Successful growth of our With Profits fund between 2013-15 was predominately based on introduced business, supported by generous introducer fees and high bonus rates in a pre-solvency II capital environment. However, the level of fees were unsustainable to continue to write profitable new business and the investment environment took a turn for the worse, compounded by tighter capital constraints arising from the regulatory changes in Solvency II thus reducing the return of the With Profits fund. Therefore, in the following period, the Board made the decision to reduce introducer fees and pay lower levels of guaranteed bonuses, impacting new business volumes significantly. In addition, introduced business from “professional introducers” e.g. mortgage brokers, proved not to be as “sticky” as traditional business and a significant proportion of our newly acquired Members transferred to other providers after staying with KU for a relatively short period of time (~5 years). In comparison, our branch-introduced Members have stayed loyal to the Society over the longer term, but since branches were centralised in 2016 and tighter regulatory controls were placed on those introducing new business, there has only been a handful of Member introductions.
To change this trend and attract new business we attempted to open-up new, non-commission-based, distribution channels - advised and direct, around the beginning of 2017. The ‘advised’ channel ultimately proved not to be productive for us with fierce competition from the likes of Aviva and Prudential, and with the direct channel, despite good initial signs, it became clear that we had insufficient time and resources to make it successful in the short term. We also launched a new innovative online Junior ISA product around the same time.
In the latter part of 2018, we recognised that we would need to grow by acquisition to complement our new business strategy. In 2019 we had an agreement in principle to this end and began detailed work to effect the acquisition but ultimately it proved unsuccessful.
The Board monitored the growth strategy monthly, with several in-depth reviews being undertaken over the last few years on our distribution and product strategy. Entering into 2019 the Society had three main distribution channels: (1) Direct; (2) Introduced; and (3) Adviser. It should also be noted that following the 2018 strategy review the Board included an objective in 2019 to consider merger and acquisition opportunities.
The Direct Channel had seen positive signs of gaining momentum over 2017 to 2018, with Premium’s increasing significantly in percentage terms, albeit at relatively modest levels. The success was mainly attributed to existing Members choosing to take advantage of the special offers to invest further monies with the Society. In 2019, despite the continued support of our existing Members, direct premium levels fell and the Society struggled to attract new Members. Whilst the Society had been successful in removing some barriers for new Members to join, such as improving our online functionality and application process, improving the quality of literature and updating our brand, the Society’s proposition struggled to be competitive in the wider market. The lack of a well-known brand, a small marketing budget, the complexity of With Profits policies and the levels of bonuses we were able to pay, all contribute to potential new Members choosing to invest elsewhere.
The Introduced Channel, which has always been our main channel for new business historically, had performed reasonably well over 2017 and 2018. However, in 2019 sales also dropped with a lower number of introducers choosing to promote the Society’s policies. Despite the Society’s best efforts to re-launch the channel during the year to encourage more introducers to sign up and promote the Society’s policies, very few new introducers registered – in large part due to the increased level of compliance controls required - leading to a fall in new business.
The Adviser Channel, which the Board felt had excellent potential if successful, had seen modest sales in 2018 from a standing start in 2017, and had developed good in-roads into a large broker’s platform. However, after a continued focus on the channel in 2019, it was clear that our overall proposition was not competitive enough to attract advisers to use our policies. Following review this channel was closed in August 2019, removing the associated resource and expenditure.
The decline in the outlook of our growth strategy and failure to achieve our set targets led the Board to review our growth strategy in the latter part of 2019, resulting in our decision to accelerate our merger and acquisition strategy.
COVID-19 has had a significant negative impact on the global investment markets, which in turn has led to a decline in the overall asset levels of the Society, especially in those assets like our Child Trust Fund (CTF) accounts that are linked to the UK stock market. Overall, the With Profits fund has weathered the current environment well, with our options strategy helping protect asset levels. However, the overall drop in asset levels will impact the level of income that the Society will generate for 2020 and it is now expected that this will lead us to have a reasonably large operational deficit for the year.
Operationally we have seen a smooth transition from office working to home-based working, with minimal impact to service levels. Member activity levels, including new business premiums and claims, have been very low during the year. This is expected to result in a fairly neutral net position for the money coming in and going out of the Society for the year. Whilst this will reverse the trend seen in previous three years where there have been significant levels of claims above premiums, leading to a net outflow of money from the Society, new business levels are expected to be lower than 2019.
KU has struggled over the last few years to be competitive in the wider marketplace with its overall proposition and products, which has in turn impacted new business sales.
Oddfellows, due to their scale and backing of the fraternal business, through its Unity Mutual brand is able to launch new and competitive products into the wider market. Whilst this must be complemented by cost-effective promotion, brand activity and smooth application processes, it gives Oddfellows a strong starting position to build on.
It must also be noted that Oddfellows have a good opportunity to encourage its large fraternal Membership to hold an insurance policy with Unity Mutual, whilst they will also have the chance to encourage their large amount of Child Trust Fund (CTF) policyholders to continue to invest with Oddfellows. The economies of scale with marketing to these larger cohorts give opportunities for targeted cross-selling that did not exist with KU.
All adult Members of Kingston Unity received notice of the Special General Meeting (SGM) on 17th October and its purpose by post during July. Additionally, the SGM notice was placed in The Times and on our own website. NB: Since this question was raised and responded to at the AGM it has become evident that the regulators will not have given their approval of all transfer formalities prior in sufficient time for us to follow due process and debate and vote on the matter at the planned SGM on 17th October even if the proposed rule change is registered. As a result, this scheduled meeting will be used as a further Q&A session for members, and notice will be given for a new SGM immediately thereafter. We apologise for this.
