UK Income and Growth Bonds, Guaranteed Equity Bonds and Distribution Bonds 2005

TABLE OF CONTENTS

CHAPTER 1 THE UK LIFE ASSURANCE 2005 REPORT 14

This briefing is part of the overall UK Life Assurance 2005 product suite 14

Report methodology for the UK Life Assurance 2005 product suite 15

CHAPTER 2 INTRODUCTION 16

What is this report about? 16

Who will this report be of use to? 16

How to use this report 16

Sources of Data 17

The products explained 18

Income and Growth Bonds 18

Guaranteed Equity Bonds 19

Distribution Bonds 20

CHAPTER 3 INSURANCE PRODUCTS IN THE COLLECTIVE INVESTMENT MARKET 22

Introduction 22

Key findings 22

The collective investments market has begun to recover following several years of decline 23

The structure of the UK life market has changed considerably over the last four years 24

The UK life related savings market has declined by more than the unit trust and OEIC market 24

With-Profits products were historically the mainstay of the life market 25

Single premium products have shown stronger recent growth than regular premium 26

Tax advantages and commission rates of investment bonds continue to make them popular with advisers and investors 27

With-profit products have fallen out of favor with investors 28

The prolonged bear market has hit With-Profits Bonds hard 29

Insurers� response to the equity downturn has added to the negative publicity 30

The decline of With-Profits has been partially offset by growth in Unit-Linked Bonds 31

The product performance of the remaining With-Profits providers has generally been strong 32

Realistic reporting has tightened capital constraints for many with-profit providers 33

CHAPTER 4 MARKET CONTEXT: �OTHER� BONDS 34

Introduction 34

Key findings 34

The decline of With-Profits and declining equity markets have shifted investors� demands towards alternative life bond products 35

The search for an alternative to the With-Profits bond has seen Distribution Bonds become the largest part of the other bond market 37

Distribution Bond new business growth has been driven by the search for an alternative to With-Profits funds 37

The general performance of Distribution Bonds compared to With-Profits Bonds has been good 39

Several Distribution Bond providers have adopted aggressive asset allocations 41

Declining stock markets have ignited interested in Guaranteed Equity Bonds 42

Growth in Guaranteed Equity Bond new business has been driven by a lack of investor confidence in equities 43

Increased competition from alternative products has seen Income and Growth Bond new business slump 44

Income and Growth Bond new business premiums are now a fraction of their pre-precipice bond levels 45

Increasing moves towards Unit-Linked Income and Growth Bonds are harming new business 46

Alternative products have weakened the demand for Income and Growth Bonds 46

CHAPTER 5 THE DISTRIBUTION LANDSCAPE 47

Introduction 47

Key findings 47

Income and Growth Bonds� distribution sales have evaporated through most channels 48

IFAs remain the only channel to report significant Income and Growth Bond new business sales 48

All non-IFA distribution channels have withdrawn from the Income and Growth market 49

Strong sales through the bancassurance channel have boosted total Guaranteed Equity Bond new business 50

Bancassurers are the sole driver of new business growth in the Guaranteed Equity Bond market 50

IFAs have maintained a neutral opinion on Guaranteed Equity Bonds despite their popularity with investors 52

The IFA channel has increased its dominance of the Distribution Bond market and driven recent growth 52

The more complicated nature of Distribution Bonds favors the IFA channel 53

The direct sales force is the only non-IFA channel to hold a share of the Distribution Bond market 54

CHAPTER 6 COMPETITIVE DYNAMICS 55

Introduction 55

Key findings 55

AXA remains a market leader within the distribution bond market 56

Industry experts highlight Legal & General, AXA Sun Life, Standard Life, Friends Provident and Allied Dunbar as industry leaders in the distribution bond market 56

Friends Provident has had the strongest 10 year Distribution Bond performance on a withdrawal basis 58

Six distribution funds can be noted for their strong performance 59

Guaranteed Equity Bonds maturing in 2005 have suffered from mixed performances 62

CHAPTER 7 THE FUTURE DECODED 64

Key Findings 64

Forecast assumptions for market size 65

Growth in the life related investment market is expected to outpace growth in the protection market 67

Datamonitor�s Base Scenario: �Other� bonds new business grows at 8% 68

�Other� bonds new business driven by Distribution Bonds and Guaranteed Equity Bonds 68

Distribution Bonds new business growth continues 70

Guaranteed Equity Bond new business growth continues to be driven by cautious investors through the bancassurance channel 71

Income and Growth Bonds see new business levels continue to fall then stabilize 72

Distribution scenario: Bancassurers increase their market share across all product ranges 73

Alternative scenario: �Other� bonds new business grows by 18% as falling Guaranteed Equity Bonds new business is offset by Distribution Bonds 75

Distribution Bonds become seen as key With-Profits substitute 75

Guaranteed Equity Bond new business growth stalls 76

Income and Growth Bond new business continues to decline 77

CHAPTER 8 APPENDIX 78

Forecasting methodology 78

Regression analysis is unsuitable for Life and Pensions forecasting 78

Datamonitor uses a qualitative forecasting methodology for Life and Pensions 78

Supplementary data 80

Insurance products in the collective investment market 80

Market Context 83

Market size 84

Distribution 86

Future Decoded 88

Definitions 91

Netted differences for IFA product attitude 91

Single premium policy 91

Regular premium 91

New business 91

Life based investment products 92

Life Product Definitions 92

Single Premium Life 92

Annual Premium Life 94

ABI definitions of distribution channels 96

Further reading 97

SPP writing team 98

How to contact experts in your industry 99

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LIST OF TABLES

Table 1: Single premium life related products 2000-2004 by product 35

Table 2: Distribution Bond capital remaining on 2 August 2004 after 5% income withdrawn from �50,000 invested on 1 August 1994 58

