With-profits business is not known as the most exciting area of the industry. But it does not have to be. Stability in the product is a quality that many investors look for, as high volatility is not desired.
As with previous years, the results in the survey should be looked at while taking into consideration the number of mergers and acquisitions that have occurred in the past five to 10 years, almost meaning some of the previous figures are not comparable.
Last year’s survey showed that life offices’ financial strength had been on a steady rise, but can the same be said of this year?
Rising steadily
A quick glance at the Tables shows that while there has been no spectacular increase in figures, the industry has indeed been rising still. The recession seems to be long behind some companies, and many even appear to be booming, even in an unpopular sector.
Table 1 shows the realistic assets, costs and liabilities of life offices compared with results from surveys in 2013 and 2012. Last year saw many name changes within the industry, but this year sees just two. Scottish Equitable is now fully under the Aegon umbrella and Co-operative Banking Group is now Royal London (CIS). This year’s survey sees the return of several firms that have not participated in previous years, such as Clerical Medical and Legal and General. Guardian has again chosen not to participate in a Money Management survey, so in this instance we collected what data is available in the company’s Prudential Regulation Authority (PRA) regulatory returns.
Last year’s survey showed assets on the whole were increasing, and this year Table 1 is no different. Just one-third - eight from 24 - of respondents saw an increase in realistic assets less any subsidies and future profits. The increases were generally not staggering. For example, Teachers Assurance saw an increase from £302m to £305m and LV=, meanwhile, saw growth of £3,862 to £4,312m - an 11 per cent rise.
The Table also shows data such as guarantee, option and smoothing costs, but importantly it shows total realistic excess available. The figure is reached by subtracting the risk capital margin (RCM) from is net assets - from this it is also possible to deduce the RCM cover percentage as seen in the final column of the Table.
On the whole this segment of the Table remains largely unchanged, but some companies have seen growth - Aviva Life & Pensions has seen an increase from 1.9 per cent to 4.1 per cent. LV= saw strong growth in this column as well, seeing RCM cover increase from 1.8 per cent to 4.4 per cent.
As with last year, this year’s survey results show some offices seeing an increase in realistic free asset ratio (FAR). Table A shows the top 10 with-profits life offices in the survey according to realistic FAR. This is calculated by deducting a firm’s total liabilities from its total assets, dividing the result by the liabilities and multiplying by 100 to produce a percentage.
Top of the class
Teachers Assurance yet again keeps the top spot in the Table, with a realistic FAR of 54.7 per cent and, as with last year, NFU Mutual is in second place with 33.1 per cent, an increase of 8.5 percentage points.
Table 2 shows the value of a portfolio containing an example 40 per cent equity, 15 per cent property, 22.5 per cent in 15-year risk-free zero coupon bonds and 22.5 per cent in 15-year corporate bonds over five-, 15-, 25- and 25-year periods. All figures in the Table are derived from line 14 of Appendix 9.4A of the 2013 PRA returns. Not all providers have to complete the section, so only those who have done so to the PRA are included within the Table. Traditionally, providers have all tended to fall within 10 percentage points of the average. This year, while overall valuations have decreased, nearly all have reached the average. Scottish Friendly saw the lowest deviation from the average. Its value is just 61.3 per cent of the average over a 35-year term. The highest comes from Phoenix Life Assurance, which saw a valuation of 113.2 per cent over a 15-year period.
Capital resources
Table 3 shows the breakdown of capital resources available from each provider. Tier one capital is seen as the more favourable and safer form of debt, while tier two is of a lower quality. Therefore, all companies in the Table have the majority of their capital - some have all - in tier one.
There are four new entrants in the Table this year from firms of different sizes. Engage Mutual, Prudential - which has the largest amount in tier one capital, £26.2bn - Reliance Mutual and Scottish Widows. The majority of companies featured in the Table have seen an increase in capital, with just four recording a decrease - Aegon, National Provident, Phoenix Life Limited and Scottish Friendly. The changes in capital are not particularly significant, but an increase is always positive. As in surveys in previous years, no firm has money in their tier one waivers.
Table B illustrates the regulatory valuation of life offices and provides information for companies that do not report on a ‘realistic’ basis. The Table often includes small friendly societies with assets under £500m - some of which are not included in Table 1.
For those that diversify
Table 4 moves on to look at the investment mix and return of with-profits businesses. It is perhaps the most interesting of Tables for clients who would like a more diversified portfolio. It shows the mix and return of the firms’ with-profits funds for the year ending 31 December 2013. The Table shows the asset breakdown, although as with other years, there is little pattern. There are some spaces that are, however, less used, such as unitised equity shares, and others such as land and buildings which have seen an increase in allocation, as well as approved fixed interest securities which has always been a popular asset allocation choice.
One change this year is that more firms have declared their with-profits income as both a percentage and a number - many were reluctant in previous surveys. There has not been any significant change in allocation percentages, and fixed interest ratings have also remained roughly the same - with the majority in the A or AA categories. Additionally, as with last year’s survey, no firm reported negative income in its with-profits funds.
Table 5 gives a breakdown of expenses and corporate efficiency by illustrating how firms spent their money to acquire new businesses and the current maintenance of the business. Due to PRA reporting requirements, it is regularly the case that firms appear to have expense rations of more than 100 per cent, so this is not something to be alarmed by.
Noticeable increases
New business income has been on a steady rise over the past few surveys. However, as with last year, Aviva has seen one of the most noticeable increases. From 2012 to 2013, new business levels have increased by £315m, although it should be noted this figure applies to the whole of Aviva Life & Pensions UK and not just the with-profits aspect of the business.
Standard Life has also seen tremendous growth over the past three years. From £1,3bn in 2012 to £1,87bn this year, its new business income has risen, and the firm has also managed to lower its new business expenses, which was one of the highest in last year’s survey. The increase has also been boosted by Standard Life Investment Funds being transferred to Standard Life Assurance on 31 December 2011 - another reason for the groups expanding business size and income.
The Tables show with-profits business is increasing overall, although at a slightly faster rate than the past few Money Management surveys. Some figures remain almost unmoved, but this lack of volatility is much sought after by those looking to enter the market - or more likely, those who have been holding policies for many years already.
The survey perhaps suggests that clients have been more interested in life and protection products than in previous years - potentially a direct consequence of the changes brought in by the RDR. Although it may take a few more years to see if this really is the case.
