TIDM41BM TIDM60KE
RNS Number : 4837H
Royal London
18 August 2016
Press Release
18 August 2016
ROYAL LONDON REPORTS STRONG GROWTH IN NEW BUSINESS SALES AND
OPERATING PROFIT DESPITE MARKET UNCERTAINTY AND LOW INTEREST
RATES
Financial highlights
-- New life and pensions business (PVNBP basis)(1) up by 39% to
GBP4,201m (30 June 2015: GBP3,032m) which represents a new record
for Royal London;
-- Funds under management(2) up by 11% to GBP93.8bn (31 December 2015: GBP84.5bn);
-- European Embedded Value (EEV) operating profit up by 20% to GBP138m (30 June 2015: GBP115m);
-- IFRS transfer to the unallocated divisible surplus before
change in basis for Solvency II(3) up by 419% to GBP83m (30 June
2015: GBP16m);
-- Margin for new insurance business is 2.1% (30 June 2015:
2.0%) reflecting changes in mix of business;
-- Solvency II Standard Formula Basis Total Company(4) surplus
of GBP2.1bn and a capital cover ratio of 169% at 1 January 2016.
Estimated capital cover ratio of 166% at 30 June 2016.
New Business Review
Intermediary new life and pensions business
-- Intermediary Protection business up by 24% to GBP287m (30 June 2015: GBP231m);
-- Group Pensions up by 66% to GBP1,921m (30 June 2015: GBP1,155m);
-- Individual Pensions and Drawdown up by 17% to GBP1,783m (30 June 2015: GBP1,524m).
The new business momentum we achieved in the second half of last
year in our UK intermediary protection business has continued in
2016 and Royal London has again posted record sales results. The
Group demonstrated its strong commitment to a high level of service
offered to customers and their advisers with our new online
quotation and underwriting systems. These innovations have been
particularly well received by advisers who have appreciated the
improvements to the speed of the processes for their clients.
The intermediary protection business in the Republic of Ireland
continues to go from strength to strength, supported by the
extension of our product range to include a new innovative whole of
life proposition, and the ongoing service improvements generated by
new digital capability leading to faster customer service.
The same commitment to excellent customer service and
market-leading propositions contributed to the continued financial
success of our intermediary pensions business. Recent innovations
include enhancements to the flexibility of the Drawdown proposition
and a unique Drawdown Governance service. Enhancements to the
Governed Portfolios ensure that our investment solutions continue
to be at the forefront of the market.
An approach to setting up automatic enrolment schemes based on
personal contact rather than employer self-service means that Royal
London continues to attract good quality business. Increasingly
schemes set up with other providers earlier in the automatic
enrolment process are switching to Royal London attracted by the
quality of our service. Our pensions business continues to grow
because of auto-enrolment which we expect to continue throughout
2016, although we anticipate this will reduce once smaller schemes
have enrolled and the initial auto-enrolment staging process comes
to an end.
Consumer new life and pensions business
-- Consumer up by 93% to GBP160m (30 June 2015: GBP83m)
The Consumer division experienced strong growth for its range of
direct-to-consumer protection products in the first half of 2016.
Our Consumer division is still a relatively new market entrant and
the Over 50s plan in particular has taken market share from
established market participants. It is an innovative and value for
money product which is proving popular with its target market.
Strong sales growth has been seen from our distribution
partnerships with Cooperative Funeral Services and Ecclesiastical
Insurance in the pre-paid funeral plan market. We continue to seek
further strategic distribution partnerships with consumer
orientated organisations who share our objective of delivering
better value for customers.
Wealth
-- Royal London Asset Management (RLAM) continued to perform
well, attracting gross inflows of GBP2.3bn (30 June 2015: GBP1.9bn)
arising from both Institutional and Wholesale markets. This is a
particularly strong result in a period of market uncertainty around
the UK referendum on European Union (EU) membership.
-- The Ascentric wrap platform saw assets under
administration(5) increase by 7% to GBP10.8bn (31 December 2015:
GBP10.1bn). In common with the wrap sector as a whole, Ascentric
saw lower gross sales against the background of market volatility
in the first half of 2016. The business recorded gross sales of
GBP1.07bn (30 June 2015: GBP1.19bn).
Review of financial performance
EEV operating profit
Group EEV operating profit increased by 20% to GBP138m (30 June
2015: GBP115m), despite the reduction in market interest rates,
assisted by strong new business profit growth of GBP22m (34%)
particularly in Pensions, Intermediary Protection and RLAM.
IFRS Transfer to Unallocated divisible surplus
As a mutual company, all earnings are retained for the benefit
of participating policyholders and are carried forward within the
unallocated divisible surplus. The IFRS transfer to the unallocated
divisible surplus for the six months ended 30 June 2016, before
change in basis for Solvency II and Other Comprehensive Income, was
GBP83m (30 June 2015: GBP16m). Our IFRS result also benefits from
the strong trading performance of the Group but is impacted by the
low interest rate environment in the first six months of 2016.
Capital
Our capital position is robust and under a Solvency II Standard
Formula basis Total Company(3) surplus was GBP2.1bn with a capital
cover ratio of 169% at 1 January 2016. The estimated capital cover
ratio at 30 June 2016 is 166%.
Phil Loney, Group Chief Executive of Royal London, said:
"Our strategy of differentiating Royal London from the
competition by concentrating on quality, value for money products
and the delivery of service excellence is driving the success of
our business. Today we are announcing a strong set of results
delivered against the uncertain backdrop of the UK referendum on EU
membership and continuing low interest rates. Despite the reduction
in interest rates, profit margins have held up well, allowing
continued investment in the business to support the development of
our product and servicing capabilities.
"For example, we have made a substantial investment in our
protection proposition for customers introduced by intermediaries,
making improvements to the customer journey with enhancements to
the online application and underwriting processes and keener
pricing. These improvements have resulted in wider adviser and
customer engagement and an improvement in first half new
business.
"We have indicated that we expect a slowing of the rate of
growth in workplace pensions for some time and this indeed is
beginning to come through in the new business figures. As smaller
employers are now starting to auto-enrol the revenue from these
schemes is lower than in earlier phases which were dominated by
larger schemes. Nonetheless the number of schemes continues to grow
and new business growth in Group Pensions was ahead by 66% on the
same half-year period in 2015.
