Norwich Union champions with profits by extending mortgage endowment promise

24 Jan 2001

Norwich Union today announces that it will extend, to all its with profit mortgage endowment policyholders, the innovative 6% promise introduced by CGU in January 2000. The statement also gives details of annual bonuses and maturity payouts on conventional and unitised with profits life and pensions policies.

The extension of the 6% promise means that Norwich Union intends to top up final bonuses on ALL Norwich Union with profits mortgage endowments at maturity, where there is any short-fall between the claim value and the mortgage originally targeted - provided future investment earnings average 6% a year after tax (see notes to editors 1&2).

The total number of policyholders who now benefit from our mortgage promise reaches almost 1.4 million. These customers have the added reassurance that no with profits mortgage endowment policy associated with any of the companies that are now part of Norwich Union has ever failed to meet its intended target.

Customers whose policies mature in 2001 will enjoy excellent rates of return on their investment, well above the rate of inflation. For example, 25 year with profits mortgage endowments are on average producing a return of 12.4% a year compared to inflation of 4.7%*.

Commenting on today's announcement, Norwich Union Life Chief Actuary, Mike Urmston said:

"The extension of the mortgage promise brings welcome reassurance to all Norwich Union with profits mortgage endowment customers at a time of falling returns. Furthermore, policies maturing today are continuing to pay out more than the associated mortgage amount."

BONUS DECLARATION
This year's regular bonus declaration reveals that rates have been generally reduced in line with long term investment returns. However, all our policies have received bonuses in excess of our investment earnings.

Maturity payouts are estimated to total Ł2.2 billion to some 114,000 customers in 2001. The underlying financial strength of its with profits funds has allowed Norwich Union to smooth the performance of its with profits policies very much to the benefit of all its with profits policyholders.

Reductions in regular bonus rates have been made as part of our strategy of bringing regular bonuses in line with an environment of low inflation and lower investment returns. However, once final bonuses are added, the total payout to policyholders compares well with other types of investment.

Commenting on the figures, Mike Urmston said: "During 2000 we have seen the FTSE 100 index fall by over 10%. Against this backdrop, returns on Norwich Union's with profit funds have been close to zero. However, the benefit of 'smoothing' of the investment returns has come into play strongly this year, so that with profits has proved a lower risk to policyholders than a simple managed fund".

TRANSPARENCY
Norwich Union supports the call for greater transparency in how life assurance providers communicate. We are committed to ensuring customers fully understand the financial products they buy and we are providing more information this year than ever before on investment performance and how we arrive at bonus rates. This represents the first stage of a major initiative to attain very high standards across all our communications and to create even greater access for all to our wide, flexible product range going forwards.

Norwich Union will undertake a research programme during 2001 to better understand consumer preferences and motivators. Whilst work is ongoing to identify the full scope of our research, we will cover core subjects in relation to with profits investments. Our objective is to enhance explanations of issues such as charging structures, expenses in the fund, the investment mix, the underlying investment performance of the fund, financial strength and asset share calculations.

Commenting on the drive towards greater transparency, Norwich Union Sales & Marketing Director Peter Hales said:

"I believe it is important that consumers do not lose sight of the benefits of with profits investments. It could be the right investment for risk-averse investors who wish to benefit from equity growth. We are committed to informing the customer on every aspect of their investment. The vital point is choosing the right with profits offer. Not only do Norwich Union policies have an excellent track record, the outlook is attractive, backed by today's promise."

Research will ultimately form the basis of a substantial educative campaign by Norwich Union to develop a clear understanding of financial products among existing policyholders and potential new customers.

- ENDS -

Press Office Contacts

Ian Frater
01904 452 828

Helen Murray Wells
01904 452 617

James Evans
01904 452 791

Notes To Editors

  1. Average investment earnings for ex-CGU (and former companies') policyholders will be taken as from 31 December 1999. Norwich Union is extending the mortgage promise to mortgage endowment policies written previously by Norwich Union Life and Pensions Ltd. Norwich Union's intention relies upon it achieving sufficient investment returns on its free reserves. Norwich Union Life and Pensions' free reserves are large and the company is confident that future investment earnings will be sufficient to provide the necessary support.

