US financial woes become personal to Filipinos

LALA RIMANDO – The fate of Wall Street luminaries became a personal concern to Filipino investors this week. News about bankrupt Lehman Brothers triggered locales to ask how safe is their money invested in the insurance policies and in local banks and if their pension is still intact.

Predictably, the government economic managers, the central bank governor, and the executives of insurance companies and a government-run pension fund tried to calm nerves exacerbated by spreading speculations. One after another, they made public assurances that all’s well.

Such efforts were not as pronounced when earlier hints of the after-effects of the US subprime mess hit headlines all over the world. Filipinos monitored but generally shrugged off Bear Sterns’ collapse in March and the US government’s bailout of mortgage financing companies Fannie Mae and Freddie Mac last week.

But it was the absence of a lifeline from the US Federal Reserve Bank forcing investment giant Lehman Brothers to declare bankruptcy that started to make some local investors worried.

Even with the succeeding news on other Wall Street giants, Merill Lynch, which clinched a takeover deal with Bank of America, and insurance firm American International Group (AIG), whose wobbles were cushioned with a federal loan, the jitters lingered.

Investors have been through several blips in the past. The 1997 regional financial crisis and the pre-need fiasco come to mind. What makes the current situation different?

So far, a common theme among the regulators and industry players’ assurances is that those entrusted with public money already have enough cushion funds—or capital—from which they could depend on in case of worse case scenarios, such as bank runs or massive withdrawals by jittery moneyed individuals.

The central bank governor has trumpeted time and again that banks remain healthy and strong as they reach the tailend of the sector’s reform agenda following the 1997 crisis.

On the other hand, insurance companies are still halfway through their reform measures that belatedly started in 2006. While much of the attention has been focused on Philamlife because it is the local subsidiary of beleaguered AIG, its sound financial standing may not necessarily represent a stable sector. Philamlife is the biggest insurance firm whose capitalization already accounts for one-third of its peers.

In other words, the concerns brought about by the US financial meltdown simply highlights how sturdy our financial sectors are when exposed to a fire test just like this.

Healthy banks

The local financial firms face potential risks if they invested in these troubled Wall Street firms, whether directly by buying Lehman’s or AIG’s shares, or their other permutations, which in industry parlance is referred to as financial derivatives.

Bangko Sentral ng Pilipinas (BSP) governor Amando Tetangco, Jr. said that a survey among the Philippine banks showed that derivative investments in Lehman Brothers aggregate to about P15 billion, roughly 0.3 percent of the banking sectors’ total assets.

Three of the top universal banks—Metrobank, Banco de Oro, and Rizal Commercial Banking Corporation—have come forward to disclose that they have exposures in Lehman but downplayed the amounts as not material enough to cause a major dent on their finances.

Metrobank, the country’s largest lender, earlier reported that it has $20.4 million bond investments in Lehman Brothers Holdings, and has set aside $14 million to cover it.

Banco de Oro also earlier announced that it has provided P3.8 billion, the peso equivalent of its $80.7 million exposure in Lehman, as buffer funds. They were joined later on by RCBC, which said it had prepared P980 million to cover potential losses in Lehman.

Tetangco said these disclosures should be considered positively. “It shows these banks have the resources to absorb a drop in the price of their investments in Lehman Brothers.”

Tetangco stressed that Philippine banks could survive this kind of disruption because they are adequately capitalized. Banks were required to set aside funds appropriate for risks being taken in line with the implementation of the Basel 2 framework, an international benchmarking system. Basel 2 sets certain thresholds for available capital which determines how much the banks could lend.

The capital adequacy ratio, which refers to banks’ capital in relation to the risks that they take, stood at 15 percent as of end-2007, well above the BSP’s required minimum of 10 percent.

This ratio has improved after 2003, when a tool called special purpose vehicle (SPV) encouraged banks to sell off the properties they inherited when owners could not pay off their loans and mortgages–in exchange for financial incentives. Selling these bad assets reduced their risks.

Beefing up the capital base and weighing the risks that banks take are some of the reform measures that the BSP have instituted. The last of the reforms is the creation of a credit reporting bureau.

The Philippines is the last in the ASEAN region without a credit reporting facility. Thailand and Malaysia established theirs soon after the 1997 Asian financial crisis.

Insurance firms: Halfway with reforms

The insurance sector, too, has some catching up to do with its neighbors.

Previous capital levels of insurance firms operating in the country were among the lowest in Asia, resulting in the proliferation of small, unstable insurers, some of them were late in their claims payouts, or were found to actually be non-existent. There had been no specific capitalization requirements for insurers and reinsurers before, since insurance firms needed only to meet the requirements generally applying under the Corporations Code.

Small firms needed only to meet the regulatory minimum of P50 million. Escobillo initially wanted to double it to P100 million, but consultations resulted in a phased implementation.