"As the auto-enrolled market matures we are beginning to see a
new trend; the growth of a secondary market as advisers recommend
schemes move to take advantage of better quality scheme
administration or investment options. Royal London has benefited
from this trend, taking on schemes that have already auto-enrolled
with other providers. This "flight to quality" introduces
competition to the market and will result in better outcomes for
scheme members.
"Our direct to consumer business is now an established franchise
in its chosen markets of Over 50s plans, term assurance and
pre-paid funeral plans. All of these products offer customers good
value for money and we will continue our strategy of targeting
markets where we believe consumers are not currently well served.
Sales of funeral plans through established distribution partners
have been particularly strong and we will continue to seek out
distribution opportunities for other products with like-minded
partners.
"RLAM recorded a strong performance in the first half of 2016
with good gross and net inflows in sharp contrast to others in the
asset management sector. Institutional business was particularly
strong, with a number of new clients investing in the credit and
government bond portfolios in particular.
"In difficult market conditions the Ascentric wrap platform saw
assets under administration increase by 7% to GBP10.8bn (GBP10.1bn
at 31 December 2015).
"Royal London continues to build its scale in the UK and Irish
markets by offering a differentiated proposition rooted in our
customer owned business model. Strong trading performance enables
us to support record levels of investment in our business, with a
strong capital position and growing operating profits for the
benefit of our members. 2016 sees the extension of our innovative
profit sharing arrangements to eligible pension customers and
members. By offering a vibrant mutual alternative Royal London
creates value directly for its own customers but also indirectly
for all consumers through its competitive influence.
Notes on the financial and new business highlights
1. New life and pensions business is on a present value of new
business premiums (PVNBP). See Editor's note 2 for further
explanation.
2. Funds under management represent the total of assets managed
or administered by the Group, on behalf of
institutional clients and on behalf of the Group.
3. 2016 result consists of IFRS transfer from unallocated
divisible surplus from the Income Statement of GBP(82)m plus the
Change in Basis for Solvency II of GBP165m. The change in basis for
Solvency II reflects a one-off charge on the adoption of Solvency
II which is explained on page 20.
4. Total Company is The Royal London Mutual Insurance Society
Limited, which comprises the Royal London Open Fund, into which all
new business is written, and seven closed ring-fenced funds from
previous acquisition activity. A restriction of GBP1.7bn is
included as a deduction to total Own Funds of GBP6.8bn, because
excess capital in the closed funds is ultimately for the benefit of
those closed fund policyholders. Therefore closed funds report a
zero surplus, with Total Company surplus equal to Royal London Open
Fund surplus. Before the GBP1.7bn, restriction, the closed funds
have a capital cover ratio of 213% at 1 January 2016.
5. Assets under administration represent the total assets
administered on behalf of individual customers and institutional
clients. It includes those assets for which the Group provides
investment management services, as well as those that the Group
administers when the customer has selected an external third-party
investment manager.
CONTENTS
In this section Page
1 New business review 6
2 Review of financial performance
7
* Consolidated income statement - EEV basis for the six
months ended 30 June 2016 8
9
* Consolidated Balance sheet - EEV basis as at 30 June
2016
* EEV operating profit
9
* EEV profit before tax
11
13
* IFRS Consolidated Statement of Comprehensive Income
for the six months ended 30 June 2016
* IFRS Consolidated Balance Sheet as at 30 June 2016
* IFRS results 14
* IFRS Balance Sheet 14
* Investment performance 14
* Solvency II capital position on a Standard Formula
basis 15
3 Other matters
* UK Referendum on EU membership 17
* Ratings agencies 17
Appendix 1: EEV basis of preparation 18
Appendix 2: IFRS basis of preparation 20
Appendix 3: Reconciliation of the IFRS
unallocated divisible surplus to the European
Embedded Value 26
Editor's notes 27
1. New business review
Intermediary
PVNBP New business New business
contribution(1) margin
--------------- ------------------ ----------------------- ------------------
30 June 30 June 30 June 30 June 30 June 30 June
2016 2015 2016 2015 2016 2015
--------------- -------- -------- ----------- ---------- -------- --------
GBPm GBPm GBPm GBPm % %
--------------- -------- -------- ----------- ---------- -------- --------
Intermediary
--------------- -------- -------- ----------- ---------- -------- --------
Pensions 3,754 2,718 67.0 43.8 1.8 1.6
--------------- -------- -------- ----------- ---------- -------- --------
Protection 287 231 25.8 22.5 9.0 9.7
--------------- -------- -------- ----------- ---------- -------- --------
Consumer
PVNBP New business New business
contribution(1) margin
---------- ------------------ ----------------------- ------------------
30 June 30 June 30 June 30 June 30 June 30 June
2016 2015 2016 2015 2016 2015
---------- -------- -------- ----------- ---------- -------- --------
GBPm GBPm GBPm GBPm % %
---------- -------- -------- ----------- ---------- -------- --------
Consumer 160 83 (5.2) (6.1) (3.3) (7.3)
---------- -------- -------- ----------- ---------- -------- --------
Wealth
PVNBP(2) New business New business
contribution(1) margin
--------- ------------------ ----------------------- ------------------
30 June 30 June 30 June 30 June 30 June 30 June
2016 2015 2016 2015 2016 2015
--------- -------- -------- ----------- ---------- -------- --------
GBPm GBPm GBPm GBPm % %
--------- -------- -------- ----------- ---------- -------- --------
RLAM 2,319 1,870 14.7 13.8 0.6 0.7
--------- -------- -------- ----------- ---------- -------- --------
30 June 30 June Change
2016 2015 %
GBPm GBPm %%
----------------- ------------- ------------ ------------
RLAM
Net new business, excluding external cash mandates:
------------------------------------------------------------
Inflows 2,319 1,870 24%
----------------- ------------- ------------ ------------
Outflows (1,852) (1,359) 36%
----------------- ------------- ------------ ------------
Net 467 511 (9)%
----------------- ------------- ------------ ------------
30 June 30 June
2016 2015 Change
Ascentric GBPm GBPm %
----------------- ------------- ------------ ------------
Gross sales 1.07bn 1.19bn (10.1)%
----------------- ------------- ------------ ------------
Notes on the new business review
1 The new business contribution in the tables above represents
the new business contribution grossed up for tax at 20% (2015:
20%). This is to aid comparability with proprietary companies which
typically pay tax at the main corporate tax rate of 20% (2015:
20%).