    At the end of 2000 free reserves in Norwich Union Life and Pensions were of the order of Ł4bn. Investment returns in 2000 were close to 0% gross, reflecting what has been a poor year for stock markets around the world. This return compares with previous years as follows:

  2. YEAR 1996 1997 1998 1999
    Investment return 9.9% 18.5% 14.9% 17.0%
  3. Support will apply to all with-profit mortgage endowment policies issued by those life companies that now form part of Norwich Union (that is CGU Life, Norwich Union, General Accident, Commercial Union and Provident Mutual) and that satisfy our criteria, namely 'top up' payments will only be made where premiums have been maintained throughout the policy term and where the policy has not been materially altered or sold through the second hand endowment market.
  4. The extension of the promise means an additional 700,000 policyholders benefit.
  5. Norwich Union has 5million policyholders. Of these, around 1.4million hold mortgage endowment policies. The Life business of Norwich Union has funds under management of about Ł80 billion.
  6. Norwich Union is the UK life and general insurance trading brand of holding company CGNU plc, which was created from the merger between CGU and Norwich Union on 30 May 2000.
  7. Norwich Union has agreed with its Asset Managers clear investment objectives and has put in place well-defined processes for the management of life and pensions funds. The investment teams' approach is risk-averse and aims to consistently out-perform relevant indices over the shorter-terms in line with specific targets, leading to out-performance over time.

* based on an approximate money weighted average of policies from Norwich Union, General Accident and Commercial Union

BONUS TERMS EXPLAINED

There are two types of with-profits policies: Unitised and Conventional.

UNITISED

Contributions buy units in the With-Profits Fund. The unit price increases as the annual bonus is added on a daily basis.

The payout for a unitised with profits policy is made up of two elements: The value of units and final bonus.

Value of units: This is the value of the units held.

Final Bonus: At the date of claim the value of the units is compared with the total earnings of the policy. Any balance is made up by the declaration of a final bonus. Scales are expressed as percentage of the unit value and vary according to the year the money was invested. Different final bonus rates will apply to the units bought with the different years' contributions.

CONVENTIONAL

Contributions secure a guaranteed benefit. Bonuses are added to the guaranteed benefit annually and at the end of the policy term as detailed below.

The payout under a conventional with-profits policy is made up of three elements: the guaranteed benefit, regular bonus and final bonus.

Guaranteed benefit (also known as sum insured): This is the amount payable at the date of the claim (eg. maturity or earlier death). Bonuses are added to this amount over the term of the policy to make up the final payout.

Regular Bonus (also known as annual or reversionary bonus): This is the amount added to a with-profits policy each year. It is a payment on account towards the full share of policy earnings which will be payable at the date of claim. For most policies it is expressed as one percentage applying to the guaranteed benefit and a further percentage applying to the bonus already added in previous years.

Final bonus (also known as terminal or additional bonus): At the date of claim the total of the guaranteed benefit and regular bonuses to date is compared with the total earnings of the policy. Any balance is made up through the declaration of a final bonus. Final bonus rates are expressed as a percentage of the guaranteed benefit and will form a scale of rates that will vary according to the year the policy was taken out.

Please note: The above is designed as an introduction to bonus terms. For details relating to specific policies, you should refer to the policy terms and conditions.

UNITISED BONUS - PAYOUT TABLES

The following tables show comparative maturity payouts following the bonus declaration for the three main companies that now form part of Norwich Union.

  • Norwich Union writes new with profits business in the CGNU Life with profit fund. The CGNU Life fund was previously the CGU fund. It has been chosen because of its stronger position in relation to equity backing ratio and superior pay out record, particularly for long term contracts
  • To maintain financial strength, investment flexibility and to facilitate the eventual merger of the with profits funds, a proportion of the with profit business will be reassured to other with profit funds in the CGNU Group, namely the Commercial Union Life (CU) and the NU Life (NUL&P) funds
  • Investment objectives and risk controls for the 3 with profit funds are the same as for CGNU Life.

