Norwich Union £1K windfalls in doubt

baby_boomer

Financial Mail

"...the plan [to redistribute £1bn of "surplus" assets to policyholders] could be scrapped after the crash in stock market values hit Aviva's capital assets and eroded the pile of surplus capital..."

The average payment was expected to be £1,000 per policyholder.

Capital preservation is the name of today's game and insurance stocks were savaged on Friday in spite of the 5% rise in the FTSE.

dunstonh

I would prefer NU to cancel it (or postpone it) and keep the money during this period.

They are still paying the special bonus though in December (and the next two Decembers) and that is the bigger amount for most policyholders.

sabretoothtigger

I didnt realise insurers were so based on markets for value, maybe income but thats passed onto the returns of policyholders so isnt a liability surely

baby_boomer

If there is little surplus capital in the with profits fund, there would be less reason for anyone to invest there as smoothing would be less likely to succeed and also the FSA would require less equity investment to reduce risk - again making the with profits fund less marketable or viable in the long term.

This in turn can affect the markets' view of future profits and the share price, especially if could be a need for a rights issue.

The insurers went through this when the market hit the bottom in 2003. People may remember that this was when with profits funds offloaded equities - thus adding to the downward, self-perpetuating spiral.

dunstonh

NU have reported though that they are seeing large inflows into their with profits fund from new business. That could offset a lot of the problems.

sabretoothtigger

I remember the regulator changing their capital requirements to be less risky and they had to sell at a low point in the market.
Standard life had to go public to gain extra funds, 2 and a half years later they are back at their float price so are good for their capital requirements?

L&G reported 5% rise in sales

baby_boomer

dunstonh wrote: »

NU have reported though that they are seeing large inflows into their with profits fund from new business.

This appears to be true. I wonder why?

Financial Mail editor

"With-profits is a busted concept. But it has not stopped sales of with-profits products --primarily singlepremiuminvestment bonds - from going through the roof.
In recent months, both Prudential and Norwich Union have reported strong with-profits bond sales. Some of the boom may be explained by an appetite among nervous savers for such conservative investments. But it is only a part explanation.

Most of the increase is down to insurance companies continuing to pay financial advisers ludicrous amounts of commission - up to eight per cent initially - for selling them.
Standard Life has recently allowed advisers to increase the annual commission they earn by holding clients' funds in with-profits bonds from 0.5% to 1%......"

dunstonh

With profits funds are best bought at or near the bottom of the market. NU and Pru are the two strongest when it comes to with profits. Personally, the with profits funds on my books bought in 2003 (after the last drop) have returned in excess of 10% p.a. and havent dropped by anything near the levels unit linked funds have. They are a dated concept but NU and Pru both have viable low cost options and strong funds. They are really the only two left that can do this.

Most of the increase is down to insurance companies continuing to pay financial advisers ludicrous amounts of commission - up to eight per cent initially - for selling them.

Not a penny difference is paid in using a with profits fund or unit linked fund.

Standard Life has recently allowed advisers to increase the annual commission they earn by holding clients' funds in with-profits bonds from 0.5% to 1%......"

Standard Life dont have a with profits bond. They have an investment bond that offers unit linked and with profits on it and the commission is identical whether its unit linked or with profits. The option to take more trail was at the expense of intial commission and it costs no different to the client which option is chosen. Quite a few providers have done this for years. With increasing numbers of advisers moving away from a transactional remuneration model to a servincing one, Std life have just moved with the times....albeit as slowly as they usually do.

Financial mail is rubbish on financial matters. Always has been. They rarely get the facts right or more commonly that get part if it right but then go right off on a tangent with the wrong conclusions.

baby_boomer

Thanks for clearing that up. I can now see that there is a problem with advisors and investment bonds as a whole, not just those offering with profits components.

I think I disagree with your own conclusion about it being best to buy with profits at the bottom of the market. Surely that's exactly the time for buying equities or equity based funds?

Why lumber yourself with all the bills for smoothing hanging over from the people who have bought at the top?

sabretoothtigger

Dunston just said with profits havent fallen as much though, safe investment with a 10% return sounds pretty amazing to me

dunstonh

Thanks for clearing that up. I can now see that there is a problem with advisors and investment bonds as a whole, not just those offering with profits components.

The commission is on the wrapper. The FSA have looked into commission bias but have found no evidence of widespread mis-use. There are always exceptions and we have seen the odd one on here at times. However, you must remember that the same commission is available on unit trusts. With a unit trust you may get 3-4% intial commission and 0.5% trail. That option is available on bonds. However, historically, bonds also used to allow you to give up the 0.5% p.a. and get an increased amount upfront. It doesnt cost the investor any difference. You can now do that on unit trusts and ISAs. So, the potential for bias that used to exist doesnt need to now.

I think I disagree with your own conclusion about it being best to buy with profits at the bottom of the market. Surely that's exactly the time for buying equities or equity based funds?

Correct. However, what is a with profits fund? In the case of NU and Pru it is mostly a balanced or cautious managed fund with a smoothing effect bolted on to it.

The problem with With Profits is that the insurer has a liablity attached to it. In the last drop, a lot of insurers couldnt afford the liability any more and had to kill returns (also suffered with the forced sell off and never recovered from that point). So, it has a damaged reputation. However, you can exempt NU and Pru from that.