With-profit announcement 2005

Article date: 18 January 2005

  • Bonuses totalling £1.0 billion declared for 3 millionwith-profit policies during 2004.
  • Continued commitment to policyholders through the mortgageendowment promise with current reserving of around £1 billion
  • Positive investment return on the CGNU with-profit fund of11.5% before tax
  • Some regular bonus rates reduced in view of the level ofguarantees already built up on policies
  • Policy payouts continue to compare favourably to otherinvestments and have produced good returns:
    • A 25 year £50 a month CGNU mortgage endowment will pay £52,576,which is £23,797 over the target amount of £28,779 – areturn of 8.9% p.a. tax free*
    • A 20 year £200 a month CGNU pension will pay £113,392 – areturn of 7.9% p.a.*
  • Returns on policies that have been held for a short termcontinue to be significantly impacted by the poor marketconditions of 2000–2002.

* Returns quoted assume the policies mature on 1 January 2005.Endowment example is for a 29 year old male at the outset of thepolicy.

Press office contacts:
Norwich Union Lifepress office: 01904 452791 / 452617 / 452828

Out of hours:
James Evans: 07800 699525
Louise Soulsby: 07800 699526
Rob Pell: 07800 699563


1) The economic background affecting with-profitpolicies
2) The investment return on the with-profitfunds
3) Our mortgage endowment promise forpolicyholders
4) How returns on with-profit policies compare toother types of investments
5) Regular bonus rates for policyholders for2005
6) Payout values for policyholders for 2005
7) Investments in the with-profit funds
8) Changes to cash-in values for unitised policies(known as MVR rates)
9) Payout examples for policies in 2005

Mike Urmston, chief actuary of Norwich Union Life, said:

“Our with-profit funds have seen a second year of positiveinvestment returns which has resulted in an increase in theunderlying value of customers’ policies. Policies maturingcontinue to pay competitive returns and compare well to other formsof investments.

“We are also taking this opportunity to restate ourcommitment to support customers through our mortgage endowmentpromise where we have set aside £1 billion to support this promise.We believe that this valuable promise is sustainable undertoday’s market conditions given the strength of ourwith-profit funds.”

1) The economic background affectingwith-profit policies

During 2004 the world economic climate stabilised following theimprovements seen in 2003. This has resulted in a second year ofpositive investment returns in our with-profit fund. However, thelast two years of positive returns have not compensated for thenegative returns of the previous three years and the FTSE 100 indexended 2004 at 4,814, around 2,100 points below its peak level of6,930 at the end of 1999.

Inflation remains at a low level of around 1.5% with the outlookfor this to edge up to around 1.9% for 2005. Base rates haveincreased during 2004 to 4.75% – with the expectation thatthese will end 2005 at the same level. The long-term outlook forinvestment returns is lower than the 1980s and 90s, however webelieve that a 7% a year (before tax and charges) return isachievable on the main CGNU/CULAC with-profit funds.

2) The investment return on thewith-profit funds

We have seen another year of positive returns on the CGNU andCULAC with-profit funds in 2004 of 11.5% before tax. This reflectsthe improving stock market conditions and a particularly good yearfor property investments. The comparable returns in 2003 and 2002were 12.1% and minus 7.7% respectively before tax. The return onthe NULAP with-profit fund was 10.2% before tax, while the returnon the Provident Mutual (PM) fund was 7.6% before tax. The PMfigure reflects the higher proportion of assets invested in fixedinterest investments.

The investment return has been passed on to our policyholdersthrough an increase in the underlying value of their policies(known as the asset share).

3) Our mortgage endowment promisefor policyholders

Norwich Union launched its mortgage endowment promise in 2000 toassist policyholders who, at the time of the announcement, were ina position of shortfall on their mortgage endowment. This promisewas designed to help people make up this shortfall on a mortgageendowment policy when it matured and is needed to pay off themortgage. The mortgage promise was conditional on the companyearning a sufficient investment return on its free reserves.

While Norwich Union has not earned the level of investmentreturn required during a number of the years in which the promisehas been running, it is committed to supporting the promise as longas this is not to the detriment of other policyholders. The companyhas already reserved around £1 billion to pay for endowmentshortfall assistance – underlining the strength of ourwith-profit funds.

Norwich Union believes that its mortgage endowment promiseremains viable under the current and improving market conditionsand as a result is not under review. If market conditions were tochange significantly in the future then the promise may bereviewed. Norwich Union has committed to its customers that if itwas to review the promise, that it will give policyholders at leastthree years’ notice of any proposed changes.

