With-profits products aim to provide investors with much needed stability, especially during times of market volatility. And even though this year’s tables do not show significant increases in business, the numbers are still rising. Many companies seem to have left recession fears behind.
Table 1 shows the realistic assets, cost and liabilities of life offices compared with the results from our surveys in 2014 and 2013. Last year, we saw two name changes within the industry as Scottish Equitable came fully under the Aegon umbrella and Co-operative Banking Group joined Royal London (CIS). This year has seen Engage Mutual merge with Family Investments to become OneFamily in April 2015. This year has also seen several firms not participating, such as Clerical Medical, Equitable Life, Aviva Life and Pensions UK and Legal & General. Guardian has also chosen again not to participate in a Money Management survey. For all the companies that did not take part, we collected the data available in the company’s Prudential Regulation Authority (PRA) regulatory returns.
Last year’s tables showed one-third of companies seeing an increase in realistic assets less any subsidies and future profits, and there is a similar trend this year with 13 companies seeing a rise in realistic assets. While some saw a significant increase, for others it was not staggering.
For instance, Aegon UK went from £5.6bn last year to £6.3bn this year while Scottish Friendly only saw an increase to £494.5m from £493m last year. Some companies also saw a fall. For instance, Phoenix Life saw its realistic assets drop from £21.8bn last year to £17.3bn this year.
“We did quite a large reassurance deal in 2014 where we reassured a large part of annuities in payment, as with all the with-profits funds, to an external reinsurer to manage the run-off, explains Andrew Burke of Phoenix Life Limited. “That would have accounted for that chunk of decrease because we obviously transferred some liabilities out to a third-party reinsurer.”
The Table also shows data such as guarantee, option and smoothing costs, but more significantly it shows total realistic excess available. This is calculated by subtracting the risk capital margin (RCM) from its net assets. From this it is also possible to deduce the RCM cover percentage, as seen in the final column of the Table.
A few companies have seen changes this year, according to the Table. For instance, if we look at the RCM cover figures, Legal & General has seen an increase from 7.3 per cent in 2014 to 13.9 per cent this year. Similarly, Scottish Friendly saw an increase from 10.9 per cent last year to 14.2 per cent this year.
Table 1 also shows a rise in the realistic free asset ratio (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. Table A shows the top 10 with-profits life offices in the survey, according to FAR. According to the table, Teachers Assurance has the highest realistic FAR at 63.4 per cent, followed by NFU Mutual at 23.8 per cent.
Diversifying portfolios
Table 2 shows the value of a portfolio holding 40 per cent in equity, 15 per cent in 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 35-year periods. Tables are derived from line 14 of Appendix 9.4A of the 2014 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.
While the previous year saw overall valuations to have fallen, this year’s table shows an increase. This year’s greatest deviation below the average surprisingly comes from Phoenix – which saw the highest valuation last year – with 81 per cent over a five-year period. The highest comes from Legal & General which saw a valuation of 114.8 per cent over a five-year period.
Breaking down capital resources
Table 3 shows the breakdown of capital resources available from each provider. Results show that tier-one capital is seen as the more favourable and safer form of debt, while tier two has not been popular among providers.
There are two new entrants in the Table this year, Foresters Friendly Society and Healthy Investments. A total of 12 companies in the Table saw an increase in their capital while eight saw a decrease in capital resources. The most significant increase in total capital resources after deductions can be seen for Royal London, which went up from £4.7bn last year to £13.7bn this year. As in surveys in previous years, no firm has money in their tier-one waivers.
Tim Harris, finance director at Royal London Group says “during 2014, our capital position improved under all measures, even after deducting members’ profit share. This reflects our overall positive result for the year. Excess regulatory capital increased by 23 per cent. The transfer of the assets and liabilities of RL (CIS) Limited into a separate sub-fund in December 2014 had a significant impact on our regulatory capital position as we were able to recognise an asset of £200m in our regulatory capital that previously could not be recognised.”
Table B illustrates the regulatory valuation of life offices and provides information for companies that do not report on a ‘realistic’ basis. The Table includes small friendly societies with assets under £500m – some of which are not included in Table 1.
Mixing returns and investments
Table 4 shows asset mix and returns of each firm’s with-profits funds for the year ending 31 December 2014.
Although an increase in use of assets such as land and buildings can be seen, there are fewer companies investing in spaces like unlisted equity shares as compared to last year. Approved fixed interest securities remained as popular as last year among providers. The two new entrants – Foresters Friendly Society and Healthy Investments, are both heavyweight on approved fixed interest securities and other fixed interest securities.
Keeping in line with the previous year, respondents have provided both with-profits income as a percentage and as a number. For those providers who did not respond to the survey, we again collected the data from their PRA regulatory returns.
Table 5, the final in this survey, provides a systematic breakdown of expenses and corporate efficiency by illustrating how firms spent their money to acquire new businesses and the current maintenance of the business.
It looks at firms’ management and maintenance expenses and calculates the expense ratio
on the basis of that. In the expense ratio column, you will find a number of firms crossing 100 per cent. This is due to discrepancies between FCA regulatory requirements and the companies’ own.
The Table shows new business income has increased for a number of providers, although it also seems to have fallen for some companies. Aviva has seen an increase from £1.4bn last year to £6.1bn this year and, like last year, this figure applies to the whole of Aviva Life & Pensions UK and not just the with-profits aspect of the business. Aegon, on the other hand, has seen its new business income fall from £3.6bn to £700m.
On the whole, the Tables do not show any massive changes compared with last year’s survey but it is interesting to note that with-profits business is slowly recovering.
This could be accredited to the changes brought in by the RDR although it is still early to measure.
“I think generally things are steady and stable,” says Mr Burke. “In this low interest rate environment, the value of the guarantees given to policy holders is really coming to the fore.
“A lot of the policies have very valuable guaranteed annuity rates and guaranteed option endowments and quite often a policyholder ends up getting a good deal because the option gives them a benefit that they could not possibly acquire in any other markets at the moment.”
