Malaysia Life Insurer Parring Down

AT least three foreign insurers seem to have initiated moves for their Malaysian units to meet the minimum local shareholding requirement of 30% amid regulatory pressure for foreign-owned insurers to do so by end-June next year.

Singapore’s Great Eastern Holdings Ltd and the UK-based Prudential plc are looking to sell strategic stakes in their local units and are currently in talks with local institutional investors, while Tokio Marine Holdings Inc may opt for an initial public offering (IPO) and has hired Kenanga Investment Bank as its sole principal adviser for the potential exercise.

Kumpulan Wang Persaraan (Diperbadankan) (KWAP), the country’s second largest pension fund, is in early talks to buy stakes in the local units of Great Eastern and Prudential.

“We have obtained Bank Negara Malaysia’s approval to talk to Prudential and Great Eastern. We are at an early stage of negotiation, so I can’t say more,” KWAP CEO Datuk Wan Kamaruzaman Wan Ahmad tells The Edge.

According to sources, Credit Suisse is advising KWAP on the potential acquisitions.

KWAP had, as early as August, acknowledged that it was interested in taking small stakes of possibly 10% in some foreign-owned insurers. At the time, it narrowed its options to units owned by Great Eastern, Prudential and AIA Group Ltd.

Meanwhile, the Employees Provident Fund (EPF) has its eye on the same two companies that KWAP is looking at.

EPF deputy CEO of investment Datuk Mohamad Nasir Ab Latif told NST Business earlier this month that the fund was looking at buying stakes in Prudential Assurance Malaysia Bhd and Great Eastern Life Assurance (M) Bhd.

Nasir was reported as saying that it was too early to say how big a stake the EPF planned to buy in the companies. He said the EPF did not know whether the insurers planned to sell a 30% stake to just one party or split it among several.

“We really don’t know. If the price is right, we will get 30%. But they may not give all to us,” he told the daily. As at the end of last year, the EPF had an investment fund size of RM731 billion while KWAP had RM125 billion.

Foreign insurers are scrambling to find ways to pare down their stakes in their local units after Bank Negara, in June, took a strong tone in reminding them that they needed to meet the minimum local shareholding requirement of 30% as part of a bigger initiative to lift domestic participation in the industry. It instructed them to comply with the requirement by June next year.

In 2009, Malaysia raised the foreign ownership cap for insurers to 70% from 49% previously. At the time, the central bank said a higher cap of more than 70% would be considered on a case-by-case basis for players who could facilitate the consolidation and rationalisation of the insurance industry.

In the past, it had granted extensions to insurers that did not comply with the foreign ownership. According to RAM Ratings, there are 11 insurers in Malaysia that are wholly owned by foreign firms.

“I think most would prefer to sell a strategic stake in their companies to one or two local parties rather than go for an IPO. If they had wanted an IPO, they’d have done so a long time ago,” observes an investment banker.

Nevertheless, it is understood that Great Eastern, Prudential and Japan’s Tokio Marine are considering all options available to them to meet the 30% local shareholding requirement. All three have wholly-owned general insurance and life insurance operations here.

In Tokio Marine’s case, plans for a listing are “still fluid”, a source tells The Edge. According to another source, Tokio Marine also has BNP

Paribas as its international adviser for trade sale or, in other words, mergers and acquisitions.

“It remains to be seen whether it will actually go for a listing. But like all the foreign-owned firms now, they need to be seen to be doing something to address the 30% shareholding issue,” an investment banker says.

Just last month, Hong Kong’s AIA Group chief executive and president Ng Keng Hooi was reported as saying that the group was not in any discussion to reduce its stake in its Malaysian operation. It wholly owns AIA Bhd.

And two months ago, it was reported that the US-listed insurer Chubb Ltd was considering paring its stake in its Malaysian unit, Chubb Insurance Malaysia Bhd, to comply with the Bank Negara ruling.

