Published September 17, 2008

AIA holders spared AIG squeeze

Local outfit says its insurance assets are safeguarded from US parent's crunch

By GENEVIEVE CUA
Email this article
Print article
Feedback

(SINGAPORE) Amid the crisis surrounding the American International Group Inc (AIG), there was a word of comfort for policyholders of its local offshoot. AIA yesterday said that its insurance funds are segregated from that of AIG, its parent.

This means its insurance assets are safeguarded from AIG's liquidity crunch.

'AIA Singapore has more than sufficient capital and reserves above the regulatory minimum requirements to meet our obligations to policyholders.

'The funds maintained in Singapore . . . are held specifically for the purpose of meeting our obligations to policyholders,' AIA said.

It added: 'Although AIG faces short-term liquidity pressures, we have a strong, well-positioned business in Singapore. We would like to assure our customers of AIA's commitment to meeting their needs.'

Yesterday, hundreds of investors flocked to AIA's office in an attempt to redeem their policies on fears that its parent in the United States could collapse.

In a statement, the Monetary Authority of Singapore (MAS) said that assets of individual insurance funds maintained by Singapore-registered insurers can only be used to meet the liabilities of the respective fund. They are segregated from the head office and other shareholders funds.



'The value of these assets is not linked to AIA's or AIG's financial condition, but like all investments, their value may be affected by general market conditions.

'MAS requires all insurance companies in Singapore to manage their investment risks carefully and we are monitoring the situation closely.'

MAS said policyholders should not act hastily to terminate their policies, 'as they may suffer losses from the premature termination and lose the insurance protection they may need'.

Insurance assets that are used as collateral will not qualify as resources to meet policyholder liabilities, it said.

Concerns had deepened yesterday on news that the state of New York had given AIG special permission to access US$20 billion of the capital in its subsidiaries to free up liquidity.

AIG stock fell 70 per cent in early New York trading, as ratings cuts threaten its efforts to raise funds.

Meanwhile, BT understands that the insurance industry's policyholder protection fund has not been set up yet, despite the fact that legislation has paved the way for such a fund since 1985. At end-2005, MAS had issued a consultation document on the establishment of the fund, and also issued a response to industry feedback.

The MAS annual report 2006/07 said it was reviewing the scheme 'to ensure it is still relevant'. The second phase of the review, which is understood to be underway, is to 'focus on the implementation details'.

MAS said the fund is an industry-funded scheme to compensate policyholders should an insurer fail or default on its obligations.

AIA's participating fund review for 2007 shows it had total assets worth $14.8 billion as at end-December. Roughly 74 per cent of the portfolio is in bonds, and 10 per cent in Singapore equities.

The par fund does not hold any sub-prime securities, but it has invested in collateralised debt obligations (CDOs) for yield enhancement over the past years, 'as these instruments provided credit spreads that were significantly higher than bonds of the same rating at the time of the investment'.

The portfolio held US$372 million in CDOs at end-December, or about 2.9 per cent of the portfolio.

AIA said the CDOs have performed as contracted and it continues to receive coupon payments. To date, there has been just one downgrade of credit ratings within the portfolio. 'Given the high quality of the portfolio, we fully expect to receive interest as contracted and a full return of principal on maturity of these instruments.'

The overall participating fund showed a return of 5.9 per cent in 2007, compared to 6.3 per cent in 2006.