2 PVNBP for Wealth relates to gross sale inflows in the
period.
2. Review of financial performance
Consolidated income statement - EEV basis for the six months
ended 30 June 2016
6 months 6 months 12 months
to to to
30 June 30 June 31 December
2016 2015 2015
GBPm GBPm GBPm
---------------------------- ----------- ----------- ----------------
Operating activities
Contribution from new
business 87 65 137
Profit from existing
business
- Expected return 45 38 76
- Operating experience
variances 13 (2) 3
- Operating assumption
changes - (1) 74
Expected return on opening
net worth 21 14 27
Profit on uncovered
business 4 5 7
Strategic development
costs and other items (32) (4) (80)
----------------------------- ----------- ----------- ----------------
Total operating profit
before tax 138 115 244
Economic experience
variances 201 (17) 21
Economic assumption
changes (177) 11 32
Movement in Royal London
Group Pension Scheme
surplus (102) (8) 23
Financing costs (23) (20) (43)
ProfitShare - - (74)
Change in basis for (182) - -
Solvency II
EEV (loss)/profit before
tax (145) 81 203
Attributed tax charge (12) (10) (22)
Total EEV (loss)/profit
after tax (157) 71 181
----------------------------- ----------- ----------- ----------------
Consolidated Balance Sheet - EEV basis as at 30 June 2016
30 June 30 June 31 December
2016 2015 2015
GBPm GBPm GBPm
----------------------------------- -------- -------- -------------
Assets
Assets held in closed funds 38,684 31,882 31,631
Assets backing non-participating
liabilities 26,173 22,998 24,084
Reinsurance assets 8,490 7,553 7,528
Assets backing participating
liabilities and net worth 8,600 7,596 7,666
Value of in-force business 1,705 1,880 2,034
Royal London Group Pension Scheme
surplus - 40 71
Total 83,652 71,949 73,014
----------------------------------- -------- -------- -------------
Liabilities
Liabilities in closed funds 38,684 31,882 31,631
Non-participating liabilities 26,173 22,998 24,084
Reinsured liabilities 8,490 7,553 7,528
Participating liabilities 5,883 5,377 5,363
Current liabilities 1,402 1,082 1,241
Royal London Group Pension Scheme 10 - -
deficit
Total 80,642 68,892 69,847
----------------------------------- -------- -------- -------------
Embedded Value
Net worth 1,315 1,137 1,062
Value of in-force business 1,705 1,880 2,034
Royal London Group Pension Scheme
(deficit)/surplus (10) 40 71
Total 3,010 3,057 3,167
----------------------------------- -------- -------- -------------
Value of in-force business - EEV basis
30 30 June 31 December
June 2015 2015
2016
GBPm GBPm GBPm
----------------------------------- ------ -------- -------------
Value of in-force business before
allowance for burn-through and
capital costs 1,730 1,922 2,066
Burn-through cost (4) (9) (3)
Cost of capital (21) (33) (29)
----------------------------------- ------ -------- -------------
Value of in-force business 1,705 1,880 2,034
----------------------------------- ------ -------- -------------
EEV operating profit
We delivered a strong operating performance in the six months to
30 June 2016 despite the challenges and uncertainty in the market
leading up to and following the UK referendum on EU membership. The
Group achieved an EEV operating profit of GBP138m (30 June 2015:
GBP115m) which was driven by strong new business performance and a
stable performance from our book of existing business.
It also includes a one-off gain of GBP21m relating to the
decision to close the Royal London Group Pension Scheme ("RLGPS")
to future accrual of benefits from 31 March 2016. This was an
important step in managing our costs and capital requirements.
Whilst we have closed the RLGPS all employees are now encouraged to
join the Royal London Group Personal Pension or the Ascentric Group
Personal Pension which are consistent with the products that we
offer to our customers through our Group pensions business.
Contribution from new business increased by 34% to GBP87m at 30
June 2016 (30 June 2015: GBP65m). This reflects strong growth in
Pensions, Intermediary Protection and RLAM. Margins have held up
well despite the challenging economic environment pre and post the
EU referendum. New business contribution in 2016 is discounted
using a rate derived from the swap curve whereas the 2015 result is
discounted using a gilt yield derived discount rate.
Profit from existing business has increased by 54% to GBP83m (30
June 2015: GBP54m) as a result of favourable operating variances of
GBP13m (30 June 2015: GBP(2)m) for morbidity and mortality
experience and persistency experience. Expected return has
increased 27% to GBP66m as a result of changes to the risk premia
applied to the risk free rate.
EEV Operating Profit includes Contribution from new business of
GBP87m (30 June 2015: GBP65m), Profits from existing business of
GBP83m (30 June 2015: GBP54m) and Strategic Development costs and
other items of GBP32m (30 June 2015: GBP4m). Strategic Development
costs include GBP14m (30 June 2015: GBP4m) to support initiatives
that we believe are important for our future competitiveness and we
expect will deliver good returns in the future. It also includes an
increase in provisions of GBP33m which mostly relates to the cost
of servicing historic remediation. These negative items are offset
by a GBP21m one off gain on the closure of the RLGPS to future
accrual as explained above.
EEV profit before tax
After reflecting the impact of economic variances, our EEV
profit before tax and before the change in basis for Solvency II
was GBP37m (30 June 2015: GBP81m). The decrease on the comparative
period in 2015 is mainly due to an GBP80m adverse movement in the
surplus within the RLGPS during the 6 months ended 30 June 2016,
which is net of the GBP21m gain on the closure of the RLGPS to
future accrual. A significant decrease in corporate bond yields
used to discount the scheme liabilities partially offset by higher
than assumed investment performance and by lower than expected
inflationary increases, resulted in the scheme ending the period in
a deficit.
As a result of the introduction of Solvency II we have chosen to
make a number of changes to the basis used to produce EEV results.