Table 3: Leading distribution fund annual returns, market size and Standard & Poor rating as of 31/12/04 60

Table 4: Selection of maturing 2005 Guaranteed equity life bonds 63

Table 5: Base scenario: Income and Growth Bonds, Guaranteed Equity Bonds, Distribution Bonds forecast new business 2004-2009f 69

Table 6: FTSE and With-Profits bond new business 2000-2004 80

Table 7: Total equity based saving market 2001-2004 gross 81

Table 8: Unit trust and life related savings new business non-APE 2001-2004 81

Table 9: Total With-Profits and Unit-Linked new business 2000-2004 82

Table 10: UK Life new single and regular new business 2000-2004 82

Table 11: Savings and protection new business market growth 2000-2004 82

Table 12: Single premium life related products 2000-2004 by product 83

Table 13: Savings and protection new business market growth 2000-2004 83

Table 14: Average asset composition of composite Distribution Bond 84

Table 15: IFAs� expectations of six month sales growth 84

Table 16: Asset mix of sample Distribution Bonds vs. average with-profit bond asset mix 2003 85

Table 17: Asset mix of Distribution Bonds vs. With-Profits vs. Lipper Distribution Bond industry average 85

Table 18: Highest, lowest and average performance of with-profit bonds vs. Distribution Bonds 2000-2004 86

Table 19: Income and Growth Bond New business distribution split 2000-2004 87

Table 20: Guaranteed Equity Bond new business distribution split 2000-2004 88

Table 21: Distribution Bond new business distribution split 2000-2004 89

Table 22: Base Scenario: Income and Growth Bonds, Guaranteed Equity Bonds and Distribution Bonds forecasts 2004-2009 89

Table 23: Income and Growth Bond new business forecast by distribution channel 2004 and 2009f 90

Table 24: Guaranteed Equity Bond new business forecast by distribution channel 2004 and 2009f 90

Table 25: Distribution Bond new business forecast by distribution channel 2004 and 2009f 91

Table 26: Alternative Scenario: Income and Growth Bonds, Guaranteed Equity Bonds and Distribution Bonds forecasts 2004-2009 91

LIST OF FIGURES

Figure 1: Bundling Structure of the UK Life Assurance 2005 report 14

Figure 2: UK Life Assurance 2005: report methodology 15

Figure 3: Total equity savings market has recovered in 2004 as unit trusts, OEICs and Unit-Linked Bonds experienced growth in new business premiums 23

Figure 4: There has been a small recovery in the savings side of the life market in 2004 24

Figure 5: Life related savings have fallen by more than unit trusts and OEICs 25

Figure 6: With-Profits products share of total life investment and protection new business has declined dramatically since 2000 26

Figure 7: While single premium life products have picked up, regular premium life products continue to slump 27

Figure 8: With-Profits Bonds have failed to recover in line with the market 29

Figure 9: Unit-Linked Bonds have become the key driver in the single premium market 31

Figure 10: Current 10 year With-Profits Bonds have generally produced higher returns than the average UK managed fund 32

Figure 11: Distribution Bonds and Income and Growth Bonds have increased their share of the life market since 2000 36

Figure 12: Distribution Bond new business has grown strongly between 2003 and 2004 37

Figure 13: The use of Distribution Bonds as a substitute for With-Profits has seen its growth follow that of Unit-Linked Bonds 38

Figure 14: Although the average performance of With-Profits and Distribution Bonds has been similar, Distribution Bonds have show greater variance in returns 40

Figure 15: Many Distribution Bonds have adopted a heavier equity focus than the average With-Profits funds 41

Figure 16: Guaranteed Equity Bonds (GEBs) new business premiums have grown at a compound rate of 31% since 2000 43

Figure 17: The rise in Guaranteed Equity Bond new business has been strong since the decline in stock markets 44

Figure 18: Income and Growth Bonds have experienced a sharp fall in new business between 2000-2004 45

Figure 19: The IFA channel has been hardest hit by the decline in Income and Growth Bond new business in 2002 48

Figure 20: The distribution split of Income and Growth Bonds has become increasingly erratic as sales have fallen, although IFAs still dominate the market 49

Figure 21: Bancassurance sales of Guaranteed Equity Bonds totaled �184m APE in 2004 50

Figure 22: Bancassurers have increased their share of the guaranteed equity market 51

Figure 23: IFA expectations of future Guaranteed Equity Bond sales growth has remained fairly muted 52

Figure 24: Growth in the IFA channel is driving the overall market 53

Figure 25: IFAs and tied agents continue to account for the vast majority of Distribution Bond new business sales 54

Figure 26: There is only a slight variation in the asset mix of the six best performing Distribution Bonds 61

Figure 27: The gap between savings and protection new business is expected to increase between 2004-2009 67

Figure 28: Base scenario: Distribution Bond and Guaranteed Equity Bond new business growth offsets fall in Income and Growth Bonds 69

Figure 29: The rise in Guaranteed Equity Bond new business has been strong since the decline in stock markets 71

Figure 30: Guaranteed Equity Bond, Distribution Bond and Income and Growth Bond market share by distribution channel 73

Figure 31: Alternative scenario: Distribution Bonds become key with profit replacement while Guaranteed Equity Bond new business slumps 75

Figure 32: �Quasi-Delphi� forecasting technique 79