Resuscitating the pre-need sector
June 9, 2003 | 12:00am
Almost coinciding with our recent article on AGILE’s study on the pre-need industry is news that College Assurance Plan Philippines (CAP) posted P5.8 billion in first quarter losses due a drastic decline in pre-need plan sales.
But before plan holders begin to panic, the company’s negative bottom line for the quarter is just one side of the whole picture. Despite the reported losses, CAP was able–based on its quarter report–to improve its trust fund balance to P17.3 billion pesos from P8.45 billion pesos of a year ago. This is an indication of the company’s increasing capability to meet future obligations, and should be a welcome respite to plan holders.
The company’s actuarial reserve liability (ARL) meanwhile reached P15.4 billion as of end-March from the previous year’s P9.78 billion figure. ARL, in layman’s term, is what the benefits owed to plan holders will cost in future minus the amount owed by the plan holder to complete his installments.
Hence, the difference between the trust fund and the ARL–which in this case has turned positive P2 billion–indicates that CAP has posted a trust fund surplus from a P2.5 billion trust fund deficit last year.
If CAP’s performance is an indication of how the sector has started to behave, then perhaps we’re seeing some positive things up ahead.
In my most recent column on the pre-need industry, we noted that the AGILE study reported that 29 of 47 companies it had analyzed had trust fund deficits based on their 1999 financial statements. The figure declined to 49 percent in 2001, only to increase to 56 percent the year after. Correspondingly, the aggregate trust fund deficit of pre-need firms amounted to P3.66 billion in 1999 and ballooned to P5 billion in 2001.
The US-funded consultancy group noted that deficit could have been mainly due to poor investment returns. Or it could have been affected by the fact that tuition fee rates in almost all schools and universities in the Philippines went up, negatively affecting initial actuarially determined estimates.
In its analysis of financial data, AGILE also discussed that two pre-need firms did not have sufficient real assets to cover their ARL, six were at "dangerously low levels", while 11 out of 52 companies had ARL asset coverage at levels that were totally unacceptable.
On top of this, AGILE reported that a review of the retained earnings of 52 pre-need firms in 2001 showed 21 of them had negative retained earnings, an indication that around two out of every five pre-need companies are not profitable.
I received a letter from a certain Hugh Patton, the commercial law group manager of AGILE, saying that the study cited above "is only a draft and has been worked on further."
I would be interested in receiving the study in its final form. However, I think that since their analysis is made on the basis of acquired financial data, their findings cited in this column would not significantly change in the final draft.
So while the facts and figures cited are in themselves alarming, all is not lost for plan holders of firms that flunked the various tests. Owners could always infuse fresh capital or could invite a white knight to provide additional funding. Again, it all depends on their willingness and ability to do what is needed.
Although the study that I have is in its draft form, AGILE’s identification of a number of areas that need to be improved is worth mentioning if the pre-need industry aims to resolve the various concerns of existing and prospective plan holders.
Allow me to highlight those that I think are most necessary:
Eliminate all instances of conflict of interest. There are a number of reported conflict of interest situations in the pre-need industry. Certain rules and standards must be put in place to reduce or eliminate any suspicion of conflict of interest and thereby prevent abuses on the use of the trust fund.
Some of these are: disallowing any entity affiliated with a pre-need company from acting as a trustee for the pre-need company; and extending the prohibition on trust fund assets being loaned to or invested with affiliated persons to include even spouses and close relative of pre-need company officials, directors and major shareholders.
Boost trust fund position and intensify compliance monitoring. The proposal to raise the required minimum trust fund contributions to 25 percent of the first 20 percent of payments collected and 75 percent of remaining payments should be seriously looked at. Its immediate implementation will address the industry-wide problem of increasing trust fund deficits.
Furthermore, there is a need to intensify monitoring of pre-need firms’ performance, profitability, actuarial reserve and trust fund compliance.
