Sunday, August 16, 2009

Ripples from Great Eastern's move

Sources: Business Times 3 Aug 2009

GreatLink Choice customers win, but who loses and will other financial institutions feel the heat?


SOME 18,000 Great Eastern policyholders have been sleeping easier following the insurer's offer to redeem their GreatLink Choice (GLC) product.

With that decision, Great Eastern, a unit of OCBC Bank, has cleverly sidestepped a potential controversy with this group of customers who invested a total of $594 million in GLC products sold since 2005.

To recap: On Friday, Great Eastern said it is making a one-time redemption offer to its GLC policyholders. During the offer period, GLC policyholders can, if they so choose, have their GLC units cancelled under this redemption offer and receive a sum equal to the original purchase price of $1.00 per unit, less the total annual payouts received to-date.

GLC is a series of investment-linked insurance products with the underlying investments in CDO (collateralised debt obligations) instruments, with insurance coverage thrown in.

Since the financial crunch began in 2007, CDO-linked products have lost much of their value and GLC policyholders became increasingly nervous, despite receiving their projected annual returns.

Although returns and principal repayment on maturity are not guaranteed, policyholders have been enjoying annual returns of between 3.5 and 4.9 per cent, princely sums given the zero interest paid on some banks' fixed deposits

But reading the mood of investors correctly, Great Eastern has decided to redeem the GLC units because the alternative would be increasing aggravation from anxious customers - 18,000 is a lot of people to upset.

Some observers may wonder if the recent censure and one-year sanction on selling structured products slapped on affiliate OCBC Securities for mis-selling Lehman-linked products was a factor that led to the redemption offer.

Insurers after all are there to give peace of mind to its policyholders, not cause them sleepless nights.

The redemption offer maintains the trust and confidence of customers for the 101-year-old company, the oldest insurance company in Singapore and Malaysia.

The ripple effect of the redemption cannot be overestimated.

The company, with $45 billion in assets and 3.8 million policyholders, is trying to expand in China, Indonesia, Vietnam and Brunei. Regulators there will be watching closely.

Said Joseph Siah, president of the Great Eastern Life Planners Association: 'If the GLC defaulted, all the work, talking of trust, will be affected.'

Great Eastern agents, 2,500 of them, are now said to be the envy of their counterparts in rival companies as the redemption will result in new sales.

So who loses from this action? Great Eastern has said the financial impact of the offer will be reflected in the Q3-09 financial results - and the loss is conservatively estimated to be in the region of $250 million.

Based on this estimate, the negative impact on OCBC Group's third quarter 2009 financial results is expected to be around $218 million.

Will the non-guaranteed returns of other policyholders also be reduced?

What about other financial institutions? Will they now feel the heat to make similar offers for underperforming investment products sold to customers?

Commenting on Great Eastern's voluntary redemption decision, the Monetary Authority of Singapore said it 'welcomes efforts by financial institutions to take appropriate steps to maintain the trust and confidence of their customers based on their own commercial considerations.'

If it hasn't struck them by now, shareholders of financial institutions should realise that the effects of the financial crisis will reverberate for some time.

a blog on: Financial Planning Advice - Christopher Pua

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