THE chances are you or someone you know owns a whole life or endowment life insurance policy.

TNP PHOTO ILLUSTRATION: SIMON ANG

It is amazing that we have put more than $60billion into these.

It averages a whopping $60,000 per household.

The only thing more amazing is how little we understand about our investment, which is the second largest after our home.

But it's not surprising that the average policyholder knows little about how insurance companies manage funds.

The reason is that relevant numbers are not always available and they are not easy to understand.

I will tell you why with a focus on AIA since it is our largest life insurer with one million policies outstanding.

AIA's US parent company - AIG - is low on money.

The US government bailed it out with a US$152.5billion ($227b) credit line, of which they have used US$128b so far.

To pay it back, the insurer must sell off parts of the company. It just sold AIG-Canada for US$308million.

It is a lot of money but it makes only a small dent in its huge debt.

AIA says it will not sell AIA-Singapore.

My view: It will be tough to pay off the US$128b in debt without offering all its units for sale - to see which fetches the highest price. If it does sell, policyholders need to know the assets will be disposed.

Some concerns

AIA has a type of bond, called 'repos'. It is short for repurchase agreements.

It lists these bonds as debt, which it claims policyholders owe to someone, but it doesn't say who. Why not disclose this?

AIA also told me that like all life insurers, it takes only 10 per cent of the earnings from policyholders' fund.

It said: 'This aligns shareholders' profit objectives to policyholders' interests and prevents excessive distribution of profits to shareholders.'

In my opinion, it appears to secure rather than prevent 'excessive distribution of profits to shareholders'.

Here is my reasoning: Unlike insurance companies, unit trusts rarely charge a performance fee.

When one does, it is for earnings that exceed a hurdle rate, like 8, 10 or 12 per cent.

Life insurers have a hurdle rate of 0 per cent, and take their performance fee from the first dollar. That is unusual. It gives insurers little incentive to shoot for better performance.

A second point is that AIA's policyholders' fund invests only a little - less than 15 per cent - in equities.

It is primarily a bond fund.

Bond funds don't need much analysis so they rarely charge a performance fee.

AIA does and it is the policyholders who must pay for it.

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