The purpose of these changes is to better align our EEV reporting
to the approach taken to prepare our capital position under the new
Solvency II regulations. The adjustments are treated as a change in
estimate which is recognised in the current period with no
restatement of prior periods. The main changes are to use a swap
curve to discount cash flows compared to a gilt curve used
previously and a change in methodology to reserve for reinsurer
default. The total impact is a one off charge of GBP182m on the
Group's Embedded Value. This change has led to our EEV result
before tax to be a loss of GBP145m (30 June 2015: profit of
GBP81m).
IFRS Consolidated Statement of Comprehensive Income for the six
months ended 30 June 2016
Restated Restated
6 months 6 months 12 months
to to to
30 June 30 June 31 December
2016 2015 2015
GBPm GBPm GBPm
------------------------------------- ----------- ----------- --------------
Revenue
Gross earned premiums 662 563 1,194
Amounts paid to reinsurers (678) (132) (400)
------------------------------------- ----------- ----------- --------------
Net earned premiums (16) 431 794
Fee income from investment and
fund management contracts 123 124 255
Investment return 7,113 812 2,122
Other operating income 38 24 44
------------------------------------- ----------- ----------- --------------
Total revenue 7,258 1,391 3,215
------------------------------------- ----------- ----------- --------------
Policyholder benefits and claims
Claims paid, before reinsurance 1,350 1,247 2,725
Reinsurance recoveries (248) (210) (470)
------------------------------------- ----------- ----------- --------------
Claims paid, after reinsurance 1,102 1,037 2,255
Increase/(decrease) in insurance
contract liabilities, before
reinsurance 4,852 (841) (1,020)
Reinsurance ceded (804) 189 122
------------------------------------- ----------- ----------- --------------
Increase/(decrease) in insurance
contract liabilities, after
reinsurance 4,048 (652) (898)
Increase in non-participating
value of in-force business - (31) (92)
Increase in investment contract
liabilities 1,315 554 911
Change in basis for Solvency 165 - -
II
------------------------------------- ----------- ----------- --------------
Total policyholder benefits
and claims 6,630 908 2,176
------------------------------------- ----------- ----------- --------------
Operating expenses
Administrative expenses 247 211 477
Investment management expenses 110 109 238
Amortisation charges and impairment
losses on acquired PVIF and
other intangible assets 36 13 40
Investment return attributable
to external unit holders 98 45 22
Other operating expenses 46 54 75
------------------------------------- ----------- ----------- --------------
Total operating expenses 537 432 852
------------------------------------- ----------- ----------- --------------
Finance costs 25 21 44
------------------------------------- ----------- ----------- --------------
Result before tax and before
transfer to unallocated divisible
surplus 66 30 143
------------------------------------- ----------- ----------- --------------
Tax charge 148 14 18
------------------------------------- ----------- ----------- --------------
Transfer (from)/to the unallocated
divisible surplus (82) 16 125
------------------------------------- ----------- ----------- --------------
Result for the period - - -
------------------------------------- ----------- ----------- --------------
IFRS Consolidated Statement of Comprehensive Income for the six
months ended 30 June 2016 (continued)
6 months Restated Restated
to 6 months 6 months
30 June to to
2016 30 June 31 December
2015 2015
GBPm GBPm GBPm
------------------------------------- ----------- ----------- --------------
Other comprehensive income
------------------------------------- ----------- ----------- --------------
Items that will not be reclassified
to profit or loss
------------------------------------- ----------- ----------- --------------
Remeasurements of defined
benefit pension schemes (93) (10) 50
------------------------------------- ----------- ----------- --------------
Transfer (from)/to the unallocated
divisible surplus (93) (10) 50
------------------------------------- ----------- ----------- --------------
Other comprehensive income - - -
for the period net of tax
------------------------------------- ----------- ----------- --------------
Total comprehensive income - - -
for the period
------------------------------------- ----------- ----------- --------------
As a mutual company, all earnings are retained for the benefit
of participating policyholders and are carried forward within the
unallocated divisible surplus. Accordingly, there is no profit or
loss for the period shown in the statement of total comprehensive
income.
IFRS Consolidated Balance Sheet as at 30 June 2016
Restated
Restated 31 December
30 June 2016 30 June 2015 2015
ASSETS GBPm GBPm GBPm
------------------------------------------------- --------------- -------------- --------------------------
Property, plant and equipment 44 54 42
Investment property 5,306 4,990 5,036
Intangible assets 778 898 832
Reinsurers' share of insurance contract
liabilities 6,162 4,985 5,052
Pension scheme asset 116 112 177
Current tax asset - 4 19
Financial investments 68,997 59,124 60,129
Trade and other receivables 953 782 546
Cash and cash equivalents 3,819 3,102 2,823
------------------------------------------------- --------------- -------------- --------------------------
Total assets 86,175 74,051 74,656
------------------------------------------------- --------------- -------------- --------------------------
LIABILITIES
------------------------------------------------- --------------- -------------- --------------------------
Participating insurance contract liabilities 32,938 28,746 28,708
Participating investment contract liabilities 2,080 2,178 2,232
Unallocated divisible surplus 3,139 3,145 3,314
Non-participating value of in-force business (909) (849) (910)
------------------------------------------------- --------------- -------------- --------------------------
37,248 33,220 33,344
Non-participating insurance contract liabilities 7,940 6,824 6,683
Non-participating investment contract
liabilities 27,414 23,917 24,984
------------------------------------------------- --------------- -------------- --------------------------
35,354 30,741 31,6677
Subordinated liabilities 744 641 743
Payables and other financial liabilities 8,156 5,634 5,156
Pension scheme liability 10 - -
Provisions 226 215 224
Other liabilities 286 268 286
Liability to external unit holders 3,937 3,245 3,145
Deferred tax liability 159 87 91
Current tax liability 55 - -
Total liabilities 86,175 74,051 74,656
------------------------------------------------- --------------- -------------- --------------------------
IFRS results
The IFRS transfer to the unallocated divisible surplus for the
six months ended 30 June 2016, before change in basis for Solvency
II and Other Comprehensive Income, was GBP83m (30 June 2015:
GBP16m). Our IFRS result benefits from the strong trading
performance of the Group and is also impacted by the low interest
rate environment in the first six months of 2016. However, there
are some differences including the amortisation of certain
intangibles recognised in IFRS and not EEV and a difference in the
value of our asset management and service company subsidiaries
which increased significantly under the EEV basis. These items were
offset slightly by an increase in the value of our subordinated
debt in the EEV results with no increase in the IFRS value. The
IFRS result is also impacted by the change in basis for Solvency II
of GBP165m and the adverse movement in the RLGPS, the majority of
which is recognised in Other Comprehensive Income. Including the
impact of changing basis to Solvency II and Other Comprehensive
Income, the total result was a transfer from unallocated divisible
surplus of GBP175m (30 June 2015: transfer to unallocated divisible
surplus of GBP6m).
