2002 Bonus Announcement
Legal & General Group PLC
27 February 2003
27 February 2003
LEGAL & GENERAL ANNOUNCES 2002 BONUS RATES
==========================================
Legal & General is increasing the guaranteed benefits of most with-profits plans
although annual bonus rates have generally been reduced following a third
successive year of falling equity markets.
Overall payouts for maturing endowments following this declaration remain in
excess of underlying asset values so demonstrating the benefits of smoothing.
Today's declaration means that a 25 year endowment policy (Note to Editors: 1)
maturing on 1/03/03 receives a payout of £59,047. This represents a rate of
return of 9.7% per annum and is 10.6% below the equivalent payout of £66,061 as
at 1/11/02.
Legal & General's bonus declaration process has been subject to independent peer
review, as it was in 2002.
Comparison of returns
---------------------
A 25 year policy (Note to Editors: 1) maturing on 1/03/03 will deliver a nominal
rate of return of 9.7% per annum equivalent to a real rate of return of 5.6% per
annum, while also providing valuable life cover. A similar investment in an
average higher rate building society account would have yielded a return of 4.7%
per annum equivalent to a real rate of return of 0.8% per annum with no life
cover. Unlike a with-profits policy, capital and income in a deposit account is
guaranteed on encashment.
Prudent Approach
----------------
The reductions in Legal & General's annual bonus rates for 2002 reflect the need
for guaranteed benefits to grow more slowly when expectations for future
inflation and nominal investment returns are low. The reductions also reflect
the poor stockmarket performance of the past three years. Our approach to
smoothing means that this poor stockmarket performance has not been fully
reflected in our bonus declarations for these three years.
Financial Strength
------------------
Market conditions have placed considerable demands on insurance funds worldwide.
Nevertheless, Legal & General Assurance Society has recently had its financial
strength rating reaffirmed by Standard & Poor's as AAA, the highest available.
Notes to editors:
-----------------
1. Maturity values and yields for Legal & General 25 year with-profits endowment
policies taken out by a 29 year old male investing £50 per month and maturing on
1 March 2003 are:
Endowment Assurance Policy: £59,047 (2002: £73,566). This is an actual return of
9.7% per annum and a real return over inflation of 5.6% per annum (2001: 6.6%).
This rate of return is 5.0% per annum higher than the 4.7% per annum the same
investment would have obtained from an average higher rate building society
account. The returns from the average higher rate building society deposit
account are the net rates to 1 March 2003 assuming that interest rates for
January to 1 March 2003 remain at the January 2003 level (Source: Micropal). A
building society guarantees the capital and added interest of its investments.
The 'real rate of return' represents the yield obtained in excess of the return
earned if the premiums had grown in line with the RPI (increase in RPI for the
period December 2002 to March 2003 remains at the same level as December 2002).
Low Cost Endowment Policy: £58,014 (2002: £72,279). This is £30,358 greater than
the mortgage of £27,656 it was designed to repay. The policy carries a higher
level of life assurance cover than the endowment assurance policies.
2. Further details
Examples of payouts to customers with policies maturing in 2003 are in the
appendices below.
3. Bonus Policy
The 2003 bonus declaration is in line with Legal & General's principles which
aim to provide competitive and equitable returns for policyholders while
maintaining the strength of the Long Term Fund for future generations of
policyholders. This requires Legal & General to:
• Treat all generations of policyholders and types of policies fairly.
• Take account of the amount of assets generated by each type and generation
of policy allowing for investment returns achieved and expenses incurred.
• Smooth maturity returns to policyholders so that they are shielded from
some of the fluctuations that can be experienced in investment returns and
other factors.
4. Total Cost of Bonuses in 2002: £579m (2001: £809m).
5. Investment Mix:
The investment mix backing participating with-profits business in aggregate
varied from end 2001 as follows:
End 2002 End 2001
% %
Fixed Interest 30 23
Property 17 15
Equity Shares:
UK Shares 37 44
Non UK Shares 12 15
Unlisted Shares 2 1
Other Investments 2 2
--- ---
100 100
The asset mix is the overall mix for all the participating with-profits
business. The asset mix and therefore the investment return attributed to
different types and generations of policies may be different from the above as
it reflects the different product designs, guarantees and representations made
to policyholders. The proportion of equity investments has fallen since end 2001
and the proportion of the remaining asset classes has risen. This change is
principally due to the fall in the market values of equities during 2002, rather
than a programme of switching investments out of equities into the remaining
asset classes.
The investment returns earned on the overall assets backing participating
with-profits business over the last five years are as follows:
1998 1999 2000 2001 2002
+15% +17% +1% -7% -9%
The total return in 2002 on the FTSE All Share was minus 23 per cent.
Regulatory Notes:
• Past performance is not necessarily a guide to future performance.
• Legal & General Assurance Society Limited is regulated by the Financial
Services Authority.
• Returns from with-profits contracts are dependent on bonuses. Future bonus
rates are not guaranteed.
• Unlike a with-profits policy, capital and income in a deposit account is
guaranteed on encashment.
