TIDM41BM TIDM60KE
RNS Number : 2088O
Royal London
17 August 2017
Press Release
17 August 2017
ROYAL LONDON REPORTS STRONG PROFIT AND NEW BUSINESS GROWTH IN
THE FIRST HALF OF 2017
Trading highlights
-- New life and pensions business (PVNBP basis)(1) up by 45% to
GBP6,078m (30 June 2016: GBP4,201m);
-- Funds under management(2) up by 6% to GBP106bn (31 December
2016: GBP100bn);
-- European Embedded Value (EEV) operating profit before tax up
by 34% to GBP185m (30 June 2016: GBP138m);
-- IFRS transfer to the unallocated divisible surplus (before
other comprehensive income) increase of GBP274m to GBP192m (30 June
2016: deduction from the unallocated divisible surplus of GBP82m);
and
-- Overall new business margins remained broadly in line with
the prior period at 1.8% (30 June 2016: 1.7%).
New business review
Intermediary business
-- Individual Pensions and Drawdown new business sales(1) were
up by 64% to GBP2,916m (30 June 2016: GBP1,783m). The strong new
business performance in the first half of the year reflects growth
in the overall market size and significant success in our
proposition, particularly the Drawdown Governance service. In
addition to these factors, we have also experienced a net increase
in individual pensions business from the Financial Conduct
Authority's (FCA) introduction of the early exit charge cap,
primarily through our focus on offering products which are good
value for money.
-- Group Pensions new business sales(1) were up by 32% to
GBP2,527m (30 June 2016: GBP1,921m). The strong performance in the
first half of the year is a result of more members moving into
existing schemes, increased transfer values driven by positive
stock market performance, and higher quality schemes being won with
larger average member numbers and contributions. We have indicated
for some time that we expect a slowdown in workplace pensions, and
the pipeline of schemes from auto-enrolment has indeed shown signs
of reducing primarily as a result of reaching the final stages of
auto-enrolment in 2017 where new schemes, which did not exist
before 2012, are not taking adviser-led decisions. As a result
Group Pensions new business is expected to be lower in the second
half of the year. The secondary market, where advisers recommend
schemes move to take advantage of better quality scheme
administration or investment options, has slowly started to emerge
and we will increasingly focus on this market going forward.
-- Intermediary Protection new business sales(1) increased by
34% to GBP384m (30 June 2016: GBP287m) following continued growth
in the market. Despite increased competition, we have maintained
our market position through our focus on adviser relationships and
customer service. We are also working on solutions to extend our
products to meet a wider range of customer needs, including
piloting a new Diabetes Life Cover product and using technology to
enhance the services to customers and advisers. Our Irish
Protection business has developed a well-received critical illness
proposition (known in Ireland as Specified Serious Illness) and has
seen increasing volumes of Whole of Life business launched last
year.
Consumer business
-- Our direct to consumer business was set up only three years
ago with the aim of bringing fairer and better value for money
products to customers. The business has initially focused on
selling pre-paid funeral plans, over 50s life cover and simple life
cover products through direct marketing and strategic distribution
partnerships.
-- Consumer new business sales(1) were up by 43% to GBP229m (30
June 2016: GBP160m), reflecting the continued success of the
direct-to-consumer propositions and in particular our Over 50s Life
Cover and Life Insurance products. In the first half of the year
the Over 50s proposition achieved one of the top positions in the
direct-to-consumer market. We have broadened our Term product to
give customers higher levels of cover and improved pricing. We have
a strong pipeline of new proposition developments underway.
-- A key part of our strategy is to expand distribution via
strategic partnerships, and alongside existing partnerships with
Co-operative Funeralcare and Ecclesiastical Insurance, our
partnership with Post Office Money launched in January 2017 is
performing well. We continue to seek opportunities to expand the
reach of our propositions through further distribution
partnerships.
Wealth
-- Royal London Asset Management (RLAM) continued to perform
well, attracting gross inflows of GBP5.1bn (30 June 2016: GBP2.3bn)
arising from both Institutional and Wholesale markets.