No, not in the short term. If the motion to transfer to Oddfellows is rejected, we will almost certainly close to new business, be forced to dramatically cut costs and will have to demonstrate to the Regulators that even if we fall below the “Solvency Capital Requirement”, as we could well do, we have a plan to resolve the situation. Ultimately if we are unable to maintain adequate capital coverage then the Regulator could indeed take control of the situation.
No there is no such dependency. Once the transfer takes place you automatically become a member of Oddfellows. Branch/Fraternal membership is optional and in the first year will be at a discounted rate for KU Members.
Oddfellows use a delegate voting system. Oddfellows delegates are known as “Deputies” and their annual general meeting is known as the “Annual Moveable Conference” or AMC for short.
It is for the Oddfellows Board (Nominations Committee) to decide who should sit on the Board and then put that to their Deputies at the following Oddfellows Annual Moveable Conference (AMC) to vote on their election to the Board. The Non-Executive Direct (NED) selection process took place in August 2020 and based on their skills gaps they have decided to select Rob Edwards and David Grant to sit on their Commercial Board and Peter Darragh to sit on their Audit, Risk and Compliance Committee.
In general, as part of our due diligence process, we analysed the performance of four of their Insurance Business funds, which all have different investment mandates and underlying investment assets and strategies. This is because they all have different capital requirements and reasonable policy-holder expectations. We examined performance over several years and looked in more detail at 2018 (a difficult year for markets), and 2019, (a better year for markets). We found that investment management performance across their funds with due regard to their respective mandates and capital constraints were objectively satisfactory and met the respective policy-holders’ reasonable expectations. We have no reason to believe that KU policy-holders’ reasonable expectations will not be met similarly if the proposal to merge is accepted.
It is worth noting that Oddfellows has not had to operate as dynamic an investment strategy as KU as they have not had the same solvency pressure so there are significant differences in performances over short time horizons but overall their long-term investment approach has performed satisfactorily. Although difficult to compare any of Oddfellows’ funds like-for-like to the KU fund (or the discreet performance of the property element of any of them) the closest comparator performed similarly to KU’s With Profits fund over the medium term. It is also worth noting that KU’s main investment manager, Vestra, is already an investment manager on some Oddfellows funds and the intention is for them to continue to manage KU’s investment money which will give further continuity to KU members.
Moreover, it is worth noting that assuming the KU fund moves into run-off over the next few years properties would likely need to be liquidated to meet claims. Due to their illiquid nature it may be the case that full value would not be realised if KU were to become a forced seller. Oddfellows have expressed a readiness to transfer such assets into other funds at fair market value which highlights another attractive attribute of the merger proposal. Oddfellows has effectively done this for another sub-fund already and has cleverly used the transfer to underwrite a new compelling product proposition to the benefit of all members.
For completeness, the investment performance of Oddfellows unit-linked policies is entirely in line with expectations based on the index they track.
KU’s directly held commercial property portfolio is valued by an independent valuer annually. The last such valuation was in November 2019 and has not been repeated this year yet, however, our property advisor, Ryden LLP, is confident, based on transactions for similar properties which they have been involved in on either side of the first ‘COVID-19 spike’ that our portfolio has lost less than 10% of its 2019 year-end value. Compared to regular ‘investment grade’ property funds this represents strong performance. This is due in part to our mix of property type and tenant, with our industrial units holding their value very well and our lack of significant exposure to city-centre office space or prime retail, which have lost significant value. The other key factor underpinning this performance has been our proactive and constructive management of tenants. Rent support has been offered (where reasonable to do so), such as rent-free periods, payment holidays and allowing more regular payments to assist with cashflow which has resulted in continued high occupancy levels and our income holding up remarkably well. This has vindicated our decision to do the ‘right thing’ not only to benefit tenants and their employees but also to act in the best long-term interests of Members.
Surpluses will be ring-fenced exclusively for KU With Profits Members. The Oddfellows Commercial Board will decide on the Investment strategy to try to get the best returns and bonuses for Members. Oddfellows will also determine how and when to distribute surpluses as the With Profits book decline as policyholders leave over time. Fairness to all Members will be the key consideration. It is not expected that a special bonus distribution will be made upon the completion of the proposed transfer.
Yes, the Society must hold reserves to meet Solvency II regulations to best ensure we can meet our commitments to Members. Our reserves or “Own Funds”, the excess of our With Profits assets over our With Profits liabilities (the mandatory policy pay-outs to Members with guaranteed bonuses) are available for future distribution to With Profits Members over time. It is currently estimated that Own Funds at the time of transfer will be circa £5m.
The former branch tables and schemes are considered With Profits policies in the main (there are a very small number that aren’t), so any With Profits Members would benefit from their fair share of any With Profits surplus profits.
The Terms and Conditions of the Medical and Interest Accounts will not change, all policies will be taken across into Oddfellows on the same Terms and Conditions. They will operate in the same manner as the currently operate and will not be changed into any comparable Oddfellows versions.
Former KU Members will not form their own branch but will be encouraged to join the Oddfellows existing branch network depending on their location. However, former KU Members that don’t join an Oddfellows branch will be allocated a certain number of spaces at the Oddfellows Annual Movable Conference (AMC), at 1 Deputy for 500 former KU Members. Only former KU Members that are not Members of an Oddfellows Branch would be eligible to apply to become a KU Deputy (this is to stop Members having multiple ways to becoming an Oddfellows Deputy, which would be unfair to the rest of the membership).