April 2010

With profits returns: Statistical analysis

With FSA’s close scrutiny of with profits in mutual organisations1, you could be forgiven for thinking that these are poor performing products that fail to give policyholders a fair return on their investment.

But the latest with profits survey from Money Management (April 2010) shows a quite different picture, with clear evidence that investing with a mutual company provides far superior returns.

Using the data from the survey, the average return by the 22 mutual companies in the survey (these were AFM members plus CIS) was £6,827 over 10 years and £42,827 over 25 years.

These figures are based on maturity values for an investment of £50 per month. Had the policy been taken out with a plc insurer instead of a mutual, the returns would have been £6,198 and £34,603 respectively2. Put another way, the average investor would have been 24% better off with a mutual over 25 years.

Not only that, but had the money been invested with a typical fund manager, the return over 25 years would have been £37,1433 (15% lower than a mutual with profits policy) or £24,902 in a 90 day deposit (72% lower).

So over 25 years, the average growth rate in a with profits problem provided by a mutual was around 8%. With the average annual inflation rate through that period running at 3.5%, this represents an average real rate of return each year of around 4.5%.

In the interests of balance it must be said that:

  • There are a number of small mutuals that pay very high maturity values and the Money Management tables are not weighted by size. To get round this we also looked at the median performer, and mutuals have outperformed non-mutuals by between 10 and 20% a year.
  • Over the last ten years a combination of low interest rates and two recessions have suppressed returns and as a result investment returns are now much lower than they were in 2000, and will never return to those levels. However, the difference between mutual and non-mutual insurers has grown over this period. This suggests that whilst mutuals have worked hard to maintain the mutual advantage in real terms, shareholders in plc companies have had their returns preserved to the cost of policyholders.


As Money Management states: “Yet again the strongest performance in the with profits sector is coming from the smaller providers, most of which are mutuals… While many criticise with profits for not providing the same returns that were seen 10 years ago or more, the fact remains that they still outperform many lower risk investments while providing a life insurance element that is not available with open ended funds and savings accounts.”

All this begs the question of why FSA’s attention is focused on mutuals, who continue to offer outstanding value, whilst the question of why policyholders in plc insurers have seen their returns eroded by so much more than shareholders.

Association of Financial Mutuals, April 2010

[1] See FSA’s Dear CEO letter from October 2009 to mutuals with a with profits fund

[2] These figures exclude the closed fund of Phoenix Assurance which is gradually paying back surplus assets for several years.

[3] Based on the average UK all companies fund, with data supplied by Morningstar to Money Management

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