CIMB Research, in a report last Tuesday titled What if foreign insurance players list in Malaysia?, says it believes certain players may list on Bursa Malaysia to meet the 30% requirement.

“The potential listing of foreign insurers could expand the size of the sector but it could also drain liquidity from existing insurance stocks, in our view,” it says.

There are 23 general insurers and 14 life insurers in Malaysia. In the general insurance segment, the market share of local and foreign players in terms of annualised gross earned premium last year seemed even with local players accounting for 52.1% and foreign players, 47.9%.

However, foreign names dominate the life insurance segment with their market share at 81.7% and that of local insurers at just 18.3%. The three major foreign-owned companies that dominate life insurance are AIA, Great Eastern and Prudential, which have a combined market share of 66.7% in terms of gross earned premiums, CIMB Research says.

“We use the average price-to-book value of 2.3 times for past acquisitions of insurance firms in Malaysia to value the foreign insurers (based on the latest book values). Based on this, we estimate the three big foreign life insurers would have a total market capitalisation of RM19.1 billion, of which RM10.9 billion would be for AIA, RM4.1 billion for Great Eastern Life and RM4.1 billion for Prudential. If the major shareholders sell a 30% stake in each, the total proceeds raised would be RM5.7 billion,” CIMB Research says, based on a scenario analysis.

Life Insurance & Trust

Life insurance is an essential part of financial planning. However, few make provisions to ensure that their beneficiaries can manage the wealth they will inherit.

“Insurance is the most expensive asset for the man in the street. Everyone wants protection. That is why we plan for the future. For many, their life insurance policy is their greatest asset and is the only protection for their next of kin in the event of their death or total and permanent disability. However, this is incomplete without an insurance trust.

An insurance trust works just like a private trust, but the asset assigned to it is an insurance policy. A private trust is a financial structure set up to transfer the legal ownership of an individual’s assets to trustees who will hold, manage and distribute the assets to the individual’s beneficiaries, often upon death. The trust document appoints a trustee to administer the assets held by the trust and provides the terms under which they should be administered.

It is important to note that a life insurance trust is an irrevocable and non-amendable facility. It is set in stone as the primary purpose of the trust is to help beneficiaries who are minors or persons unable to manage proper financial dealings.

The trust deed designates the beneficiaries and details the terms by which they will receive benefits from the trust. “For example, if I suffer a stroke — which can extend from partial to total permanent disability — or fall into a coma, it puts a severe strain on my family members, especially if I am the sole breadwinner. I am not dead. So, on top of their daily financial needs, there is also the question of my medical care,” says Saw.

“If I don’t protect that fund [the lump sum payout from the insurance policy] and I am in a coma, who will be authorised to manage that money? In some cases, if the wife is paralysed or in a coma, the husband may take the money and refuse to take care of the wife. So, via an insurance trust, I make it easy for the people who have to care for me to deal with the living expenses and fund my treatments.”

More security with a trust structure - If the data on spending habits following a windfall are anything to go by, the trust mechanism is probably the only instrument to protect the future of your loved ones.

According to a 2014 survey conducted by the US-based National Endowment for Financial Education, it was found that up to 70% of individuals who come into the sudden possession of money — whether from winning a lottery, an inheritance, an insurance settlement or a pension payout — will deplete the funds in a matter of years. Last December, the Employees Provident Fund was reported as saying that many of its contributors use up their savings within three to five years of tapping their retirement fund.

A trust structure will also prevent situations where third parties try to take advantage of the sudden windfall. For example, I have two young daughters and I am their living parent as my wife has passed away. There may be people who will try to get close to them for the money they will inherit from my life insurance.

“So, when I set up a trust, I can specify that in the event something happens to me, my daughters will only receive money for their living expenses. I can also specify that they will only receive 10% a year from the trust after they graduate.

“So, even if someone tries to cheat them, he won’t be able to swindle all of their inheritance. And my daughters will have at least 10 years to get wiser and learn how to manage their finances. Also, if they have so much money at their disposal, they may not want to work.”