IFRS balance sheet
As a result of our performance in the year, the unallocated
divisible surplus has decreased from GBP3,314m at 31 December 2015
to GBP3,139m at 30 June 2016.
Our balance sheet remains robust and we experienced no
significant asset impairments in the period. Our total investment
portfolio (including investment property) was GBP74.3bn at 30 June
2016, an increase on 31 December 2015 of 14%. Our financial
investments portfolio remains high quality and 52% (31 December
2015: 51%) of our asset portfolio is in fixed income investments
and deposits with credit institutions.
Investment performance
We measure our investment returns against benchmarks that we
have constructed from market indices weighted to reflect the asset
mix of each sub-fund. At 30 June 2016 the investments backing the
asset shares of the Royal London Open Fund achieved a return of
7.5%, (actual 6 months to 30 June 2015: 2.1%) which was behind our
benchmark of 8.7% (6 months to 30 June 2015: 1.6%). This was
because the weighting of the fund compared to benchmark was lower
in gilts, the value of which increased significantly as yields
decreased following the UK referendum on EU membership.
Despite investment performance being behind benchmark it is up
on the same period in 2015. In particular, within the IFRS results
a significant increase in financial investments was attributable to
unrealised gains on gilts, interest rate swaps and overseas
equities.
The total Royal London Open Fund annualised investment
performance over 5 years to the 30 June 2016 was 9.3% against a
benchmark of 9.0%.
The Royal London with-profits investment performance for the six
month period ended 30 June 2016 for UK equities was 3.6% (benchmark
4.3%), overseas equities returned 8.7% (benchmark 10.6%), returns
from UK corporate bonds were 7.1% (benchmark 7.6%), government
bonds achieved a return of 20.2% (benchmark 20.9%) and our property
portfolio returned 3.0% (benchmark 2.7%).
Solvency II capital position on a Standard Formula basis
Our capital position is robust, reflecting the strength of our
underlying business and effective capital management strategies.
Royal London, on a Total Company(1) basis after closed fund
restrictions of GBP1.7bn, had a surplus of GBP2.1bn and a capital
cover ratio of 169% at 1 January 2016. This surplus arises wholly
in the Royal London Open Fund, which considered in isolation has a
capital cover ratio of 239% at 1 January 2016. The capital cover
ratio on a Total Company basis at 30 June 2016 is estimated to be
166%. The surplus and capital cover ratios include capital add-ons
agreed with the Prudential Regulatory Authority (PRA).
At 1 January 2016, the use of the approved Transitional Measure
on Technical Provisions contributed 11% to the Total Company
capital cover ratio.
The vast majority (78%) of total Own Funds within the Royal
London Open Fund is made up of Tier 1 capital, with only
subordinated debt valued at GBP0.8bn, classified as Tier 2 capital.
Own Funds within the closed funds are entirely Tier 1 capital.
The Royal London Open Fund capital cover ratio is sensitive to
changes in economic and demographic assumptions. As an indication,
at 1 January 2016 a change in equities of 20% would impact the
cover ratio by an estimated +/- 4% and a change in interest rates
of 100bps would impact the cover ratio by an estimated +/- 7%.
(1.) Total Company is The Royal London Mutual Insurance Society
Limited, which comprises the Royal London Open Fund, into which all
new business is written, and seven closed ring-fenced funds from
previous acquisition activity. A restriction of GBP1.7bn is
included as a deduction to total Own Funds of GBP6.8bn, because
excess capital in the closed funds is ultimately for the benefit of
those closed fund policyholders. Therefore closed funds report a
zero surplus, with Total Company surplus equal to Royal London Open
Fund surplus. Before the GBP1.7bn, restriction, the closed funds
have a capital cover ratio of 213% at 1 January 2016.
1 January 2016 Royal Royal
London London Closed
Open Closed Fund Total
Fund Funds Restriction Company
GBPbn GBPbn GBPbn GBPbn
------------------------------ -------- -------- -------------- ----------
Own Funds:
Tier 1 2.8 3.2 - 6.0
Tier 2 0.8 - - 0.8
------------------------------ -------- -------- -------------- ----------
Total Own Funds 3.6 3.2 - 6.8
Closed Funds restriction - - (1.7) (1.7)
------------------------------ -------- -------- -------------- ----------
Adjusted Own Funds
(A) 3.6 3.2 (1.7) 5.1
------------------------------ -------- -------- -------------- ----------
Solvency Capital Requirement
(B) 1.5 1.5 - 3.0
------------------------------ -------- -------- -------------- ----------
Surplus 2.1 1.7 (1.7) 2.1
Capital cover ratio
(A/B) 239% 213% n/a 169%
------------------------------ -------- -------- -------------- ----------
The above figures are taken from Royal London's opening Solvency
II Balance Sheet submission to the Regulator in May 2016. The
Solvency Capital Requirement includes capital add-ons agreed with
the PRA.
The Solvency II position has been prepared in accordance with
the Solvency II Directive which came into effect on 1 January 2016
for all insurance entities operating in Europe. We have adopted the
Standard Formula approach for the purposes of measuring regulatory
capital under Solvency II. Royal London received approval for the
use of both the Transitional Measure on Technical Provisions and
the Volatility Adjustment. The results have not been subject to a
full external independent audit opinion.
3. Other matters
UK Referendum on EU membership
We have considered the impact of the UK's decision to leave the
European Union and are confident that there is no significant
impact to the operations or the capital of the Group. The Group
maintains a very strong capital position. We will continue to
monitor the implications of the vote to leave, but expect to
continue to trade as normal.
Since the vote outcome, we have seen a period of market and
currency volatility for the UK. We continue to work on behalf of
our customers to provide them with the best possible long-term
returns.
