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April 2011

Market-beating investment returns from mutuals...again

Mutual Insurers continue to dominate the Money Management tables for with-profits returns, with returns over 25 years 27% higher than for non-mutual insurers, and easily beating alternative typical investments too.

Each year Money Management[i] publishes a comprehensive report on with-profits returns. This year the report coincides with FSA’s consultation on with-profits (Cp11/5), and whilst the regulator continues to display a strong bias against the product, the research shows that on closer inspection, a policyholder’s experience of the product will largely depend on whether they hold a policy with a mutual or a proprietary company.

The survey collects data from providers and/ or FSA returns, and assumes a policy taken out for £50 per month. Over 25 years, the average mutual payout was £42,650, 26.8% more than the average for non-mutual firms (of £33,626). The average mutual payout was also comfortably more than comparative products: 

  • 20% more than the average balance managed fund
  • 3% more than the UK all companies fund; and
  • 57% more than the average 90 day notice deposit account.

As the chart below shows, it hasn’t always been the case that mutuals outperformed shareholder owned companies. 

graph

Source: Money Management, April 2011

Until 2000 non-mutuals outperformed the mutual sector- though it should be pointed out that during the period up to 2000 many of our current shareholder-owned companies demutualised. Since 2000 we have been in a low-inflation, low interest economy, and with a number of periods of falling equity markets, with-profits policies have become far more conservatively managed. At the end of 2010 for example, the average with-profits policy contained a third in equities and 50% in fixed interest- a reversal of the picture a few years ago. As a result overall returns have fallen, but as the chart shows the non-mutuals in particular have seen rates tumble much more quickly.

Over ten years the situation is similar, with mutual with-profits policies paying out an average of £7,040, around 15% more than non-mutuals. Indeed, a customer purchasing a with-profits policyholder with a non-mutual in 2001 and paying in £50 a month over ten years would see a net return of just £127- one-eighth of the £1,040 with a mutual, and only just over a quarter of the £574 they would have received from a 90-day account with a building society. Little wonder that the top eight spots in the Money Management tables are occupied by mutuals.

The lesson appears clear: with-profits remain an attractive investment alternative for some policyholders, with returns often supported by life cover, underlying guarantees and a low-risk investment strategy. Mutual insurers in addition provide an excellent investment return, that outperforms comparable investments in the long-term. 

Association of Financial Mutuals, April 2011

 

[1] All data is sourced from Money Management, April 2011. Data excludes Phoenix Assurance whose with-profits policies have been subject to significant overpayments of excess surplus in recent years.


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