Matters could get even more complicated if there are estranged spouses or minors involved. Without a trust structure in place, the insurance settlement will be given to the living parent of minors in the absence of a legal guardian, even though the relationship may have suffered a setback after years of estrangement.

“If I am a single parent, upon my death, the insurance settlement will be given to my ex if I had not legally appointed a guardian for my children. It doesn’t matter if you are divorced, if he or she has remarried or is estranged from you and your children, your ex will still be the trustee of the money for the children. This is something that most people are not aware of. The estranged parent is still the legal guardian if no legal provision has been made to name one,” says Saw.

“[With a life insurance trust] if I have young children, I can decide how I want it disbursed, the intervals and the purpose. For example, I can assign the trustee to pay for my children’s tuition and educational expenses and after my children graduate — if there is any money left — I can give them RM1,000 a month until they gain employment. As for my spouse, I can allocate RM3,000 monthly to continue supporting the family and running the household.”

The amendments to the Financial Services Act 2013 state that the policyholder cannot be the trustee of his/her own insurance money. In the event that there is no qualified person to step in and take over, and in the absence of an insurance trust, the insurance payout will be managed by public trustee Amanah Raya Bhd. Beneficiaries will be able to claim their share of the insurance settlement when they come of age.

“Say, I have not appointed a trustee. The Act specifies that children who are above 18 can claim the money and be the trustee of it. But at 18, will these young adults, most of whom have never had so much to manage to begin with, be able to handle the sudden emotional and financial responsibility, especially after losing their parents? What if there are younger children involved? Will the older ones continue to care for them? We cannot leave these kinds of situations to chance.

By setting up an insurance trust, individuals not only get to set the terms — ensuring a steady flow of income to finance education needs and living and medical expenses — but also protect their beneficiaries from creditor claims.

He adds that trusts are not subject to the Islamic law of inheritance (faraid), which dictates the distribution of a deceased’s estate in accordance with the Quran and the Hadith. Under the provisions of the law, the religious authorities decide how a Muslim’s estate is to be distributed (in most cases, male heirs receive double the amount received by a female heir). Parents and siblings also have claim to the assets under Islamic law.

“Say you are a Muslim. By placing your life insurance in an insurance trust, you can make sure that what you are leaving behind is somewhat equally disbursed.

That is because assets in a trust come under the purview of the trustee, which takes effect immediately. As the assets are no longer part of anyone’s estate, they are not subject to the faraid.

Put aside some insurance money to pay off liabilities such as credit card debt, personal loans, hire-purchase loans and even loans taken to finance property investment. For example, if you are a property investor, normally you will not take the Mortgage Reducing Term Assurance (MRTA) for all of the properties. So, this actually reduces the compound interest effect on the property owned and the possibility of a lawsuit when you are no longer around or incapable.

“The insurance trust will help settle loans while waiting for the will to kick in (if any) and relay instruction of the executor to look for an appropriate buyer. That buys you a bit of a time and allows you to get a good value for your investment. Otherwise, you will have to do a forced sale, which means giving up your investment for a low price. At least with a certain amount of money, you will have a year to two to find a suitable buyer.

An insurance trust also allows the policyholder to extend protection to his parents, siblings or even a charity of his choice. “But if they don’t do this and follow the insurance nomination, they can only nominate their immediate family members. So, there is a limitation there.

The Life Insurer That Matters

When it comes to personal financial planning, buying life insurance is a common task. Some individuals want to assure their family is financially covered when they die, while others use life insurance as an investment plan for their children’s college expenses. There is no shortage of life insurance companies available to consumers, and many of them promise the lowest rates and biggest returns.

But, buying insurance based on price alone is risky. This is especially true when you want to invest in a long-term life insurance policy. Financially stable life insurance companies are more likely to still be in existence when it is time for your family to claim the death benefit from a policy, 20 or even 50 years from now. 