Institutional gross inflows were GBP3.1bn (30 June 2016: GBP1bn)
with some large investment mandate wins during the first half of
2017. Gross and net flows in Wholesale continued to be strong as we
broadened our coverage of wealth managers and financial advisers.
Funds under management(2) increased to GBP106bn (31 December 2016:
GBP100bn), with market conditions more stable in the first half of
2017 compared with the same period in 2016. Our funds have
performed well (particularly short duration bond funds, UK equity
and sustainable fund ranges -- all of which have won awards), and
two new funds have also recently launched: the Emerging Markets
Equity Tracker fund on 5 June 2017 and the Multi Asset Credit (MAC)
fund on 17 July 2017.
-- Royal London Platform Services (RLPS) gross inflows were up
27% to GBP1.4bn (30 June 2016: GBP1.1bn), which maintained its
market share. Royal London's wrap platform saw assets under
administration(3) increase by 9% to GBP13.4bn (31 December 2016:
GBP12.3bn). The business trades under the Ascentric brand and also
provides white label platform services for larger advisory firms
and other Royal London businesses. In the first half of 2017
Ascentric launched a simplified pricing structure with a single
charge across all wrappers and investment offerings, which makes it
easier for advisers and their clients to understand total costs.
Since the new pricing structure was introduced in May, Ascentric
has seen a significant increase in Self-Invested Personal Pension
(SIPP) accounts set up on the platform.
Review of financial performance
EEV operating profit
Our EEV operating profit before tax increased by 34% to GBP185m
(30 June 2016: GBP138m), assisted by strong new business profit of
GBP149m (an increase of 71%) particularly in Pensions, Consumer and
RLAM.
EEV profit before tax increased to GBP327m (30 June 2016: loss
before tax GBP145m) as a result of the new business profit
mentioned above, benefits from economic conditions and yield
assumptions, and the Royal London Group Pension Scheme (RLGPS)
moving from a deficit to a small surplus. The 2016 interim results
included a charge for a change in basis for Solvency II of GBP182m,
reflecting a one-off accounting charge arising from the alignment
of EEV with the requirements of Solvency II.
The overall new business margins remained broadly in line with
the prior period at 1.8% (30 June 2016: 1.7%), driven by the
margins for new pensions business increasing to 2.3% (30 June 2016:
1.8%) from very strong pensions new business performance (both
Individual Pensions and Drawdown and Group Pensions), offset by a
decrease in margins on Protection business.
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 (before other comprehensive income) for the six
months ended 30 June 2017 was GBP192m (30 June 2016: deduction from
the unallocated divisible surplus of GBP82m).
Our IFRS result for the first six months of 2017 benefited from
the strong trading performance of the Group and rising stock
markets increasing investment returns, however the results remained
impacted by the low interest rate environment. The 2016 interim
results included a charge for a change in basis for Solvency II of
GBP165m.
Capital
Our capital position is robust and our Solvency II Standard
Formula basis Investor View(4) surplus was GBP4.0bn at 30 June 2017
(31 December 2016: GBP4.5bn) with a capital cover ratio of 203% (31
December 2016: 232%). The Regulatory View surplus was GBP1.9bn at
30 June 2017 (31 December 2016: GBP1.9bn) with a capital cover
ratio of 149% (31 December 2016: 155%).
The 31 December 2016 Solvency II(5) surplus and capital cover
ratios are as presented in Royal London's 2016 Annual Report and
Accounts. These figures were estimates and final figures were
disclosed in the Solvency and Financial Condition Report (SFCR) in
May 2017; being a capital cover ratio of 227% and GBP4.4bn surplus
(Investor View), and capital cover ratio of 153% and GBP1.8bn
surplus (Regulatory View). The decrease in surplus and the
reduction in the capital cover ratio on an Investor View and
Regulatory View in the first half of 2017 were predominantly as a
result of the expected run off of the Transitional Measure on
Technical Provisions (TMTP) from 1 January 2017, and a revised
capital add-on agreed with the Prudential Regulation Authority
(PRA) on 7 March 2017 which was mainly as a result of a fall in the
risk-free rate during 2016.
