The Traded endowment policies market suffered a fall in 2002 as a result of weak economic markets and life offices cutting bonus rates
After a fall in 2002, the demand for traded endowment policies (Teps) has risen since the beginning of this year, according to intermediaries and market makers.
Weak economic markets and bonus rate cuts from life offices had a huge negative impact on the market last year, said Colin Jackson, director of Baronworth Investment Services.
However, Jackson added, there are signs the market is picking up and he is fielding more enquiries and offers from market makers on endowment policies.
David Carrington, sales and marketing director at Policy Plus, said as bonus rates have fallen the guaranteed sum assured in many cases represents a growing proportion of a Tep's value.
As a result the average capital guarantee on policies held by Policy Plus is more than 80% of the portfolio and in many cases there are Teps available with a 100% guarantee.
There are two approaches to buying a Tep, according to Carrington.
Firstly, investors can go for policies from the big UK life offices such as Standard Life, Prudential and Norwich Union, which have fairly high guarantees and offer some room for capital growth as the market recovers.
Alternatively, they can buy a Tep from a life office such as Britannic, which has seen its price driven down because of the deferral of its bonus rate declaration. As a result of this, Carrington said, its guarantee is worth more and the capital protection on a Tep is more than 100%.
'In this case, an investor gets higher protection but the potential for capital growth when the markets recover is less,' Carrington said. 'However, in these policies, you are guaranteed not to lose any money, even if the life office never makes another bonus declaration.'
Brian Goldstein, managing director of Policy Portfolio, feels the Tep market has changed significantly in the past six months and that, in the wake of poor investor confidence, the supply of policies has increased.
He said: 'We have been able to buy policies more easily for three reasons. Firstly, the negative sentiment has prompted more people to surrender their policies. Secondly, life offices have been writing to their customers showing how much their mortgages have declined in value, which has led to more selling of endowment policies.'
The third reason he cited is the FSA directive PS106, which came into effect in September 2002. This insists life offices tell their policyholders about the existence of the Tep market when they seek information about surrendering their endowment, in turn pushing more policies in the direction of the market makers.
Goldstein said: 'Teps are one of the few investments where the value has increased, as once the bonuses are declared they cannot be taken away. In some cases, if life offices reduced bonuses by 50%, policies could still deliver 4%-7% pa growth between now and their maturity date.'
On this basis, Teps are increasingly being purchased by risk-averse investors, although Goldstein pointed out they should be purchased selectively, with advice from an intermediary.
Life industry analyst Ned Cazalet noted that when investing in Teps, investors should be cautious and consider the chances of disappointment on the bonus assumptions used by the life office that wrote the policy.
He said: 'Looking ahead to the end of the year, a number of big-name players will have to cut their bonuses and payout levels on conventional with-profit policies because these levels are simply too high.'
Cazalet has been asking life companies how much they have been paying in excess of their asset share on their maturing policies, as he feels it is a good indicator of the sustainability of returns.
In some cases, he said, the impact of with-profits smooth- ing is making companies pay more than their asset share, sometimes up to 19%. Companies cannot maintain this level of overpayment, he added, so there is a strong prospect of further cuts in bonus rates.
'The key issue for Tep investors is that we are not in a stable environment,' Cazalet. said. 'While these are not necessarily bad investments, with the solvency of life companies continuing to deteriorate, investors have to be very careful about what they are buying.'
He added the outlook for the market continues to be negative, particularly because the claims value for the players whose policies trade most on the market are at present considerably ahead of the underlying asset share.
This, he said, is a major signal for investors that their payout levels are likely to drop considerably in the future. However, even if a life office goes bust, Carrington said, a safety net of state protection will shield investors holding the office's Teps.
The statutory Policyholder Protection Act gives investors 90% of the guaranteed level of the endowment policy, so if an investor bought a Tep with guarantees worth £10,000 and the life office collapsed, they would be assured of getting £9,000 back.
Policy Plus has seen an increase in demand for Teps from two areas, according to Carrington: UK intermediaries and offshore investors.
UK intermediaries are increasingly buying these policies in their search for strong capital-guaranteed products for risk-averse investors, he said.
For the same reason, they have also been selling a lot of policies into Germany, Sweden and Austria, with the demand for sterling investment and UK with-profits driven by a lack of similar products in the European market, he added.
After a strong rise in the second half of 2002, Carrington said surrender values levelled out from the start of 2003, which means his firm can now be more selective in the policies it buys in.
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