CGU (including General Accident)

With profits bond

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Effected 5 years ago:
Unit value Ł13,552 Ł13,590
Final bonus Ł2,710 Ł2,718
Total payout Ł16,262 Ł16,308
Yield 10.2% 10.2% 2.8%
Effected 10 years ago:
Unit value Ł20,191 not applicable
Final bonus Ł8,077
Total payout Ł28,268
Yield 10.9% 2.8%

10 year personal pension

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Unit value Ł33,642 Ł34,700
Final bonus Ł7,334 Ł7,295
Total payout Ł40,976 Ł41,995
Yield 10.3% 10.7% 2.8%

Commercial Union

With profits bond

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Effected 5 years ago:
Unit value Ł12,927 Ł13,079
Final bonus Ł2,198 Ł2,616
Total payout Ł15,125 Ł15,695
Yield 8.6% 9.4% 2.8%
Effected 10 years ago:
Unit value not applicable yet not applicable yet
Final bonus
Total payout
Yield

10 year personal pension

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Unit value Ł33,391 Ł32,244
Final bonus Ł6,355 Ł5,666
Total payout Ł39,746 Ł37,910
Yield 9.7% 8.9% 2.8%

Norwich Union Life & Pensions (NUL&P)

With profits bond

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Effected 5 years ago:
Unit value Ł12,769 Ł12,950
Final bonus Ł2,426 Ł3,238
Total payout Ł15,195 Ł16,188
Yield 8.7% 10.1% 2.8%
Effected 10 years ago:
Unit value Ł18,631 Ł19,604
Final bonus Ł5,030 Ł3,921
Total payout Ł23,661 Ł23,525
Yield 9.0% 8.9% 2.8%

10 year personal pension

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Unit value Ł31,926 Ł32,831
Final bonus Ł7,371 Ł7,861
Total payout Ł39,297 Ł40,692
Yield 9.5% 10.2% 2.8%

The bond examples above are based on a Ł10,000 single contribution made by a man under age 75 at outset. The Pension example is as issued to a male for a monthly premium of Ł200, maturing at age 65, with a return of fund death benefit.

CONVENTIONAL BONUSES - PAYOUT TABLES

CGU (including General Accident)

10 year endowment

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Guaranteed benefit Ł5,322 Ł5,322
Regular bonus Ł2,525 Ł2,721
Final bonus Ł1,098 Ł1,448
Total payout Ł8,945 Ł9,491
Yield 7.7% 8.8% 2.8%

25 year endowment

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Guaranteed benefit Ł14,139 Ł13,937
Regular bonus Ł30,288 Ł31,703
Final bonus Ł60,864 Ł71,199
Total payout Ł105,291 Ł116,839
Yield 13.3% 13.9% 4.7%

CONVENTIONAL BONUSES - PAYOUT TABLES

Commercial Union

10 year endowment

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Guaranteed benefit Ł5,361 Ł5,361
Regular bonus Ł2,441 Ł2,676
Final bonus Ł1,170 Ł1,527
Total payout Ł8,972 Ł9,564
Yield 7.8% 9.0% 2.8%

25 year endowment

  Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Guaranteed benefit Ł13,253 Ł13,253
Regular bonus Ł52,328 Ł55,058
Final bonus Ł36,725 Ł39,620
Total payout Ł102,306 Ł107,931
Yield 13.2 13.5% 4.7%

CONVENTIONAL BONUSES - PAYOUT TABLES

Norwich Union Life & Pensions (NUL&P)

10 year endowment

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Guaranteed benefit Ł5,533 Ł5,533
Regular bonus Ł1,727 Ł2,009
Final bonus Ł1,937 Ł1,937
Total payout Ł9,197 Ł9,479
Yield 8.3% 8.8% 2.8%

25 year endowment

Maturing 1.1.01 Maturing 1.1.00 Average rate of Inflation to December 2000
Guaranteed benefit Ł14,260 Ł14,260
Regular bonus Ł34,335 Ł36,756
Final bonus Ł37,433 Ł38,502
Total payout Ł86,028 Ł89,518
Yield 12.1% 12.3% 4.7%

The endowment policy examples above are based on a male aged 30 next birthday, when the policy was started, for a monthly premium of Ł50.

Important notes:

Future bonus rates are not guaranteed and may vary, as they depend on profits yet to be earned. Past performance is not a guide to the future. The value of investment linked funds can go down as well as up and is not guaranteed. The illustrative maturity amounts include periods of high inflation and high investment returns. We may apply a market adjustment factor on encashments (except on maturity or death) which will reduce what you get back from the unitised with-profits fund. Past performance is based on the charging structures applicable to the products at the time the policies were effected. Different charging structures apply to the current products. Full written terms and conditions of Norwich Union products are available on request. Norwich Union is regulated by the Personal Investment Authority and only advises on its own products. All charging structures are applied to the product at the time the policy was effected.