Phil Loney, Group Chief Executive of Royal London, said:
Our strategy remains to deliver excellent value for money by
focusing on creating the best customer outcomes and best customer
experiences at really competitive prices. This philosophy is rooted
in our status as a mutual. The growth in profit and new business
sales we announce today underlines the continued success of our
strategy.
During 2017 we have consolidated our position as one of the new
business leaders in the retail protection, pension and drawdown
markets, and as one of the main providers of new workplace pension
schemes entering auto-enrolment. Our Consumer business continues to
grow successfully, in particular through the Over 50s Life Cover
and Life Insurance products whilst securing strategic distribution
partnerships.
Our market position reflects our strategy of delivering
high-quality products and service. We continue to invest in our
capabilities to increase value for money for customers and to make
it easier for their advisers to do business with us. For example
the new Royal London Review Service launched in July 2017
automatically collates all Royal London pensions information for
advisers into individual tailored client reports; advisers are then
able to focus their time on providing important advice and
recommendations for their clients based on this insight.
As part of our strategy we are working continually to improve
our proposition and enter new consumer markets to offer better
value where we see that the market is delivering a poor deal for
consumers. We have recently launched pilots for two new innovative
products. In April 2017 we introduced the Diabetes Life Cover plan
to improve outcomes for a group of consumers who are not currently
well served by the life insurance industry; reducing the time taken
to accept an application from weeks to less than an hour. Further,
in June 2017 a new life insurance application service moved into
pilot called 'Streamlined Mortgage Protection', which uses advanced
'machine learning' to simplify the underwriting journey and provide
an online, immediate decision to mortgage customers without
additional underwriting questions and medical evidence being
required.
Recent FCA data confirmed a significant rise in Income Drawdown
business across the market since the introduction of 'Pension
Freedoms' in 2015. The data revealed a particular surge in
non-advised Drawdown sales; we think this is concerning as the best
outcome for customers when choosing an income drawdown strategy
generally occurs when they take financial advice, as the decisions
are complex and can form a significant part of an individual's
retirement income. We are pleased that the FCA is looking at this
area more closely, and our view is that they should do more to
encourage individuals to take impartial financial advice when
contemplating Income Drawdown. We are also concerned that some
providers may be "sleep-walking" their existing non-advised pension
customers into their own in-house drawdown offerings, repeating
some of the poor practice seen in the historic annuity market.
Royal London intends to develop a better value for money drawdown
offering and tools for those clients who insist on the non-advised
route, but such competition will only be a viable solution if the
FCA takes action to open this part of the market up to
competition.
We also believe that the Pensions Dashboard has the potential to
boost competition in the UK pensions market. It is an important
project designed to help customers by allowing savers and their
advisers to have a comprehensive view of their pension savings and
entitlements in one place to determine their retirement income. The
dashboard could also provide a useful starting point for those
advisers and customers seeking to obtain better value for money by
consolidating numerous small pension pots. There is currently no
legislation to ensure that all pension providers make their data
available to the dashboard, which may create gaps in the data
available causing the project to fail. We believe it is imperative
that the Government legislates to mandate participation in the
Pensions Dashboard as a key step to underpin greater competitive
rivalry in the UK pensions sector which will in turn drive better
value for money for consumers.
During the first half of 2017 Article 50 was triggered and the
process commenced for the UK to leave the European Union (EU). We
are in the process of domiciling a subsidiary in Ireland to enable
our business in the Republic of Ireland to continue to trade and to
mitigate any uncertainty. We expect to maintain strong
capitalisation and profitability as the UK leaves the EU.
For further information please contact:
Gareth Evans 0203 272 5431
Gareth.evans@royallondon.com 07919 170069
Editor's notes:
Royal London is the largest mutual life, pensions and investment
company in the UK, with funds under management of GBP106 billion,
around 9.0 million policies in force and 3,449 employees. Figures
quoted are as at 30 June 2017.
