there, surrender your policy and get protection from another company.

5. For investors in Philam Asset Management Inc. (PAMI), the trust business of Philamlife, you are more likely to lose money if you take out your funds now, because the market is down. Shareholders–that’s you–can terminate the contract of the fund manager (in this case PAMI) and hire a new one, if push comes to shove. This has been done before.

“The fund is owned by investors. The money is not AIG money but investors money…Shareholders can decide through a special meeting to appoint someone else. It is not a unique phenomenon,” says Fernando Jose Sison III, chairman of the Investment Company Association of the Philippines (ICAP).

There’s reputational risk now in PAMI to be sure, but not much aside from that. PAMI is most insulated from AIG’s troubles than any of Philam’s businesses. The risk, if any, would be if PAMI invested fund assets in AIG debt or securities. A source familiar with the matter told me the fund has none.

I am still working on getting information on the pre-need side. If pre-need companies were regulated this tightly, we wouldn’t have seen the likes of CAP, etc. Stay tuned and I hope this helps.

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