Ratings agencies
Whilst the Group's credit rating remains unchanged in 2016,
Moody's changed the Group's outlook from stable to negative on the
29 June 2016 following the UK referendum result. Moody's downgraded
the UK country rating on the expectation of lower future UK
economic growth and at the same time Moody's also changed the
outlook for a number of Insurance companies. This is not reflective
of a change in Group strategy or current performance and the Group
maintains a strong capital position and a resilient Balance
Sheet.
Appendix 1 - EEV Basis of preparation
The EEV results provide supplementary information for the six
months ended 30 June 2016 and should be read in conjunction with
the Group's IFRS results included on pages 11 to 16. The EEV
results have been prepared in accordance with the EEV Principles
and Guidance issued in April 2016 by the CFO Forum. Following the
introduction of Solvency II on 1 January 2016, the EEV Principles
and Guidance have been revised to permit, but not require the use
of projection methods and assumptions consistent with Solvency II.
The Group has made a number of changes to its EEV methodology as a
result of Solvency II, as set out below.
The EEV Principles and Guidance were designed for use by
shareholder-owned companies to assess the value of the firm to its
shareholders. As a mutual, Royal London has no shareholders.
Instead we regard our members as the nearest equivalent to
shareholders and the EEV Principles and Guidance have been
interpreted accordingly. The reported embedded value provides an
estimate of Royal London's value to its members.
EEV methodology - impact of Solvency II
The Group's EEV results were previously prepared using the PRA's
realistic balance sheet regime. Although that regime was replaced
by Solvency II with effect from 1 January 2016, the Group is
continuing to apply a basis for preparing its EEV results which is
consistent with the former realistic regime. In particular, the
Group has continued to apply the margins of prudence within
assumptions and the definition of contract boundaries in a
consistent way to the previous realistic regime.
As a result of the introduction of Solvency II, a number of
changes have been made to the basis which is used to produce the
EEV balance sheet to more closely align with the methodology used
for Solvency II. The main changes are to use a swap curve to
discount cash flows compared to a gilt curve used previously; a
change in the methodology to reserve for reinsurer default and
consequential changes to the methodology for calculating the Value
of in-force business (VIF).
The effect of these adjustments has been recognised in the
current period with no restatement of prior periods. The total
impact is a reduction in the VIF of GBP346m and an increase in the
net worth of GBP164m, resulting in a net reduction in the Group's
Embedded Value of GBP182m. This net impact has been included within
the EEV income statement as a separate line item.
EEV operating profit
The definition of EEV operating profit follows the same
principles as IFRS operating profit with the exception of those
items which are recognised under IFRS but are excluded from EEV as
they cannot be recognised for regulatory purposes. Most notably,
IFRS operating profit includes amortisation and impairment of
intangibles whereas in the EEV reporting, goodwill or other
intangible assets (other than VIF) are excluded because these items
are not permitted to be recognised for regulatory purposes.
Appendix 2 - IFRS Basis of preparation
The IFRS financial information for the six months ended 30 June
2016 has been prepared on the basis of the accounting policies that
The Royal London Mutual Insurance Society Limited and its
subsidiaries ('the Group') expects to adopt for the 2016 year end.
These accounting policies are in accordance with IFRS issued by the
International Accounting Standards Board as adopted for use in the
European Union. In preparing the results for the six months ended
30 June 2016, the Group has not applied IAS 34, 'Interim Financial
Reporting', because this accounting standard is not mandatory for
the Group.
The accounting policies applied are consistent with those set
out in the Group's financial statements for the year ended 31
December 2015, with the following exception. The Group has made a
change to the presentation of its insurance and participating
investment contracts which qualifies as a change in accounting
policy under IFRS. Further detail is set out below.
In addition to the change in accounting policy noted above, the
Group has made changes to the methodology used to calculate the
insurance and participating investment contract liabilities. These
adjustments are treated under IFRS as a change in estimate which is
recognised in the current period with no restatement of prior
periods. The main changes are to use a swap curve to discount cash
flows compared to a gilt curve used previously and a change in the
methodology to reserve for reinsurer default. The total impact is a
reduction in the Group's Unallocated Divisible Surplus of GBP165m.
This net impact has been included as a separate line item within
the consolidated statement of comprehensive income.
The results for the six months ended 30 June 2016 and 30 June
2015 are unaudited. These results do not constitute statutory
accounts as defined in Section 434 of the Companies Act 2006. The
results for the year ended 31 December 2015 have been taken from
the Group's 2015 Annual Report and Accounts as delivered to the
Registrar of Companies, with the exception of the restatement for
the change in accounting policy for insurance and participating
investment contracts set out below. The auditors have reported on
the 2015 financial statements and their report was unqualified and
did not contain a statement under section 498 of the Companies Act
2006.
After making enquiries, the directors are satisfied that the
Group has adequate resources to continue to operate as a going
concern for the foreseeable future and have prepared the IFRS
financial information on that basis. There are no material
uncertainties to our ability to adopt the going concern basis of
accounting.
Accounting policy change - change in presentation of insurance
and participating investment contracts
i. Overview of the change in presentation
The Group has changed the presentation of its insurance and
participating investment contracts to more closely align with the
way that they are presented under Solvency II. This has resulted in
items previously included in the negative liability, the
'non-participating value of in-force business', now being deducted
from the related liabilities. There is no change to the unallocated
divisible surplus.
The items that have been re-presented are the present value of
future profits on non-participating insurance contracts and the
value of the administration and asset management arrangements in
place between the Royal London Open Fund and certain closed funds.
The future profits on non-participating insurance contracts are now
deducted from the non-participating insurance contract liabilities.
The value of the administration and asset management arrangements
is deducted from the participating insurance and participating
investment contract liabilities.
The presentation of the present value of future profits on
non-participating investment contracts and the value of future
transfers from the Group's 90:10 funds has not changed. These items
are still shown within the 'non-participating value of in-force
business'.
The presentational change constitutes a change in accounting
policy. As required by IFRS the Group has applied the change
retrospectively and has restated the figures previously presented
as set out in iii below.
ii. Revised accounting policy
The presentation change set out above has been reflected in a
revised accounting policy for insurance and participating
investment contracts. The amended policy is as follows:
Insurance contracts and participating investment contracts
Under IFRS 4, 'Insurance Contracts', insurance and participating
investment contract liabilities are valued using accounting
policies consistent with those adopted prior to the transition to
IFRS.