1) Present value of new business premiums (PVNBP) 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
results has been derived from the swap curve.
2) Funds under management represent the total of assets managed
or administered by the Group on behalf of institutional and
wholesale clients, and on behalf of the Group.
3) 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.
4) We have presented a Total Company ('Investor View'), which
comprises the Royal London Open Fund, into which all new business
is written, and seven closed ring-fenced funds from previous
acquisition activity. The Investor View includes the surplus from
the closed funds. Total Company ('Regulatory View') includes a
restriction of GBP2.1bn (31 December 2016: GBP2.6bn) as a deduction
from total Own Funds of GBP7.9bn (31 December 2016: GBP7.9bn),
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 the Open
Fund surplus. After the GBP2.1bn restriction, the Total Company
('Regulatory View') reported a capital cover ratio of 149% at 30
June 2017 (31 December 2016: 155%).
5) 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. Initially we are
using the Standard Formula approach for the purposes of measuring
regulatory capital under Solvency II. However, we are preparing an
Internal Model that we plan to seek approval to adopt in 2019. We
already use an internal capital model for the purposes of
monitoring our capital and decision making across the Group. Royal
London received approval for the use of both the Transitional
Measure on Technical Provisions (TMTP) and the Volatility
Adjustment. The Solvency II results at 30 June 2017 are estimated
and are not subject to an external audit opinion.
6) Financial calendar
13 November 2017 RL Finance Bonds No 3 plc subordinated debt interest payment date
30 November 2017 RL Finance Bonds No 2 plc subordinated debt interest payment date
Royal London will hold an investor conference call to present
its 2017 interim financial results on Thursday 17 August 2017 at
09:00. Interested parties can register at:
https://cossprereg.btci.com/prereg/key.process?key=PL4BNL3HV
7) 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.
CONTENTS
In this section Page
1 New business review 8
2 Review of financial performance
9
* Consolidated income statement - EEV basis for the six 10
months ended 30 June 2017 10
* Consolidated balance sheet - EEV basis as at 30 June
2017
* EEV operating profit
11
* EEV profit before tax 12
14
* IFRS consolidated statement of comprehensive income
for the six months ended 30 June 2017
* IFRS consolidated balance sheet as at 30 June 2017
* IFRS results 15
* IFRS balance sheet 15
* Investment performance 15
* 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 19
Appendix 3: Reconciliation of the IFRS unallocated
divisible surplus to EEV 20
New business review
Intermediary
PVNBP New business New business
contribution(1) margin
--------------- ------------------ ----------------------- ------------------
30 June 30 June 30 June 30 June 30 June 30 June
2017 2016 2017 2016 2017 2016
--------------- -------- -------- ----------- ---------- -------- --------
GBPm GBPm GBPm GBPm % %
--------------- -------- -------- ----------- ---------- -------- --------
Intermediary
--------------- -------- -------- ----------- ---------- -------- --------
Pensions 5,465 3,754 126.5 67.0 2.3 1.8
--------------- -------- -------- ----------- ---------- -------- --------
Protection 384 287 20.7 25.8 5.4 9.0
--------------- -------- -------- ----------- ---------- -------- --------
Consumer
PVNBP New business New business
contribution(1) margin
---------- ------------------ ----------------------- ------------------
30 June 30 June 30 June 30 June 30 June 30 June
2017 2016 2017 2016 2017 2016
---------- -------- -------- ----------- ---------- -------- --------
GBPm GBPm GBPm GBPm % %
---------- -------- -------- ----------- ---------- -------- --------
Consumer 229 160 0.9 (5.2) 0.4 (3.3)
---------- -------- -------- ----------- ---------- -------- --------
Wealth
PVNBP(2) New business New business
contribution(1) margin
--------- ------------------ ----------------------- ------------------
30 June 30 June 30 June 30 June 30 June 30 June
2017 2016 2017 2016 2017 2016
--------- -------- -------- ----------- ---------- -------- --------
GBPm GBPm GBPm GBPm % %