4) How returns on with-profitpolicies compare to other types of investments

Investment bond – 10 years

Investment productOriginal investmentValue of investment after 10 yearsReturn before deducting inflation of2.7%
CGNU with-profit bond£10,000£17,4935.8%
NULAP with-profit bond£10,000£17,4405.7%
CULAC with-profit bond£10,000£17,4715.7%
NULAP balanced managed unit-linked fund£10,000£16,7195.3%
NULAP Equity unit-linked fund£10,000£18,0636.1%
Bank/building society savings account£10,000£14,1913.6%

Examples based on a £10,000 single investment made on 1January 1995.

The bank/ building society savings account illustration iscompiled from an aggregate of 19 bank and building societyrates, chosen to represent the industry as a whole, for adeposit of £2,500 to £25,000.

Source: Micropal S&P.

When comparing different types of investment and savingsproducts you should bear in mind that access, tax treatment andrisk to your money may differ.

Pension – 20 years

Investment productAmount of investmentValue of investment after 20 yearsReturn before deducting inflation of3.15%
CGNU (incl.GA) with-profit pension£200 per month£113,3927.9%
NULAP with-profit pension£200 per month£112,9797.9%
CULAC with-profit pension£200 per month£120,5168.4%
Provident Mutual with-profit pension£200 per month£95,2876.4%
NULAP UK balanced managed unit-linked fund£200 per month£96,2716.5%
NULAP UK Equity unit-linkedfund£200 per month£102,0297.1%
Examples based on a £200 per monthinvestment started on 1 January 1985.

5) Regular bonus rates forpolicyholders for 2005

Unitised policies

Money is invested in a unitised with-profit fund, and units areallocated to policyholders. In a unit-linked fund, units go up anddown with market movements, in a unitised with-profit fund, theyincrease steadily at a rate, determined annually, (the annual bonusrate). At the time of a claim, a final bonus may be added toreflect additional smoothed returns over the annual bonus rate.

  • Explicit charged unitised policies, no change from thefollowing: Life/investment policies 4.25%, pensions 4.00%,stakeholder pensions 3.50%

    Explicit charged policies are policies where the bonus rate isexpressed as a gross rate before the deduction of the 1% annualfund management charge.
  • Implicit charged life/investment policies: All NULAP and CGNUfrom October 1998 reduced from 2.5% to 2%. All CULAC and CGNUbefore October 1998, no change from 2.50%
  • Implicit charged pensions: NULAP/CULAC reduced from 4% to 3%.CGNU remains at 3%

Implicit charged products means that the annual managementcharge for the policy is deducted from the investment return beforethe annual bonus rate is set.

The different levels of bonus rates for the implicit andexplicit (net of charges) policies reflects the level of guaranteesbuilt up in the different ranges of policies and the differinginvestment periods during which money has been invested.

Conventional policies

Policies have an initial amount that is guaranteed to be payableto the policyholder on maturity. Each year this guaranteed amountcan be increased by an amount called an annual bonus (formerlyknown as a reversionary bonus). At maturity, an additional amount,called a final bonus (formerly known as a terminal bonus) may alsobe added, such that the amount paid out reflects what thepolicyholder’s investment is actually worth, subject tosmoothing.

  • Life, investment and pension policies for NULAP, CGNU andCULAC policies, no change to regular bonus rates. Regular bonusrates on these policies range from 0% to 1%. Regular bonus rateson Provident Mutual policies are all now 0%. The bonus ratesreflect the level of valuable guarantees in the funds.

The above bonus rates on unitised and conventional policies areapplicable until further notice.

6) Payout values forpolicyholders for 2005

Unitised policies

  • Policy values have all increased during 2004. Final bonusrates have also increased (except for money invested between 1998and 2001 where an MVR is applying).

Conventional policies

Life, investment and pension policies – for all NorwichUnion companies:

Regular premium life and pension policies:

  • Payouts on policies with a term of 10 and 15 years will changeby +2% to –8%.
  • Payouts on policies with a term of 20 and 25 years will belower by 6% to 10%

Single premium pension policies:

  • Payouts on policies with a term of 10 and 15 years will changeby +5% to –9%.
  • Payouts on policies with a term of 20 and 25 years will belower by 5% to 10%

Payouts on polices reflect the investment earnings during aperiod a policy is actually held and invested. As policies are heldover different investment periods then payouts differ. A policystarted in 1975 which matured in 2000 will reflect investmentearnings during the specific 25 year period. A policy taken out in1980 and maturing in 2005 will reflect investment earnings duringthis specific 25 year period. These are different investmentperiods and hence the difference in returns on a year on yearbasis. This is why payouts on a 25 year policy, for example, willcontinue to reduce even in years with positive investmentreturns.

7) Investments in the with-profitfunds

Investments of the CGNU with-profit fund at the end of2004

Investment type% at the end of 2004% at the end of 2003
UK shares42.941.4
International shares8.09.3
UK fixed Interest/bonds24.026.1
International bonds3.74.4

The equity backing ratio (EBR) (the proportion of money investedin shares and property) increased from 65.2% at the start of 2004to 66.9% at the end of the year.

