INSURANCE companies are required from this year to issue statements on their participating funds for 2007, in the form of an 'annual bonus update'.
From the statements that BT has seen so far, the quality and extent of disclosure vary widely. NTUC Income's statement, for instance, is in its annual report. Great Eastern Life, whose parent is listed, has more publicly available information than others, but its update to policyholders is relatively simple and pared down.
By far, the most comprehensive statement that BT has sighted appears to be from Prudential. AIA and Manulife also detail their respective life funds' asset allocation as well as rates of return achieved over three years.
Prudential, however, has separate disclosures for each subfund, itemising the asset mix and returns in a clear sign that it segregates assets. It also tells policyholders which subfund their policy is invested in.
In each subfund statement, it gives the most recent year's return as well as longer-term five to eight-year returns, and how bonuses are supported. It also gives a comment on the future outlook.
Such commentaries will go a long way towards increasing transparency on how life funds are invested. They also help policyholders understand that life funds, like all other market portfolios, are subject to volatility.
Income's commentary can be found in a couple of pages of its annual report. But policyholders will have to peruse the balance sheet and notes to work out the asset mix. Income said its 2007 return was 10.7 per cent. Its average total return over 10 years was about 7 per cent.
Great Eastern's statement to policyholders details its asset mix and its 2007 return of 10.95 per cent. While it did not give its longer-term rate of return, it told BT that it has achieved an annualised return of 7.9 per cent for Great Eastern and 5.4 per cent for OAC over five years.
AIA issued its first par fund commentary last year for its 2006 performance. Manulife's first commentary was made this year for its 2007 performance.
In disclosing their funds' asset mix, both firms include a breakdown of the fixed income allocations. For example, AIA's $14.8 billion life fund - by market value at end-2007 - was 74 per cent invested in fixed income securities. Of these, about 60 per cent was in investment grade debt and 28.7 per cent in government and statutory board bonds.
Manulife's $2.13 billion life fund was about 67 per cent invested in fixed-income assets at end-2007. Of these, 47 per cent was in government and statutory board bonds and 18 per cent in corporate debt.
The commentaries provide data on the life funds' rates of returns over three years.
Manulife's fund, for instance, achieved rates of return of 10.69 per cent and 15.44 per cent for 2007 and 2006 respectively. 'The overall performance of the Par Fund achieved a higher than expected return, due to the good performance of the equity market in 2007,' it said. It warned, however, that the outlook for 2008 remained 'challenging and difficult'.
AIA's par fund statement is comprehensive, to the extent of disclosing varying rates of return for different product groups, which are distinguished by their equity and real estate allocations.
It said it may look to raise the par fund's equity exposure over time 'as and when suitable opportunities arise'. In 2007, the overall fund was about 10 per cent was in equities.
It also itemised its exposure to collateralised debt obligations (CDOs), worth US$372 million at end-2007 or 2.9 per cent. None of it was in sub-prime securities. '(The par fund) has invested in CDOs for yield enhancement over the past several years as these instruments provided credit spreads that were significantly higher than bonds of the same rating at the time of investment.' About 49 per cent of the CDOs were rated AA- to AAA at the time.
It said it fully expected to receive interest as contracted and a full return of principal on the instruments' maturity. On whether these have subsequently been written down, AIA said it will issue an update in its next par fund review.
Both firms disclosed the top five stocks in their equity holdings. SingTel was the largest holding for both. AIA's equity portfolio included Cosco and Macquarie Meag Prime Reit.
This article was first published in The Business Times on December 06, 2008.