--------- -------- -------- ----------- ---------- -------- --------
RLAM 3,220 2,018 21.6 14.7 0.7 0.7
--------- -------- -------- ----------- ---------- -------- --------
30 June 30 June
2017 2016 Change
GBPm GBPm %
------------------- ----------- ---------- --------
RLAM
Gross and net flows (including cash mandates)
------------------------------------------------------
Inflows 5,122 2,319 121%
------------------- ----------- ---------- --------
Outflows (2,988) (1,852) (61%)
------------------- ----------- ---------- --------
Net 2,134 467 357%
------------------- ----------- ---------- --------
30 June 30 June
2017 2016 Change
Ascentric GBPm GBPm %
------------------- ----------- ---------- --------
Gross inflows 1,366 1,070 28%
------------------- ----------- ---------- --------
Notes on the new business review
1 The new business contribution in the tables above has been
grossed up for tax at 19% (2016: 20%). We have done this to help
compare our results with the results of shareholder-owned life
insurance companies which typically pay tax at 19% (2016: 20%). The
EEV Consolidated income statement has been grossed up at the
applicable tax rates. Overall new business margin of 1.8% (2016:
1.7%) combines Intermediary, Consumer and Wealth and is based on
exact figures.
2 PVNBP for Wealth relates to gross sales inflows in the period,
excluding external cash mandates which are treated as uncovered
business and not valued on an EEV basis. The 2016 comparative has
been updated to exclude cash mandates.
2. Review of financial performance
Consolidated income statement - EEV basis for the six months
ended 30 June 2017
6 months 6 months 12 months
to to to
30 June 30 June 31 December
2017 2016 2016
GBPm GBPm GBPm
------------------------------- ----------- ----------- ----------------
Operating activities
Contribution from new
business 149 87 223
Profit from existing
business
- Expected return 52 45 90
- Operating experience
variances 16 13 4
- Operating assumption
changes - - 50
Expected return on opening
net worth 13 21 41
(Loss)/profit on uncovered
business (4) 4 (44)
Strategic development
costs and other items (41) (32) (82)
-------------------------------- ----------- ----------- ----------------
Total operating profit
before tax 185 138 282
Economic experience variances 34 201 395
Economic assumption changes 104 (177) (192)
Movement in Royal London
Group Pension Scheme
surplus / (deficit) 27 (102) (118)
Financing costs (23) (23) (46)
ProfitShare - - (120)
Change in basis for Solvency
II - (182) (182)
EEV profit/(loss) before
tax 327 (145) 19
Attributed tax charge (11) (12) (40)
Total EEV profit/(loss)
after tax 316 (157) (21)
-------------------------------- ----------- ----------- ----------------
Consolidated balance sheet - EEV basis as at 30 June 2017
30 June 30 June 31 December
2017 2016 2016
GBPm GBPm GBPm
---------------------------------- -------- -------- ------------
Assets
Assets held in closed funds 36,161 38,684 37,033
Assets backing non-participating
liabilities 35,676 26,173 29,882
Reinsurance assets 5,789 8,490 8,442
Assets backing participating
liabilities and net worth 9,061 8,600 8,759
Value of in-force business 2,312 1,705 2,065
Royal London Group Pension - -
Scheme surplus 1
Total 89,000 83,652 86,181
---------------------------------- -------- -------- ------------
Liabilities
Liabilities in closed funds 36,161 38,684 37,033
Non-participating liabilities 35,676 26,173 29,882
Reinsured liabilities 5,789 8,490 8,442
Participating liabilities 6,273 5,883 6,129
Current liabilities 1,639 1,402 1,523
Royal London Group Pension
Scheme deficit - 10 26
Total 85,538 80,642 83,035
---------------------------------- -------- -------- ------------
Embedded Value
Net worth 1,149 1,315 1,107
Value of in-force business 2,312 1,705 2,065
Royal London Group Pension
Scheme surplus/(deficit) 1 (10) (26)
Total 3,462 3,010 3,146
---------------------------------- -------- -------- ------------
EEV operating profit
The Group achieved an EEV operating profit before tax of
GBP185m, an increase of 34% (30 June 2016: GBP138m) which was
driven by new business sales, and included a GBP30m benefit arising
from release of a counterparty default reserve following a change
to the agreement with BlackRock. This was partially offset by
higher strategic development costs and other items.
