Publication of Principles and Practices of Financial Management for with-profit funds

Content

1. What are PPFMs?
2. Realistic balance sheets and their impacts
3. Future of with-profits
4. Revised projection rates for Provident Mutual (PM) and Norwich Union Life & Pensions (NULAP) with-profit funds and the introduction of a guarantee charge on NULAP policies.

1. What are PPFMs?

In accordance with new regulations applying to all with-profit funds, Norwich Union will be publishing the Principles and Practices of Financial Management (PPFM) for each of its with-profit funds by 30 April 2004. The new documents seek to explain the management of each of the with–profit funds and include an explanation of the following key points:

• The amount payable under a with-profits policy
• Investment strategy
• Calculation of asset share
• Business risks undertaken
• How charges and expenses are treated
• Management of the inherited estate
• Volume of new business and arrangements on stopping taking new business
• Equity between the with-profits fund and shareholders.

In accordance with the new regulations, the Norwich Union Life board will have to certify each year that the funds have been managed in accordance with the stated principles and practices outlined in the PPFMs. There will also be an independent external review confirming this has happened.

The publication of the PPFMs will greatly increase the transparency with which with-profits funds are operated and will give policyholders further reassurance that the funds are being run in the agreed way. The new documents will be published on our web site at: www.norwichunion.com/ppfm. Norwich Union will be informing customers about the availability of PPFMs when it sends customers their annual with-profits statement. The FSA is currently consulting on the possible introduction of "more consumer friendly" versions of the PPFMs.

2. Realistic balance sheets and their impacts

In the light of the new realistic reporting regime being introduced for 2004, Norwich Union has included within its 2003 FSA return, information on the strength of its three main with-profit funds on a "realistic" basis. This shows total surplus assets of £4.3bn, 2.6 times the Risk Capital Margin with no need for support from shareholder funds. Full details of the realistic reporting figures are shown in notes to editors.

Norwich Union chief actuary, Mike Urmston, said: "We are very supportive of the new reporting regime. Norwich Union’s initial results on this basis show how strong and resilient its with-profit funds are when measured under the tough new requirements. The introduction of PPFMs demonstrates even greater transparency in with-profits reporting and we now have a complete picture linking together realistic reporting, investment policies and bonus declarations."

3. Future of with-profits

Norwich Union remains committed to with-profits and believes that it is still a key part of the investment offering for many customers, continuing to deliver the benefit of investing in a diversified pool of assets with smoothing of returns.

Mike Urmston added: "The new realistic reporting regime does not impact on our ability or our inclination to sell with-profits policies."

4. Revised projection rates for Provident Mutual (PM) and NULAP with-profit funds and the introduction of a guarantee charge on NULAP policies

The new reporting regime gives greater clarity and therefore more comfort to policyholders in a financially strong fund. Norwich Union has assessed the impact of this on its management of its with-profit funds. In particular we have reviewed the level of equity backing ratio (EBR), this is the proportion of the fund invested in shares and property, and whether or not to apply a charge to asset shares towards the cost of policy guarantees in the funds. Norwich Union has concluded that, where a change is necessary, it is more in policyholders’ interests to include a charge to asset share rather than further reduce the EBR. Reducing the EBR would lessen the impact of improving stock markets after the last few years of poor returns.

CGNU with-profit fund (the main new business fund) & CULAC with-profit fund

• The financial strength of the fund means there is no requirement to change the EBR from 65% (31 December 2003) or to introduce a charge on asset share
• The EBR will not be varied by product type or guarantee type
• Projected growth rates will continue at the current FSA recommended levels of 4%, 6%, and 8% (5%, 7% and 9% for pensions)
• All current new business, and new business generally written post merger of CGU and Norwich Union, is written in these with-profit funds.

NUL&P with-profit fund

There is a significant build up of valuable policyholder guarantees which are more likely to take effect in the current and forecast low inflation, lower investment return environment
We will introduce, from 1 May, a 0.75% per annum charge on asset share towards the cost of policy guarantees. (The need for the charge and its level will be regularly reviewed in the future in the light of the financial position of the fund. Any profit on this charge will be used to enhance future investment returns)
As a result of introducing the guarantee charge there are no plans to make any material changes to the 52% EBR level (31 December 2003)
Projection growth rates will be reduced to reflect the lower anticipated overall returns to policyholders, with the mid rate being reduced by 1%.

Provident Mutual with-profit fund

• This fund has a lower EBR than the other funds of 24% (31 December 2003). This reflects the relative strength of the fund and the covering of its guarantees
• We have no plans to introduce a charge on asset share in the near future
• Projection growth rates will be reduced to reflect the lower anticipated overall returns to policyholders, with the mid rate being reduced by 1.5%.

The summary of the change on mid-rate projection growth rates is as follows: