Never heard of Traded Endowment Policies anymore.
Around 2007, Traded Endowment Policies were aggressively marketed to many investors. Today, we seldom hear of anyone marketing such products anymore. No prize for guessing why.
Traded Endowment Policies are just regular premium insurance endowment policies. These endowments have cash values and maturity values. All Traded Endowment Policies are "participating" meaning that there will be future bonuses - only the question is what will to be bonus amount.
There was a market for the Traded Endowment Policies because original owners of such policies would like to sell it away. Instead of surrendering these policies to the insurer, these owners sells it in the open market because the selling prices were better. The buyer hopes that the initial investment plus the regular commitment for its premium will yield good returns.
In Singapore, the most common Traded Endowment Policies were from United Kingdom. It was aggressively marketed as something "safe." Most firms did not permit financial advisers to market the Traded Endowment Policies due to the conflict of interest – the seller of the policy is effectively “surrendering” his own life policy. Hence, the Traded Endowment Policies were marketed by non-financial advisory companies. In fact, I remember a particular person aggressively soliciting individuals in an internet forum to buy the Traded Endowment Policies from him. One of the selling points which he often mentioned was that if the insurer goes belly up, 90% of the cash value is protected by the British government. Personally, I have always disliked this form of marketing because of lack of full disclosure.
Here were some risks that were not properly disclosed:
- These Traded Endowment Policies are denominated in British pound (a foreign currency). The foreign currency risk of the British pound is not insignificant. The product was marketed as something "safe” which is not correct.
- The market values of these Traded Endowment Policies were actually correlated with the equity and bond markets. What do I mean? The correlation of these Traded Endowment Policies with the market's performance is due to the fact that the underlying investments were merely a balanced fund investing in fixed income and equities.
So how have these Traded Endowment Policies performed since 2007? There is one particular fund which invests in UK’s Traded Endowment Policies. Because it is a fund, there is a historical published values. Below is the chart showing the performance of the fund.
The blue line shows the performance of the fund in Singapore dollar. It appears it never even recovered from the financial crisis! But if you look at the red line – which is the value of the pound measured in Singapore dollar, you will find that the massive loss of the fund is due to foreign currency lost. Is the Traded Endowment Policies a "safe" product? Of course not. This being said, there is nothing wrong with this product per se. But the manner it was marketed as something 'safe' was wrong. The lesson is this: it is important to be careful whom you buy products from.
Click to enlarge
Like this article? Subscribe to my newsletter below for more.
There’s still a company that offers to buy back endowment plans. In theory, you will be able to get back more than surrendering it. http://www.repsholdings.com.sg/
Hi Martin, it’s definitely. If not the PH can just surrender to the issuing insurer. We pay higher, faster.
Cash on Delivery (signing paperwork) option available.
Assignment and paying higher is straight forward. We have PHs coming to us with monthly premium of 1K to 20K who had terminated their policy as they have not acquire cash value before the completion of 3 yrs.
The point is not the pros and cons of selling but is it in the interest to the PHs to be made known of the availability of such an option? We could have paid 40-60% of the premium paid to date.
Micky Neo
REPs Holdings
Problem with such market is illiquidity and nontransparent pricing. Everything is a black box and not subjected to constant scrutiny by millions of analysts, professional investors, retail investors, finance researchers such as stocks, bonds, or mature property locations.
Just to share with all. I bought a TEP (UK) 7 years ago, maturity early this month. Came out with some gains. Most gains were eaten up by GBP drops as shown in the A, B graphs above. On hindsight, its better to stick with Singapore blue chips. Be careful of exchange risks.
Hi Mark, did you buy the TEP from a local firm which buys back insurance plans?
Mark, here is the thing. You did make some gain but the gain was wiped out because of the currency exchange right?
To me the issue if you were to invest in a TEP in a foreign currency there is a risk, but if you were not investing in a foreign currency then it would stand the logic that it is a good instrument to make money right?
Just trying to put this into perspective.
I’ve checked up on the few Singapore firms that buy back insurance plans. Apparently these plans are not resold to another individual who would like to consider life/endowment plan.
So what do these firms do with these insurance plans? What is the economic benefits for them to buy back? Is this business sustainable?
There are currently 6 companies that deal with the secondary insurance market.
I will try to list them all down.
1. Reps Holdings – Seems to be the leader in this industry. Founder: Mickey Neo.
2. Conserve Capital – Not much is known, except that is lead by Trevor Xie, who seems to be running a charity also.
3. Kashfrov – Annie Heng. A startup attempting to build an exchange whereby investors and sellers cut out the middle man.
4. Purvis Capital – Former Philips Securities Director.
5. First Grand Capital – New player to the scene. Company is 10 years old but seems to be just getting into this business only.
6. Traded Endowment – Seems older than Reps holdings.
My take is the secondary market is a virgin market.
Purvis Capital, being led by a former director of Philips Securities makes me think carefully about this market. He knows there is money to be made in this market, and that is why he went into this market. Buys only for internal consumption, so your guess is as good as mine if it can sustain.
Reps Holdings has about 1 million in inventory at any one time. In a month, Reps sells about 600k or thereabouts and buys in about 400k. I might be off on the figures, but I am looking from a data science point of view.
Kashfrov is one of the latest companies to enter into this foray. Their attempting to create an exchange for endownment and life insurance makes them the most interesting among the lot. My gut feel is that they will do well in the future. They seemed to also have cracked the code for CPF Arbitrage, especially with their hotshot PhD COO.
Conserve Capital. Not much is known except they operate out of a serviced office and that their CEO is a founder of a charity.
First Grand Capital. New player whose company is previously listed as property investment.
Traded Endowment. One of the longest running companies but little is heard from them.
Just my two cents worth.