Profit contribution from new business was GBP149m, up 71% from
the previous year (30 June 2016: GBP87m). New business contribution
continues to be discounted using a rate derived from the swap
curve. The overall new business margins(1) remained broadly in line
with the prior period at 1.8% (30 June 2016: 1.7%), driven by the
margins for new pensions business increasing to 2.3% (30 June 2016:
1.8%) from very strong pensions new business performance (both
Individual Pensions and Drawdown and Group Pensions), offset by a
decrease in margins on Protection business.
Strategic development costs and other items increased to GBP41m
(30 June 2016: GBP32m), which related primarily to the cost of
servicing historic remediation and costs we expect to incur meeting
the requirements of regulatory developments.
____________ (1) New business margins have been grossed up for
tax at 19% (2016: 20%). The EEV Consolidated income statement has
been grossed up at the applicable tax rates.
EEV profit before tax
EEV profit before tax was GBP327m (30 June 2016: loss of
GBP145m). The increase on the previous year is due to our strong
operating performance, benefits from economic conditions and yield
assumptions, and the RLGPS moving from a deficit to a small
surplus. The 2016 loss of GBP145m includes an accounting charge of
GBP182m arising on the alignment of our EEV methodology to Solvency
II requirements.
Change in basis for Solvency II
The introduction of Solvency II during 2016 resulted in a change
to the basis used to produce the EEV balance sheet to more closely
align with the methodology used for Solvency II. The main changes
were 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 was recognised in 2016 with no restatement of
prior periods as the adjustments were treated as a change in
estimate. The total impact on 2016 was 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.
EEV balance sheet
During the first half of 2017 the reinsurance agreement with
BlackRock was changed to move our investment with BlackRock Life
Limited to investments in other BlackRock funds. This change
resulted in a GBP2.6bn reclassification on the EEV balance sheet; a
reduction in 'Reinsurance assets' with a corresponding increase in
'Assets backing non-participating liabilities'.
IFRS consolidated statement of comprehensive income for the six
months ended
30 June 2017
6 months 6 months 12 months
to to to
30 June 30 June 31 December
2017 2016 2016
GBPm GBPm GBPm
------------------------------------- ----------- ----------- --------------
Revenues
Gross earned premiums 630 662 1,291
Premiums ceded to reinsurers (91) (678) (730)
------------------------------------- ----------- ----------- --------------
Net earned premiums 539 (16) 561
Fee income from investment
and fund management contracts 145 123 254
Investment return 2,159 7,113 10,864
Other operating income 36 38 76
------------------------------------- ----------- ----------- --------------
Total revenues 2,879 7,258 11,755
------------------------------------- ----------- ----------- --------------
Policyholder benefits and
claims
Claims paid, before reinsurance 1,316 1,350 2,703
Reinsurance recoveries (251) (248) (507)
------------------------------------- ----------- ----------- --------------
Claims paid, after reinsurance 1,065 1,102 2,196
(Decrease)/increase in insurance
contract liabilities, before
reinsurance (555) 4,852 4,545
Reinsurance ceded 185 (804) (548)
------------------------------------- ----------- ----------- --------------
(Decrease)/increase in insurance
contract liabilities, after
reinsurance (370) 4,048 3,997
(Increase) in non-participating
value of in-force business (171) - (317)
Increase in investment contract
liabilities 1,455 1,315 3,974
------------------------------------- ----------- ----------- --------------
Total policyholder benefits
and claims before change in
basis for Solvency II 1,979 6,465 9,850
------------------------------------- ----------- ----------- --------------
Change in basis for Solvency
II - 165 165
------------------------------------- ----------- ----------- --------------
Total policyholder benefits
and claims 1,979 6,630 10,015
------------------------------------- ----------- ----------- --------------
Operating expenses
Administrative expenses 277 247 561
Investment management expenses 128 110 266
Amortisation charges and impairment
losses on acquired PVIF and
other intangible assets 38 36 120
Investment return attributable
to external unit holders 138 98 308