Thus, in 2006 former insurance commissioner Evangeline Escobillo introduced Department Order 27-06, which set a series of deadlines for life, non-life, and reinsurance companies to comply with a new paid-up capital requirement, or funds infused by the shareholders.

The minimum requirement for paid-up capital, was set at half the networth, with different dates and levels depending on the degree of foreign participation in the company. For example, a Filipino company with a minimum statutory networth of P500M would have to have a minimum capitalization of P250M and would have to achieve this level by Dec 31, 2011.

A company with the same networth and 40 percent or less foreign equity would have the same paid up capital by Dec 31, 2009.

Networth is calculated as the difference between assets and liabilities, and includes accumulated profits from previous years, plus the capital funds.

Escobillo eventually resigned in August 2007 as the industry, especially the small players, continued to lobby for a more accommodative policy.

Less stringent regulator

Unlike the BSP, which had pushed for the stringent capital rules despite complaints from the banks before, the Insurance Commission is more prone to caving in to the sector’s clamor.

Besides the already delayed implementation of the reform agenda, a few months ago the industry players were calling for changes in the implementation deadlines, citing lower yields from their investments because of soaring inflation.

In various media interviews, Insurance Commission officials said they were considering to extend the deadline to three years after, or by 2015.

As of 2006, there are 34 life insurance firms in the Philippines, of which 26 are fully Filipino-owned, five 100 percent foreign-owned, and the rest, with at least 40 percent foreign equity.

Of the 90 licensed non-life firms, at least 16 have yet to meet the minimum P50 million required paid-up capital.

Pre-need fiasco and OFW shift

When the concerns over the US financial woes flowed among policy holders and investors of insurance firms, one of the financial products that were looked into were the variable policies. Moneyed individuals were concerned that their variable policies could have been invested in Lehman or AIG or other fledging Wall Street firms.

Philamlife and Sunlife executives eventually clarified that these products were not invested in these US firms because they only allowed by the Insurance Commission to invest in local sovereign or corporate bonds, and equities.

Variables are long term savings instrument in which one gets higher yields, than say a bank deposit or placement that has 1 to 3 or 5 percent returns per year. What more, this higher yield is on top of the financial protection if anything happens to the policy holder.

The recent growth of variable products—also referred to as investment-linked products—has been considered by industry insiders as “phenomenal.”

Unlike life insurance, which are generally not attractive because of the connotation that it brings benefits only after one dies, variable policies both provide life protection and help to facilitate wealth accumulation.

Variables helped the insurance firms cope with two things that hit their sector: the pre-need fiasco and the overseas Filipino workers’ (OFW) shift to real estate investments.

The financial troubles of pre-need market leader College Assurance Plan, and another player, Pacific Plans Inc., almost brought the insurance firms to their knees.

The two firms’ failed to fulfill their financial obligations to millions of plan holders who were promised that their educational expenses will be paid at actual levels at the time the scholar named in the plan is in school.

The insurance sector suffered from negative perception since most of the players sold pre-need products, even if these are technically not insurance products.

Moreover, sales to OFWs used to grow between 30 to 40 percent in 2003 and 2004. But because the pre-need fiasco had an impact on them, succeeding growth were reduced to single digits.

Around that time, OFWs shifted to real estate investments.

Guaranteed 8% for GSIS

Another entity that made Filipinos concerned was the Government Service Insurance System, a government-run pension fund for state workers.

It has a P2 billion fund called “Kinabukasan Fund” currently being managed by Philamlife. The association to AIG concerned a few. Philamlife executives’ explained that AIG would not be able to dip into these funds, since each managed fund is a separate legal entity with separate sources of capitalization.

Unlike the banks and the insurance firms mentioned above, GSIS, which has a $1 billion fund called Global Investment Fund (GIF), seems to be in a better position.

Despite criticisms on the brash personality and political leanings of GSIS president and general manager Winston Garcia, how he and his team managed to get a financial package with fund managers is to be lauded.

He inked a deal with ING Investment Management and Credit Agricole Asset Management, two fund managers of its GIF’s $600 million (out of the $1 billion) in February, which guarantees GSIS a minimum return of 8 percent per annum during the three year term they are managing it.

This means that even if the interest rates fluctuates and are at levels not favorable, just like now, GSIS is assured that it will get at least 8 percent compounded by 2011.

GSIS has been allowed to invest abroad through its Global Investment Fund as part of its diversification strategy. Investing in foreign assets also allowed GSIS to increase its average yield so it could extend its actuarial life beyond its current 47 years. The local capital market is too small and illiquid for them.

Sergio M. Andal, Jr., head of GSIS’ investments group, said their GIF is not invested in any of the fledging Wall Street firms.

LALA RIMANDO, abs-cbnNEWS.com/Newsbreak

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