The estimation techniques and assumptions used are periodically
reviewed, with any changes in estimates reflected in the
consolidated statement of comprehensive income as they occur.
Participating insurance and participating investment
contracts
For participating insurance and participating investment
contracts, the liabilities are determined on a realistic basis in
accordance with the measurement requirements of the former UK GAAP
standard FRS 27, 'Life Assurance', which was adopted on transition
to IFRS. Under FRS 27, the participating liabilities are measured
using the PRA's realistic balance sheet regime. That regime was
replaced by Solvency II with effect from 1 January 2016. However
the Group is continuing to apply the realistic basis, including any
waivers or guidance from the PRA that were in force on transition
to Solvency II, because it is the measurement basis established on
transition to IFRS. In particular, the Group has continued to apply
the margins of prudence within assumptions and the definition of
contract boundaries in a consistent way to the previous realistic
basis.
The participating contract liabilities include an assessment of
the cost of any future options and guarantees granted to
policyholders measured on a market consistent basis. The
calculations also take into account bonus decisions which are
consistent with the Parent company's Principles and Practices of
Financial Management.
For the closed funds, any excess of the IFRS value of assets
over liabilities is included in the participating contract
liabilities because it is not available for distribution to other
policyholders or for other business purposes. The closed funds are
the Refuge Assurance IB Sub-fund, the United Friendly IB Sub-Fund,
the United Friendly OB Sub-Fund, the Scottish Life Fund, the PLAL
With-Profits Fund, the Royal Liver Assurance fund and the RL (CIS)
With-Profits Fund.
The present value of future profits on non-participating
investment contracts, the value of future transfers from the
Group's 90:10 funds and the value of administration and asset
management arrangements in place between the Royal London Open Fund
and certain closed funds are accounted for as part of the
calculation of the realistic value of participating contract
liabilities. The value of the administration and asset management
arrangements can be allocated to participating policies and so the
participating liabilities are shown net of this item. The future
profits on non-participating investment contracts and the value of
future transfers cannot be allocated to particular participating
liabilities and so are shown as a separate negative liability on
the face of the balance sheet, the 'non-participating value of
in-force business'.
Non-participating insurance contracts
For non-participating insurance contracts, the liability is
calculated as the discounted value of the cash flows expected to
arise on those contracts. In determining the cash flows an
allowance for risk is made by including margins within the
assumptions used.
Liability adequacy test
A liability adequacy test is performed on insurance liabilities
to ensure that the carrying amount of liabilities (less related
intangible assets) is sufficient to cover current estimates of
future cash flows. When performing the liability adequacy test, all
contractual cash flows are discounted and compared against the
carrying value of the liability. Any shortfall is charged
immediately to the statement of comprehensive income.
Claims outstanding
The claims outstanding provision represents the estimated cost
of settling claims reported by the balance sheet date.
iii. Restatement for the presentation of the non-participating
value of in-force business
As set out above, the Group has made a change to the
presentation of the non-participating value of in-force business.
The Group has applied this presentational change retrospectively
and has restated the figures previously presented as set out in the
tables below.
IFRS Consolidated Balance Sheet 30 June 2015
---------------------------------------------------------------------
As previously reported Impact of change in presentation Restated
GBPm GBPm GBPm
----------------------------------------------- ----------------------- --------------------------------- ---------
Assets
Reinsurers' share of insurance contract
liabilities 5,237 (252)(1) 4,985
Other assets not impacted by the change 69,066 - 69,066
----------------------------------------------- ----------------------- --------------------------------- ---------
Total assets 74,303 (252) 74,051
----------------------------------------------- ----------------------- --------------------------------- ---------
Liabilities
Participating insurance contract liabilities 28,890 (144)(2) 28,746
Participating investment contract liabilities 2,275 (97)(2) 2,178
Unallocated divisible surplus 3,145 - 3,145
Non-participating VIF (1,383) 534(1,2) (849)
Non-participating insurance contract
liabilities 7,372 (548)(1) 6,824
Non-participating investment contract
liabilities 23,914 3 23,917
Other liabilities not impacted by the change 10,090 - 10,090
----------------------------------------------- ----------------------- --------------------------------- ---------
Total liabilities 74,303 (252) 74,051
----------------------------------------------- ----------------------- --------------------------------- ---------
IFRS consolidated statement of 30 June 2015
comprehensive income
------------------------------------------------------------------------
As previously reported Impact of change in presentation(3) Restated
GBPm GBPm GBPm
-------------------------------------------- ----------------------- ------------------------------------ ---------
Total revenues 1,391 - 1,391
-------------------------------------------- ----------------------- ------------------------------------ ---------
Policyholder benefits and claims
Claims paid, after reinsurance 1,037 - 1,037
Decrease in insurance contract liabilities,
before reinsurance (851) 10 (841)
Reinsurance ceded 225 (36) 189
-------------------------------------------- ----------------------- ------------------------------------ ---------
Decrease in insurance contract liabilities,
after reinsurance (626) (26) (652)
Decrease in non-participating VIF (51) 20 (31)
Increase in investment contracts 548 6 554
-------------------------------------------- ----------------------- ------------------------------------ ---------
Total policyholder benefits and claims 908 - 908
Total operating expenses 432 - 432
Finance costs 21 - 21
-------------------------------------------- ----------------------- ------------------------------------ ---------
Result before tax and transfer to UDS 30 - 30
Tax 14 - 14
Transfer to Unallocated divisible surplus 16 - 16
-------------------------------------------- ----------------------- ------------------------------------ ---------
Result for the period - - -
-------------------------------------------- ----------------------- ------------------------------------ ---------
IFRS Consolidated Balance Sheet 31 December 2015
---------------------------------------------------------------------
As previously reported Impact of change in presentation Restated
GBPm GBPm GBPm
----------------------------------------------- ----------------------- --------------------------------- ---------
Assets
Reinsurers' share of insurance contract
liabilities 5,302 (250)(1) 5,052
Other assets not impacted by the change 69,604 - 69,604