In addition to the death benefit, permanent life insurance policies, such as whole life, promise a return on your premium in the way of cash value. The cash value increases as you pay additional premiums and interest accumulates. As the policyholder, you can withdraw this cash value or borrow from it to pay for expenses like tuition fees or a new car.

Yet not every insurance company is sufficiently stable to make sure your loved ones won’t be left with less than you’d planned after you go. Here are three risks you need to consider before you select a life insurance company.

Handling unexpected expenses

Life insurance companies invest a large portion of premiums they receive from policyholders in order to increase their profits. These investments are in the form of stocks and bonds in the public market, as well as other assets that can be more difficult to sell quickly. Putting too much in illiquid investments, such as infrastructure, runs the risk that the company will be unable to meet short-term financial requirements. Known as liquidity risk, this can threaten the company’s ability to process, say, a large number of policy surrenders or death benefit claims. If they can’t, they risk litigation costs, a damaged reputation and, ultimately, a decline in clients.

Requests to surrender policies can spike almost overnight, especially if a catastrophic event or change in the stock market occurs. These high-volume requests can leave the insurance companies short of the cash they need to meet the high demand. If a company doesn’t have the financial resources to pay surrenders or requests to borrow money, you risk not having your money available when you need it.

Weathering market changes

The market is an unpredictable force that impacts life insurance companies. It fluctuates based on economic factors, politics, and natural disasters. When something negative occurs that affects the economy, particularly for an extended period of time, your insurer’s stability can be significantly affected.

Depending on the event and widespread the impact is, the insurer’s investments can take a negative hit, making it difficult for them to operate smoothly. When an investment loses money, it can leave the company with fewer resources to pay surrendered policies or claims. In these cases, the insurer may borrow money to make payments, but large amounts of borrowing impacts their financial stability. Choosing an insurance company that has a stable and well-diversified portfolio is important, since otherwise the company can become insolvent.

Light regulation

The strict regulations that are the norm in other financial sectors are generally lacking in the insurance industry. With little regulation, it is difficult to compare one company to another or to identify when a company is starting to fail financially. Little supervision also means there is no guaranteed fund that will pay you the cash value if an insurance company fails.

How to protect yourself

The good news is there is a vast amount of information available about life insurance companies, and it allows you to learn a lot about the company’s fiscal health. Rating services like A.M. Best, Moody’s, Standard and Poor’s (S&P), and Fitch, facilitate comparing the financial stability of multiple companies, and more easily than you could do so yourself. You can easily access ratings by visiting their websites and entering the insurer you are researching in the search field.

What is a rating service?

Rating service companies are independent agencies that review and report on the financial stability of insurance companies. Because of that, sing a third-party agency rather than relying on the company’s financial statements and promises allows you to see an unbiased analysis of corporate performance.

What do they do?

Every rating service has a formula for calculating a company’s financial health. The majority of services review profitability, liquid resources, and investments. After a thorough analysis, each rating company assigns a grade or a financial stability rating (FSR).

These grades are similar to traditional educational marks: A, B, C, & D. A C-rated company is less strong than an A-rated one and, according to the rating service, is not as likely to meet its financial obligations. Like individual credit scores, financial stability ratings can differ across companies. A company with an “A” rating may be in the top tier for one agency, but be ranked in a lower tier by another. Given such variation it’s best to check multiple ratings and review how each arrives at its scores before making a decision.

Do ratings change?

The factors that affect the financial industry change almost by the day. At any given time, these forces can influence the stability of a life insurance company. Consequently, the FSR of a company may change too, from time to time. It’s wise, then, to periodically check in on the financial health of your insurance company after you purchase a policy.

Reviewing financial strength is just the first step to choosing the right life insurance provider. To get a well-rounded view of a company, it’s also important to look at a company’s business history, online reviews, and length of service. Paying for a life insurance policy that eventually pays nothing, is, of course, a worthless investment. Taking some time today for due diligence will help avoid financial stress later, for you and your beneficiaries.