The equity backing ratio of the CULAC fund is 66.9%, the NULAPfund is 48.2% and Provident Mutual fund is 10.1%.

The higher the EBR, the better the long-term performancepotential of the fund.

8) Changes to cash-in values forunitised policies (known as MVR rates)

Market value reductions (MVRs) apply when the quoted value ofunits is above the policyholder's 'fair share' of the fund- knownas the asset share. Asset shares have increased during the year asa result of positive investment earnings. To reflect this MVRs havebeen reduced. The level of the reduction is not the same in eachfund, due to the different investment earnings achieved and thelevel of smoothing applied. In particular the level of smoothing inthe CGNU/CULAC fund has been reduced to bring payouts (after anyapplication of an MVR) closer in line with asset shares.

Average MVR rates* for money invested in a specific year


The higher MVR rates reflect money invested when the stockmarket was around its peak.

* life and pension products across CGNU, NULAP and CULACwith-profit funds.

9) Payout examples for policiesin 2005

Unitised with-profit policies

Investment bond – 10 years

CompanyCash-in value
Cash-in value
Including a final bonus ofIncrease in value during 2004
CGNU (incl GA)£16,251£17,493£833£1,242
The example above is based on a £10,000 singlecontribution on 1 January 1995, made by a male aged under 75 atthe outset and shows the change in policy value over 2004.

Conventional with-profit policies

Pension – 20 years

CompanyMaturity Value
Including a final bonus ofReturn before deducting inflation of3.15%
CGNU (incl GA)£113,392£1,3537.9%
Provident Mutual£95,287£7,8666.4%

The above example is based on a male, investing £200 a monthfor 20 years, from 1 January 1985, with the policy maturing atage 65, with a return of fund death benefit.

A CGNU £200 per month, 20 year with-profit pension policymaturing 01/01/04 produced a payout of £122,635 giving areduction of 7.5% at 01/01/05, this is due to the differentinvestment returns achieved during the individual term of thepolicy.

Mortgage endowment policy – 25 years

CompanyOriginal target value of policyMaturing policy value 01/01/05Including a final bonus ofExcess amount over targetReturn before deducting inflation of3.55%
CGNU (incl GA)£28,779£52,576£16,065£23,7978.9%
Provident Mutual£30,688£40,452£7,295£9,7647.2%

The above example is based on a male aged 29 investing £50 amonth for 25 years with the policy starting on 1 January1980.

A CGNU 25 year £50 per month with-profit mortgage endowmentpolicy maturing 01/01/04 delivered a payout of £59,444, givinga reduction of 11.5% at 01/01/05. 1.6% of the reduction is dueto an increase in the cost of the extra life cover provided onmortgage endowments during these years. The remainder is as fora normal endowment and is due to the different investmentreturns achieved during the individual term of the policy.

Mortgage endowment policy – 15 years

CompanyOriginal target value of policyMaturing policy valueIncluding a final bonus ofShortfall to targetReturn before deducting inflation of2.7%
CGNU (incl GA)£14,909£13,033£0£1,8764.8%
Provident Mutual£14,497£12,113£238£2,3843.8%

The above example is based on a male aged 29 investing £50 amonth for 15 years, with the policy starting on 1 January1990.

A CGNU 15 year £50 per month with-profit mortgage endowmentpolicy maturing 01/01/04 delivered a payout of £13,715, givinga reduction of 5% at 01/01/05. This is due to the differentinvestment returns achieved during the individual term of thepolicy.

Notes to Editors

Further examples of payouts for conventional and unitisedpolicies over different terms are available on request.

Important notes: Future bonus rates are notguaranteed and may vary, as they depend on profits yet to beearned. Past performance is not a guide to the future. The value ofinvestment linked funds can go down as well as up and is notguaranteed. The illustrative maturity amounts include periods ofhigh inflation and high investment returns. We may apply a marketvalue reduction on encashments (except on some maturity or death)which will reduce what you get back from the unitised with-profitfund. Past performance is based on the charging structuresapplicable to the products at the time the policies were effected.Different charging structures apply to the current products. Fullwritten terms and conditions of Norwich Union products areavailable on request. Norwich Union is authorised and regulated bythe Financial Services Authority and only advises on its ownproducts.

Norwich Union is the UK’s largest insurer. It is a leadingprovider of life, pensions and investment products and one of theleading IFA providers. IFAs provide around 75% of thecompany’s long-term savings business. Norwich Union hasstrategic alliances with building societies and other leading UKbrand names including Tesco Personal Finance and The Royal Bank ofScotland Group.

Norwich Union’s news releases and a selection of imagesare available in the media centreof this website.

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