• The surplus arose during a period when investment returns were high,
similar returns and therefore such large surpluses may not be available in
future years.
Issued By:
----------
John Morgan
Head of Public Relations
Tel: 020 7528 6213
Appendix A
==========
2002 ENDOWMENT ASSURANCE BONUS DECLARATION
------------------------------------------
ANNUAL (REVERSIONARY) BONUSES ON LIFE POLICIES
2002 2001
1.00 % of sum assured 1.50
1.75 % of existing bonus 2.75
PAYOUTS ON MATURING ENDOWMENT POLICIES
£50 per month
Maturing Yield % Maturing Yield % Maturing Yield %
1/3/03 (Real Return) 1/11/02 (Real Return) 1/3/02 (Real Return)
£ £ £
25 Year Payout 59,047 9.7 66,061 10.4 73,566 11.1
(5.6) (6.2) (6.6)
20 Year Payout 27,955 7.8 29,976 8.4 33,696 9.4
(4.4) (4.9) (5.9)
15 Year Payout 14,459 6.0 15,475 6.9 17,217 8.2
(3.2) (3.9) (5.2)
10 Year Payout 7,320 3.9 7,670 4.8 8,470 6.7
(1.4) (2.3) (4.4)
Notes:
------
1. The examples assume a male aged 29 paying a premium of £50 per month.
2. The 'real rate of return' represents the yield obtained in excess of the
return earned if the premiums had grown in line with the RPI (increase in RPI
for the period December 2002 to March 2003 remains at the same level as December
2002).
Appendix B
==========
2001 UNITISED WITH-PROFITS BONUS DECLARATION
--------------------------------------------
The figures in the table are the running yields for premiums paid in 2002 and
the interim running yields for premiums paid in 2002 and 2003.
SINGLE PREMIUM LIFE POLICIES (CURRENT SERIES)
With-profits Income Bond
------------------------
Date of Investment 2002 2002 2003
Interim Declared Current interim
running yield running yield running yield
2002 Q1 5.75% 5.75% 4.25%
2002 Q2 5% 5% 4.5%
2002 Q3 5% 5% 5%
2002 Q4 5% 5% 5%
2003 Q1 - - 5%
With-profits Growth Bond
------------------------
Date of Investment 2002 2002 2003
Interim Declared Current interim
running yield running yield running yield
2002 Q1 4% 3% 3%
2002 Q2 4% 3% 3%
2002 Q3 4% 4% 4%
2002 Q4 4% 4% 4%
2003 Q1 - - 4%
REGULAR PREMIUM (ANNUAL) LIFE POLICIES (LATEST CONTRACT VERSIONS)
Flexible Mortgage Plan (Higher rates apply to some earlier versions of the Plan)
--------------------------------------------------------------------------------
Date of premium 2002 2002 2003
payment Interim Declared Current interim
running yield running yield running yield
2002 4.25% 3.25% 3.25%
2003 - - 3.75%
Savings Plan (Higher rates apply to some earlier versions of the Plan)
----------------------------------------------------------------------
Date of premium 2002 2002 2003
payment Interim Declared Current interim
running yield running yield running yield
2002 3.6% 2.6% 2.8%
2003 - - 3.1%
REGULAR PREMIUM (ANNUAL) PENSIONS POLICIES
Personal Pension Plan (accumulation units) - not single charge
--------------------------------------------------------------
Date of premium 2002 2002 2003
payment Interim Declared Current interim
running yield running yield running yield
2002 4.5% 4.5% 3.5%
2003 - - 4.5%
Personal Pension Plan (accumulation units) - explicit charge
------------------------------------------------------------
Date of premium 2002 2002 2003
payment Interim Declared Current interim
running yield running yield running yield
2002 5.25% 5.25% 4.25%
2003 - - 5.25%
Notes:
------
For most of Legal & General's Unitised with-profits policies growth comes from
the addition of a 'contractual addition' and the addition of bonuses. Both
depend upon when the premiums were paid and can vary from year to year. Where
Unitised with-profits policies do not attract a contractual addition the annual
bonuses have been correspondingly higher.
Each year a normal, annual bonus, is declared for the previous year and the sum
of the normal annual bonus and any contractual addition is called the 'Running
Yield'. An interim bonus rate, which is not guaranteed and which can be changed
without notice is also declared and applies in respect of the current year for
any claims. 'Interim Running Yield' is the sum of interim bonus and any
contractual addition. NB: the annual bonus rates declared for 2003 may be
different from the interim rates.
Terminal (Final) bonus may also be paid in the event of claim. Terminal bonus
rates are not guaranteed and can be changed without notice. For with-profit
Income Bonds the total return comes through the addition of annual bonus. There
is zero terminal bonus.
The Unitised with-profits terminal bonus rates which range from 0% to 5.20% per
annum also depend on the policy type and when the premiums were paid.
Legal & General reserves the right in certain investment conditions to reduce
the amount payable on surrender or switch by the application of a Market Value
Reduction Factor.
Further examples of bonus rates applicable to premiums paid in other years can
be obtained from Legal & General.
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