Improve quality of governance. To enhance quality and level of governance, the pre-need industry may have to introduce a fit-and-proper test for managers, directors and shareholders, similar to what is being undertaken in the banking industry.
There is no doubt the pre-need industry has offered the most successful retail financial product in the country, while at the same time serving as a major avenue of savings needed to sustain the country’s economic growth.
Yet, there is also no doubt that some abuses have been made, and as such many reforms have to be done. The drafting of a pre-need code is a good start. But our lawmakers must put it in place soonest before the distraction of political electioneering sets in.
But before plan holders begin to panic, the company’s negative bottom line for the quarter is just one side of the whole picture. Despite the reported losses, CAP was able–based on its quarter report–to improve its trust fund balance to P17.3 billion pesos from P8.45 billion pesos of a year ago. This is an indication of the company’s increasing capability to meet future obligations, and should be a welcome respite to plan holders.
The company’s actuarial reserve liability (ARL) meanwhile reached P15.4 billion as of end-March from the previous year’s P9.78 billion figure. ARL, in layman’s term, is what the benefits owed to plan holders will cost in future minus the amount owed by the plan holder to complete his installments.
Hence, the difference between the trust fund and the ARL–which in this case has turned positive P2 billion–indicates that CAP has posted a trust fund surplus from a P2.5 billion trust fund deficit last year.
If CAP’s performance is an indication of how the sector has started to behave, then perhaps we’re seeing some positive things up ahead.
The US-funded consultancy group noted that deficit could have been mainly due to poor investment returns. Or it could have been affected by the fact that tuition fee rates in almost all schools and universities in the Philippines went up, negatively affecting initial actuarially determined estimates.
In its analysis of financial data, AGILE also discussed that two pre-need firms did not have sufficient real assets to cover their ARL, six were at "dangerously low levels", while 11 out of 52 companies had ARL asset coverage at levels that were totally unacceptable.
On top of this, AGILE reported that a review of the retained earnings of 52 pre-need firms in 2001 showed 21 of them had negative retained earnings, an indication that around two out of every five pre-need companies are not profitable.
I would be interested in receiving the study in its final form. However, I think that since their analysis is made on the basis of acquired financial data, their findings cited in this column would not significantly change in the final draft.
So while the facts and figures cited are in themselves alarming, all is not lost for plan holders of firms that flunked the various tests. Owners could always infuse fresh capital or could invite a white knight to provide additional funding. Again, it all depends on their willingness and ability to do what is needed.
Allow me to highlight those that I think are most necessary:
Eliminate all instances of conflict of interest. There are a number of reported conflict of interest situations in the pre-need industry. Certain rules and standards must be put in place to reduce or eliminate any suspicion of conflict of interest and thereby prevent abuses on the use of the trust fund.
Some of these are: disallowing any entity affiliated with a pre-need company from acting as a trustee for the pre-need company; and extending the prohibition on trust fund assets being loaned to or invested with affiliated persons to include even spouses and close relative of pre-need company officials, directors and major shareholders.
Boost trust fund position and intensify compliance monitoring. The proposal to raise the required minimum trust fund contributions to 25 percent of the first 20 percent of payments collected and 75 percent of remaining payments should be seriously looked at. Its immediate implementation will address the industry-wide problem of increasing trust fund deficits.
Furthermore, there is a need to intensify monitoring of pre-need firms’ performance, profitability, actuarial reserve and trust fund compliance.
Improve quality of governance. To enhance quality and level of governance, the pre-need industry may have to introduce a fit-and-proper test for managers, directors and shareholders, similar to what is being undertaken in the banking industry.
Yet, there is also no doubt that some abuses have been made, and as such many reforms have to be done. The drafting of a pre-need code is a good start. But our lawmakers must put it in place soonest before the distraction of political electioneering sets in.
Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. If you wish to view the previous columns or telecasts of "Isyung Kalakalan at Iba Pa," you may visit my website at http://bizlinks.linkedge.biz <http://bizlinks.linkedge.biz/ .
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