Other operating expenses 64 46 113
------------------------------------- ----------- ----------- --------------
Total operating expenses 645 537 1,368
------------------------------------- ----------- ----------- --------------
Finance costs 23 25 47
------------------------------------- ----------- ----------- --------------
Result before tax and before
transfer to unallocated divisible
surplus 232 66 325
------------------------------------- ----------- ----------- --------------
Tax charge 40 148 249
------------------------------------- ----------- ----------- --------------
Transfer to/(deduction from)
the unallocated divisible
surplus 192 (82) 76
------------------------------------- ----------- ----------- --------------
Result for the period - - -
------------------------------------- ----------- ----------- --------------
IFRS consolidated statement of comprehensive income for the six
months ended 30 June 2017 (continued)
6 months 6 months 12 months
to to to
30 June 30 June 31 December
2017 2016 2016
GBPm GBPm GBPm
------------------------------------- ----------- ----------- --------------
Other comprehensive income
------------------------------------- ----------- ----------- --------------
Items that will not be reclassified
to profit or loss
------------------------------------- ----------- ----------- --------------
Remeasurements of defined
benefit pension schemes 32 (93) (98)
------------------------------------- ----------- ----------- --------------
Transfer to/(deduction from)
the unallocated divisible
surplus 32 (93) (98)
------------------------------------- ----------- ----------- --------------
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 2017
30 June 30 June 31 December
2017 2016 2016
ASSETS GBPm GBPm GBPm
----------------------------------------------------- -------------------- ---------- -------------
Property, plant and equipment 67 44 51
Investment property 5,413 5,306 5,297
Intangible assets 639 778 683
Reinsurers' share of insurance contract liabilities 5,722 6,162 5,907
Pension scheme surplus 137 116 131
Current tax asset - - 3
Financial investments 77,733 68,997 74,479
Trade and other receivables 1,112 953 788
Cash and cash equivalents 3,512 3,819 3,292
----------------------------------------------------- -------------------- ---------- -------------
Total assets 94,335 86,175 90,631
----------------------------------------------------- -------------------- ---------- -------------
LIABILITIES
----------------------------------------------------- --------------------------------
Participating insurance contract liabilities 32,291 32,938 32,709
Participating investment contract liabilities 2,149 2,080 2,154
Unallocated divisible surplus 3,516 3,139 3,292
Non-participating value of in-force business (1,388) (909) (1,217)
----------------------------------------------------- -------- ---------- ----------
36,568 37,248 36,938
Non-participating insurance contract liabilities 7,723 7,940 7,860
Non-participating investment contract liabilities 34,668 27,414 31,329
----------------------------------------------------- -------- ---------- ----------
42,391 35,354 39,189
Subordinated liabilities 744 744 744
Payables and other financial liabilities 7,341 8,156 7,448
Provisions 272 226 279
Other liabilities 285 286 279
Liability to external unit holders 6,498 3,937 5,502
Pension scheme liability - 10 26
Deferred tax liability 226 159 226
Current tax liability 10 55 -
Total liabilities 94,335 86,175 90,631
----------------------------------------------------- -------- ---------- ----------
IFRS results
The IFRS transfer to the unallocated divisible surplus for the
six months ended 30 June 2017, before other comprehensive income,
was GBP192m (30 June 2016: deduction from the unallocated divisible
surplus of GBP82m). Similar to EEV, our IFRS result benefits from
the strong trading performance of the Group and rising stock
markets increasing investment returns, however the results remain
impacted by the low interest rate environment. Other comprehensive
income included the positive movement in the Group's pension
schemes of GBP32m (30 June 2016: a charge of GBP93m), moving from a
deficit to a surplus. The 2016 result included the impact of the
change in basis for Solvency II of GBP165m. Including other
comprehensive income, the total transfer to the unallocated
divisible surplus for the 6 months to 30 June 2017 was GBP224m (30
June 2016: deduction from unallocated divisible surplus of
GBP175m).
