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LV= With Profits Performance

LV=, the UK's largest friendly society, has announced its annual with-profits payouts and performance details.

  • A £50 a month 25 year savings endowment policy maturing 1 March 2009 will pay out £53,025. 
  • The 25 year payout from LV= is at least 22% higher than equivalent payouts from the major proprietary firms that have made bonus declarations so far this year. 
  • The payout from a LV= unitised with-profits Mutual Investment Bond taken out ten years ago has outperformed three comparable risk-profiled ABI sector investment types in each of the last four years. 
  • LV='s mortgage endowment guarantee means that all with-profits mortgage endowment policies paid to full term will meet any mortgage covered by the policy. A 20 year policy covering a £50,000 mortgage is currently paying a £15,000 surplus. 
  • The LV= with-profits fund made a cumulative investment return of 29% over the last five years, with an average annualised investment return of 5.23% over that period. 
  • 85% of LV= with-profits bonds are not subject to any Market Value Reduction (MVR). Where an MVR applies, the average reduction in policy value is 1.9%. 
  • Due to exceptionally volatile markets in 2008 some policy values are lower than last year, although maturing policies are benefiting significantly from smoothing. In contrast, unit-linked products will have experienced the full impact of stock market falls. 
  • An estimated £84.5m in bonuses will be added to LV= with-profits policies.

John Perks, LV= Life & Pensions Director, said: "Long term policy payouts from LV= continue to outperform many other forms of comparable investments. Our average annualised investment return of 5.23% over the last five years is also a creditable achievement.

"Exceptionally volatile investment markets in 2008 have inevitably impacted the performance of many funds, including short term with-profits returns. The average fall in the value of a maturing 25 year with-profits policy is 1.2% but thanks to smoothing this is much smaller than the fall in the actual value of the assets backing the policy. It also compares favourably with a fall of over 32% in the FTSE All Share Index over the same period.

"Our consistently strong performance in with-profits returns over many years shows the benefit of our financial strength as a mutual provider, with no corporate borrowings and no shareholders to pay."

25-year payout outperforms proprietary providers

LV= policyholders with maturing 25-year conventional with-profits life policies are at least £9,657 (22.3%) better off than similar policyholders with the major proprietary with-profits providers who have announced their bonus declarations so far this year.

Provider

25-year 
conventional 
with-profits payout

(£50pm, male, 30nb)

LV= members better off by

LV=

£53,025

-

-

Norwich Union (a)

£43,368

£9,657

22.3%

Prudential (b)

£37,738

£15,287

40.5%

Legal & General (c)

£37,594

£15,431

41.0%

Standard Life (d)

£32,534

£20,491

63.0%

Scottish Widows (e)

£31,662

£21,363

67.5%

Friends Provident (f)

£29,184

£23,841

81.7%

Notes to table:

a: CGNU Savings Endowment
b: Mortgage Endowment
c: CWP Savings Endowment
d: Savings Endowment
e: Life - Endowment
f: FPLP Main Series
Source: 2008 Bonus Declarations, issued Q1 2009.

With-profits bond outperforms comparable investments

The surrender value of a LV= Mutual Investment Bond, with £10,000 invested on 31 December 1998, outperformed the average of funds in three comparable risk profiled ABI sectors, over each of the last four years.

 

As at
31/12/2008

As at
31/12/2007

As at 31/12/2006

As at 31/12/2005

 

£
value

Equivalent 
annual 
rate of
return

£
value

Equivalent
annual
rate of
return

£
value

Equivalent
annual
rate of
return

£
value

Equivalent
annual
rate of
return

LV=
Mutual 
Invest-
ment 
Bond

£16,046

4.8%

£15,926

5.3%

£14,314

4.6%

£12,647

3.4%

UK
average
Distri-
bution
Life
Fund

£11,158

1.1%

£13,388

3.3%

£13,426

3.8%

£12,571

3.3%

UK average 
Cautious
Managed
Life Fund

£11,029

1.0%

£13,158

3.1%

£13,155

3.5%

£12,316

3.0%

UK average
Balanced
Life Fund

£10,994

1.0%

£13,886

3.7%

£13,290

3.6%

£12,211

1.9%

Notes to table: Surrender values for lump sum of £10,000 invested on 31/12/1998. Source: Lipper.

Mortgage Endowment Guarantee

LV= has an unconditional Mortgage Endowment Guarantee, originally made in 2000, meaning that all LV= with-profits mortgage endowment policies paid to full term are guaranteed to meet any mortgage amount covered by the policy.

Currently a 20 year mortgage endowment policy with a projected return of £50,000 is yielding a return of £64,963, a £14,963 surplus, whilst a 15 year policy is achieving a £3,095 surplus.

Low cost endowment maturity values as at 1 March 2009

Policyholder: Male, aged 30 next birthday at entry

20-year endowment

Mortgage Amount £50,000

Surplus £14,963

Maturity Value £64,963

15-year endowment

Mortgage Amount £50,000

Surplus £3,095

Maturity Value £53,095

Equity Ratio and Free Asset Ratio

As at 31 December 2008, the LV= with-profits fund had a 51.0% investment in equities, 16.0% in property, and 5.2% in venture funds i.e. over 70% in assets with the potential for long term growth.

