L&G Bonus Announcement 2004
Legal & General Group PLC
24 February 2005
24 February 2005
Legal & General Group Plc
=========================
Bonus Announcement 2004
=======================
• 2004: 12% investment return for eligible with-profits policies
• Terminal bonuses increased for most policyholders
• Annual bonus rates held for conventional life policies
Investment returns for 2003 and 2004 were favourable, but have not yet been
sufficient to recover fully from the adverse investment conditions of 2000 to
2002, according to Legal & General.
In publishing its 2004 bonus declaration, Legal & General Actuary, UK, Ian
Gibson said, 'As a result of a second successive year of favourable investment
returns we have been able to increase terminal bonuses for most of our
customers. However, the economic outlook continues to be for interest rates and
inflation to remain low and we anticipate that future payouts will reflect this
economic climate.'
When setting bonus rates, Legal & General aims to bring policy benefits and
underlying asset values into line over the longer term. As a result of this,
bonus rates depend on both past investment returns and prospects for future
investment returns. The company also aims to smooth returns so that short-term
fluctuations in the value of investments are not immediately reflected in bonus
rates.
These fluctuations, and the scale of recent investment recovery compared with
the earlier falls, can be seen in the following table which shows both UK equity
returns for the last five years and investment returns applicable to
Legal & General's with-profits policies eligible for bonuses.
Year 2000 2001 2002 2003 2004 5 year average
annual return
With-profits 1% -7% -9% 14% 12% 2%
UK equities(1) -6% -13% -23% 21% 13% -3%
The impact on customers will vary according to product type and is illustrated
by examples shown overleaf.
Press Office:
John Morgan Head of PR 020 7528 6213
Angela Robertshaw Deputy Head of PR 01737 375351
Investor Relations:
Peter Horsman Head of Investor Relations 020 7528 6362
2004 Bonus Declaration
======================
Conventional Endowment Annual Bonus Rates
-----------------------------------------
2004 2005
---- ----
0.75 % of sum assured 0.75
1.25 % of existing bonus 1.25
Conventional Endowment Terminal Bonus Rates
-------------------------------------------
Examples of terminal bonus as a percentage of existing bonus:
Entry year Before declaration After declaration
---------- ------------------ -----------------
1980 36% 39%
1985 38% 56%
1990 27% 39%
Impact of Bonuses on Legal & General customers
==============================================
The following examples show the impact of the bonus declaration by comparing
payouts on policies in 2005 with those in 2004.
25 year endowment, male aged 29 at entry, £50pm
-----------------------------------------------
1/3/79 to 1/3/04 Maturity value £53,333
(9% annualised return vs. inflation of 3.6%, real return of
5.2%)
1/3/80 to 1/3/05 Maturity value £48,757
(8.4% annualised return vs. inflation of 3.4%, real return of
4.8%)
25 year low cost mortgage endowment, male aged 29 at entry, £50pm
-----------------------------------------------------------------
1/3/79 to 1/3/04 Maturity value £52,397 against target of £27,656 (£24,741
surplus)
(8.9% annualised return vs. inflation of 3.6%, real return of
5.1%)
1/3/80 to 1/3/05 Maturity value £47,903 against target of £27,656 (£20,247
surplus)
(8.3% annualised return vs. inflation of 3.4%, real return of
4.7%)
10 year endowment, male aged 29 at entry, £50pm
-----------------------------------------------
1/3/94 to 1/3/04 Maturity value £6,885
(2.7% annualised return vs. inflation of 2.4%, real return of
0.3%)
1/3/95 to 1/3/05 Maturity value £7,003
(3% annualised return vs. inflation of 2.5%, real return of
0.5%)
20 year pension, male aged 65 at retirement, £200pm
---------------------------------------------------
1/3/84 to 1/3/04 Open market option of £129,232
(9% annualised return vs. inflation of 3.1%, real return of
5.7%)
1/3/85 to 1/3/05 Open market option of £121,316
(8.5% annualised return vs. inflation of 3.0%, real return of
5.3%)
With-profit bond, £10,000 single premium
----------------------------------------
1/3/95 to 1/3/04 Surrender value £17,499
(6.4% annualised return vs. inflation of 2.5%, real return of
3.8%)
1/3/95 to 1/3/05 Surrender value £18,416
(6.3% annualised return vs. inflation of 2.6%, real return of
3.6%)
NB: The 'real' 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 January 2005 to March 2005 remains at the same level as January 2005).
Notes to Editors
================
Number of customers: Bonuses declared affect around 1 million policyholders
Total cost of bonuses in 2004: £422m (2003: £465m).
Size of with-profits fund
-------------------------
Assets supporting non-linked with-profits business are approximately £21bn.
Financial strength
------------------
Legal & General Assurance Society is one of the UK's top rated companies for
financial strength. Three of the world's leading independent rating companies,
Standard and Poor's, Moody's and AM Best have recognised this.
The current ratings are:
Standard and Poor's AA+ 'Very Strong'
Moody's Aa1 'Superior'
AM Best A+ 'Superior'
Asset mix
---------
At the end of 2004, the overall mix of assets applicable to with-profits
policies eligible for bonuses was:
End 2004 End 2003
-------- --------
UK shares 43% 41%
Overseas shares 9% 10%
Fixed interest securities 29% 31%
Commercial property 19% 18%
Other 0% 0%
Bonus policy
------------
In determining the amounts payable under with-profits policies the methods used
have the following aims.
• To treat all with-profits investors equitably.
• To take account of the returns earned on the underlying investments.
• To take account of the requirement to honour guarantees and options
already granted to investors.
• To smooth returns to investors so that some of the short-term
fluctuations in the value of the investments of the with-profits sub-fund
are not immediately reflected in payments.
• To incorporate some pooling and sharing of experience between
policyholders.
In order to treat different types and generations of with-profits investments
equitably the methods also aim to have regard to differences in product design,
such as differences in:
• The nature and extent of guarantees and options provided.
• The types and value of risk benefits provided between different types of
product and different policies of the same type.
• Taxation between products.
Compliance with Principles and Practices of Financial Management
----------------------------------------------------------------
The bonus declaration has been subject to independent review by the Tillinghast
business of Towers Perrin. In Tilinghast's judgement, today's bonus declaration
and the process by which it was reached comply with Legal & General's Principles
and Practices of Financial Management. In undertaking this review, Tillinghast
has relied on the accuracy and completeness of the information supplied to it by
Legal & General.
Endowment Policies RAG status
-----------------------------
Legal & General has around 720,000 mortgage endowment policies(2) at 31 December
2004. The current RAG status is: Red - 55%, Amber - 20%, Green - 25%.
Regulatory notes
----------------
• Past performance is not necessarily a guide to future performance.
• Legal & General Assurance Society Limited is authorised and regulated by
the Financial Services Authority.
• Returns from with-profits contracts are dependent on bonuses. Future
bonus rates are not guaranteed.
• The surpluses over targets shown in the endowment examples above arose
during a period when investment returns were high, similar returns and
therefore such large surpluses may not be available in future years
Additional bonus rates and running yields
-----------------------------------------
Given the large number and scope of Legal & General's bonus rate announcement,
further examples are available on request.
1 FTSE All Share total return
2 Includes low cost mortgage endowments and similar contracts that use PEPs and
ISAs as the underlying investment.
This information is provided by RNS
The company news service from the London Stock Exchange
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