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‘Churning’ points

HBOS has rejected a City analyst’s claim that the company is a “churner”.

Aviva, Prudential, Standard Life and HBOS have all been branded “churners” in a new report conducted by Fox-Pitt Kelton. The report, The DNA of Life, measures persistency by calculating whether new business premium growth translates into reserve growth.

It claims that HBOS stands out as the worst performer, with a 14 per cent fund outflow as a percentage of reserves last year. The report says the firm’s focus on single-premium unit-linked life bond products makes it susceptible to higher lapses.

But an HBOS spokesman says: “We have had two short-term policies that have matured recently – one was a one-year policy with £1bn in it and the other was a two-year policy with £300m in it.”

HBOS head of existing business Ray Milne says the report’s figures are “factually incorrect” as the majority of its “lapsed” business was in one and twoyear guaranteed growth bonds that matured in 2005.

Fox-Pitt Kelton says Standard Life has seen a temporary improvement in persistency rates to 6.9 per cent in 2005 as policyholders held out for demutualisation windfalls but the analyst expects total outflows at Standard to hit 11 per cent in 2006.

The report claims that a deterioration in Aviva’s persistency rate in 2005 was confirmed by its decision to set aside a persistency reserve of £130m for lapses, £35m of which was used in the first half of this year. It says Aviva’s early surrender experience has been worsening across life and pensions while the industry average improved in 2005 compared with 2004.

Norwich Union finance director Nic Nicandrou, says the criticism of NU in the report is unfair for pension business but admits the firm has had problems with investment bond persistency. He considers that a decrease in persistency was inevitable after A-Day but says NU has taken in more business than it has lost.

Nicandrou says: “Churning is very emotive language. We took the prudent approach last year of setting aside money for increased lapses after A-Day.”

A Prudential spokesman says: “As we manage our back book of business, persistency remains a key priority. Our focus is on value, not volume, and to ensure that the business we write is profitable.”

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