The Free Asset Ratio is a common measure of the financial strength of life offices – the higher the Free Asset Ratio, the stronger the life company and the greater its ability to invest in longer term growth assets. At the end of 2007 the LV= with-profits fund had a realistic Free Asset Ratio of 20.7%, one of the highest in the industry, demonstrating the solid financial strength of LV= (Money Management, August 2008).

Investment strategy

Our aim is to generate strong returns over the long-term for our with-profits members. Therefore, LV= maintains relatively high holdings in equities and property, because we believe these growth assets are likely to produce better returns over the long term than fixed interest investments. With-profits are long term products and this investment strategy should pay off over the long term for our policyholders, as our historical payout performance shows.

Market Value Reductions (MVRs)

85% of LV= unitised with-profits bonds are not subject to any MVR. In the small number of cases where an MVR applies, the average rate is a 1.9% reduction in the bond's value. A five year with-profits bond is currently paying a final bonus of 29.7%.


Notes:

  1. ASSET ALLOCATION

With-profits fund asset allocation (as at 31 December 2008)

Asset Class

Allocation

Equities

51.0%

Property

16.0%

Fixed interest

24.6%

Venture funds

5.2%

Cash / other

3.2%

Total

100%

2. WITH-PROFITS FINAL BONUS RATES AND PAYOUTS 2009

Conventional with-profits

Policy duration

Policy Description

Payout

Final Bonus Rate

Equivalent annual
rate of return 
over the full term

25 years (a)

Ordinary Branch Endowment

£53,025

72.6%

9.0%

25 years (b)

Industrial Branch Endowment

£5,125

77.4%

8.2%

15 years (c)

Pension Policy

£63,300

0%

7.1%

Notes:
a: Regular premium £50 per month, male aged 30 next birthday at entry.
b: Regular premium £5 per four week period, male aged 30 next birthday at entry.
c: Regular premium £200 per month, male retiring at age 65.
The effective calculation date is 01/03/2009, and the policy durations are exact.

Unitised with-profits

Policy duration

Policy Description

Payout

Final Bonus Rate*

Equivalent annual
rate of return
over the full 
term

10 years (a)

Endowment

£6,981

12.5%

3.0%

10 years (c)

Pension Policy

£31,039

8.1%

5.0%

Notes:
a: Regular premium £50 per month, male aged 30 next birthday at entry.
c: Regular premium £200 per month, male retiring at age 65.
Final bonuses are determined for each unitised policy individually.
The effective calculation date is 01/03/2009, and the policy durations are exact.

Unitised with-profits bonds

Policy duration

Policy Description

Surrender
value as at
1 March 2009

Surrender
value 
a year ago

Effective return
over the year

1 year (d)

With-Profits Growth Bond

£9,314

N/A

-6.9%

2 years (d)

With-Profits Growth Bond

£10,232

£10,175

0.6%

3 years (d)

With-Profits Growth Bond

£11,586

£11,519

0.6%

4 years (d)

With-Profits Growth Bond

£12,904

£12,827

0.6%

5 years (d)

With-Profits Growth Bond

£14,130

£13,838

2.1%

10 years (d,e)

Mutual Investment Bond

£15,600

£15,670

-0.4%

Notes:
d: Single premium £10,000, male aged 30 exact at entry.
e: Final bonuses are determined for each unitised policy individually.
The effective calculation date is 01/03/2009, and the policy durations are exact.

3. ANNUAL BONUS RATES ON CURRENTLY SOLD PRODUCTS

Product

Bonus rate 2008

Bonus rate 2007

With-Profits Pension Annuity (WPPA) – Series 3 (2007 entry year)

1.40% pa

2.80% pa

With-Profits Pension Annuity (WPPA) – Series 3 & 4 (2008, 2009 entry years)

0.00% pa

n/a

With-Profits Income Bond

3.00% pa

3.75% pa

Tax Free Savings Plan

2.75% pa

3.25% pa

With-Profits Growth Bond, MAX

1.75% pa

2.25% pa

Personal Pensions

2.50% pa

3.00% pa

Life ISA

1.00% pa

1.45% pa

Flexible Savings Plan – Series 2

2.25% pa

2.75% pa

Note: The above bonus rates are effective from 01/03/2009, except for the WPPA where the rate is effective from 01/02/2009.

4. HOW BONUS RATES ARE DETERMINED

LV= is committed to managing annual and final bonuses so that policyholders receive a fair return, whether at policy maturity or when surrendering earlier.

Unitised with-profits

The Principles & Practices of Financial Management from LV= state that the unitised with-profits annual bonus rate is targeted at 50% of the expected future investment return, less tax and charges. Paying higher annual bonuses would restrict levels of equity investment and would be likely to damage longer term returns.

Conventional with-profits

Annual bonuses are set taking into account current and prospective gilt yields for the average outstanding term of the policies and bonuses previously added. Annual bonuses add to policy guarantees, which then need to be matched by fixed interest investments. Therefore, higher annual bonuses would restrict levels of equity investment and would be likely to damage longer term returns.

It is important to remember that past performance is not a guarantee of future returns as these depend on bonuses yet to be declared.

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