----------------------------------------------- ----------------------- --------------------------------- ---------
Total assets 74,906 (250) 74,656
----------------------------------------------- ----------------------- --------------------------------- ---------
Liabilities
Participating insurance contract liabilities 28,874 (166)(2) 28,708
Participating investment contract liabilities 2,326 (94)(2) 2,232
Unallocated divisible surplus 3,314 - 3,314
Non-participating VIF (1,526) 616(1,2) (910)
Non-participating insurance contract
liabilities 7,291 (608)(1) 6,683
Non-participating investment contract
liabilities 24,982 2 24,984
Other liabilities not impacted by the change 9,645 - 9,645
----------------------------------------------- ----------------------- --------------------------------- ---------
Total liabilities 74,906 (250) 74,656
----------------------------------------------- ----------------------- --------------------------------- ---------
IFRS Consolidated Statement of 31 December 2015
Comprehensive Income
------------------------------------------------------------------------
As previously reported Impact of change in presentation(3) Restated
GBPm GBPm GBPm
-------------------------------------------- ----------------------- ------------------------------------ ---------
Total revenues 3,215 - 3,215
-------------------------------------------- ----------------------- ------------------------------------ ---------
Policyholder benefits and claims
Claims paid, after reinsurance 2,255 - 2,255
Decrease in insurance contract liabilities,
before reinsurance (948) (72) (1,020)
Reinsurance ceded 160 (38) 122
-------------------------------------------- ----------------------- ------------------------------------ ---------
Decrease in insurance contract liabilities,
after reinsurance (788) (110) (898)
Increase in non-participating VIF (194) 102 (92)
Increase in investment contracts 903 8 911
-------------------------------------------- ----------------------- ------------------------------------ ---------
Total policyholder benefits and claims 2,176 - 2,176
Total operating expenses 852 - 852
Finance costs 44 - 44
-------------------------------------------- ----------------------- ------------------------------------ ---------
Result before tax and transfer to UDS 143 - 143
Tax 18 - 18
Transfer to Unallocated divisible surplus 125 - 125
-------------------------------------------- ----------------------- ------------------------------------ ---------
Result for the year - - -
-------------------------------------------- ----------------------- ------------------------------------ ---------
Notes on the IFRS restatement:
1. Balances re-presented on a realistic basis and shown net of
the present value of future profits which was
previously included in the Non-participating VIF.
2. Value of inter-fund administration and asset management
arrangements previously included in the Non-participating VIF and
now deducted from the participating contract liabilities.
3. Movement in the above adjustments in the period.
Appendix 3 Reconciliation of the IFRS unallocated divisible
surplus to the European Embedded Value
Restated
30 June 30 June 31 December
2016 2015 2015
GBPm GBPm GBPm
------------------------------------------- --------------- -------- -------------
IFRS unallocated divisible
surplus 3,139 3,145 3,314
Valuation differences between
IFRS and EEV
- Goodwill and intangible
assets (274) (286) (280)
- Deferred tax valuation differences (2) 4 (1)
- Subordinated debt at market
value (38) (28) (25)
* Subsidiaries valuation differences (12) (31) (16)
Add items only included on
an embedded value basis
- Valuation of asset management
and service subsidiaries 195 199 156
Other valuation differences 2 54 19
------------------------------------------- --------------- -------- -------------
European embedded value 3,010 3,057 3,167
------------------------------------------- --------------- -------- -------------
Reconciliation of the IFRS transfer (from)/to unallocated
divisible surplus to EEV (loss)/profit for the period
Restated
30 June 30 June 31 December
2016 2015 2015
GBPm GBPm GBPm
------------------------------------- -------- -------- -------------
IFRS transfer (from)/to unallocated
divisible surplus (175) 6 175
Amortisation of intangible assets 6 (13) (7)
Differences in valuation of
subsidiaries 43 27 (1)
Change in realistic value of
subordinated debt (13) 14 17
Movement in valuation differences
for deferred tax assets (1) 1 (4)
Change in basis for Solvency (19) - -
II
Other movements in valuation
bases 2 36 1
EEV (loss)/profit for the period (157) 71 181
------------------------------------- -------- -------- -------------
For further information please contact:
Gareth Evans 0207 506 6715
Gareth.evans@royallondon.com 07919 170069
Editor's notes:
1) Royal London is the largest mutual life, pensions and
investment company in the UK, with Group funds under management of
GBP93.8 billion, around 9.1 million policies in force and 3,080
employees. (Figures quoted are as at 30 June 2016).
2) Present value of new business premiums is the total of new
single premium sales received in the year plus the discounted
value, at the point of sale, of the regular premiums the Group
expects to receive over the term of the new contracts sold in the
year. The rate used to discount the cash flows in the reported 2016
results have been derived from the swap curve, whereas the rate
used in the 2015 reported results was derived from the gilt
curve.
3) Solvency II Basis of Preparation
The Solvency II position has been prepared in accordance with
the Solvency II Directive which came into effect on 1 January 2016
for all insurance entities operating in Europe. We have adopted the
standard formula approach for the purposes of measuring regulatory
capital under Solvency II. Royal London received approval for the
use of both the Transitional Measure on Technical Provisions and
the Volatility Adjustment. The Solvency II results have not been
subject to a full external independent audit opinion.
4) Financial Calendar
4 November 2016 Interim management statement and third quarter new business results
13 November 2016 RL Finance Bonds No 3 plc subordinated debt interest payment date
30 November 2016 RL Finance Bonds No 2 plc Subordinated debt interest payment date
Royal London will hold an investor conference call to present
its 2016 interim financial results on Thursday 18 August 2016 at
09:30. Interested parties can register at:
https://cossprereg.btci.com/prereg/key.process?key=PNTEWLGYM
5) Forward-looking statements
This document may contain forward-looking statements with
respect to certain of Royal London's plans, its current goals and
expectations relating to its future financial position. By their
nature, forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances which are
beyond Royal London's control. These include, among others, UK
economic and business conditions, market-related risks such as
fluctuations in interest rates, the policies and actions of
governmental and regulatory authorities, the impact of competition,
the timing, impact and other uncertainties of future mergers or
combinations within relevant industries.
As a result, Royal London's actual future financial condition,
performance and results may differ materially from the plans, goals
and expectations set forth in Royal London's forward-looking
statements. Royal London undertakes no obligation to update the
forward-looking statements.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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