The Future Prospects of With-Profits
The increasing polarisation between the strong and weak Life Offices is likely to continue with the stronger companies that have higher Equity Backing Ratios (EBRs) producing better long term growth for investors.Even in times of stock market volatility, the ability to hold a higher proportion of the fund in equities is likely to lead to stronger long term performance and any company with an EBR of over 50% should have strong performance prospects. The table below shows the EBRs for the stronger Life Offices.
In addition to strong performance prospects created by the investment lag and high equity content, investors should look to exploit the hidden value in with-profits funds.
Several Life Offices have accrued surpluses known as ‘inherited estate' within their funds and there is now regulatory pressure to distribute these surpluses.
Aviva, for example, has just announced a £2.1 billion payout to policyholders in the form of additional bonuses on General Accident and Commercial Union policies over the next 3 years. They are still in talks with Claire Spottiswoode, the policyholder advocate, about the reattribution of the remaining surplus. Prudential is also in the process of agreeing distribution of its inherited estate thought to be worth in excess of £9 billion.
In addition to this, most funds are now closed for new business which means that the with-profits market is entering a long slow run off phase. All existing reserves and surpluses will be shared amongst the remaining investors. Many with-profits funds have surpluses that have been built up over a number of years.
As the with-profits funds approach maturity all of the reserves and surpluses need to be distributed. This distribution will need to take place over at least the last ten years of the fund to ensure equitable treatment of policy holder and that the last few policyholders don't get everything!
A number of funds are already approaching the stage where this tontine effect (avoiding the last policyholder getting everything) has to be managed and this should lead to a further performance boost for traditional with-profits policies.
This hidden value, combined with the effect of the investment lag, means that returns on traded endowments will become increasingly non-correlated to investment markets ensuring that Investors are well placed to benefit from both the strength of the with-profits providers and the additional hidden value in with-profits.
Nothing contained within this document constitutes investment advice or an offer to subscribe . If in doubt, please talk to your financial adviser.