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SOMETIMES, a willingness on the part of a company to voluntarily take a loss can be a savvy business decision. Such would appear to be the case with the insurer Great Eastern Life's surprise move, announced last week, to fully redeem some $594 million worth of units of its 'GreatLink Choice' (GLC) series of investment-linked products.
Some 18,000 policyholders stand to benefit; they will get back their original investments, less total payouts to date. As a result of this offer - which has been made without any admission of liability - GE Life estimates that it will lose some $250 million, which will be reflected in its Q3 2009 financial results.
In addition, about 1,000 GE Life agents have been asked to return a total of $12.6 million in commissions they had earned on the sale of GLCs.
The move is in sharp contrast to the (in)action by financial institutions that sold structured products linked to the failed investment bank Lehman brothers, which became near-worthless after Lehman collapsed in September last year. Investors in Lehman-linked products lost out heavily and got little or no compensation.
GE Life's decision has been hailed by consumer groups as well as the Securities Investors Association (Singapore), and rightly so. It is a savvy and farsighted call, for several reasons.
For a start, the potential losses for GE Life are limited, and indeed, may turn out to be far less than $250 million. The securities underlying the GLC products are collateralised debt obligations (CDOs), which, despite gaining a certain notoriety during the financial crisis as many were tied to US real estate values, are far from worthless; some are worth at least 60 cents on the dollar. As at end-June, the GLCs had a total value of $218 million.
In any case, GE Life can hold these securities on its books until maturity - which stretches until 2014 - and redeem them at par. In the interim, particularly if the US real estate market rises and confidence in financial markets improves further, so could the value of the CDOs. Secondly, by offering to redeem GLCs now, GE Life has bought itself an insurance policy against possible future declines in value, which could alienate 18,000 of its customers.
Now, not only is GE Life likely to retain its existing customers of investment-linked products, it could also get many more, including from its rivals. Already, it has a total of 3.8 million policyholders, more of whom might be willing to buy investment-linked products. It also has plans to expand into China, Indonesia, Vietnam and Brunei. Its agents in these countries will have a great story to tell potential policyholders.
Above all, GE Life's decision to do well by its customers reflects an understanding of that most fundamental of values that all companies need to project, but especially those in the financial industry, and that value is trust.
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