Consistent with previous periods and as set out in Appendix 3,
there are some differences between the EEV and IFRS results which
include the value of our asset management and service company
subsidiaries (30 June 2017: IFRS result lower by GBP67m) and an
increase in the fair value of our subordinated debt (30 June 2017:
IFRS result higher by GBP18m). These items were offset slightly by
the amortisation of certain intangibles recognised in IFRS and not
EEV (30 June 2017: IFRS result lower by GBP5m).
IFRS balance sheet
Our balance sheet remains strong. Our total investment
portfolio, including investment property, was GBP79.8bn at 31
December 2016 and grew by 4.1% to GBP83.1bn at 30 June 2017. Our
financial investment portfolio continues to be well balanced across
a number of financial instruments, with the majority (85% at 30
June 2017) in equity securities and fixed income assets.
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. In the six months to 30 June 2017 the
investments backing the asset shares of the Open Fund achieved a
return of 3.3%, (30 June 2016: 7.5%). In the first half of 2017 our
investments achieved positive returns through equities and
corporate bonds in particular. Investment return is lower than the
same period in 2016 due to yields reaching historic lows following
the vote to exit the EU, which resulted in a significant increase
in both asset and liability valuations as at 30 June 2016.
Solvency II capital position on a Standard Formula basis
Our capital position remains robust, reflecting the strength of
our underlying business and effective capital management
strategies. The Investor View capital cover ratio for Royal London
is 203% including surplus in the closed funds (31 December 2016:
232%). The decrease in the surplus and capital cover ratios between
31 December 2016 and 30 June 2017 is driven by the expected run-off
of the TMTP from 1 January 2017, and a revised capital add-on
agreed with the PRA on 7 March 2017 which was mainly as a result of
a fall in the risk-free rate during 2016.
The Open Fund had an excess surplus of GBP1.9bn on 30 June 2017
(31 December 2016: GBP1.9bn) and a capital cover ratio of 203% at
30 June 2017 (31 December 2016: 209%). The closed funds are also
well capitalised with a surplus of GBP2.1bn on 30 June 2017 (31
December 2016: GBP2.6bn) and a capital cover ratio of 203% (31
December 2016: 254%). The Regulatory View capital cover ratio,
which does not recognise surplus in the closed funds, was 149% at
30 June 2017 (31 December 2016: 155%).
The majority (78%) of total Own Funds within the Royal London
Open Fund is made up of Tier 1 capital, with subordinated debt
valued at GBP0.8bn classified as Tier 2 capital. Own Funds within
the closed funds are entirely Tier 1 capital.
In common with many in the industry, we present two cover
ratios. An 'Investor View' for analysts and investors in our
subordinated debt, which does not restrict the surplus in the
closed funds, and a 'Regulatory View' where the closed funds'
surplus is treated as a liability.
30 June 2017 Royal Royal Total Closed Total Company
London London Company Fund Restriction (Regulatory
GBPbn Open Closed (Investor View)
Fund Funds View)
------------------ -------- -------- ----------- ------------------ --------------
Own Funds:
Tier 1 3.0 4.1 7.1 - 7.1
Tier 2 0.8 - 0.8 - 0.8
------------------ -------- -------- ----------- ------------------ --------------
Total Own Funds 3.8 4.1 7.9 - 7.9
Closed funds
restriction - - - (2.1) (2.1)
------------------ -------- -------- ----------- ------------------ --------------
Adjusted Own
Funds (A) 3.8 4.1 7.9 (2.1) 5.8
------------------ -------- -------- ----------- ------------------ --------------
Solvency Capital
Requirement (B) 1.9 2.0 3.9 - 3.9
------------------ -------- -------- ----------- ------------------ --------------
Surplus 1.9 2.1 4.0 (2.1) 1.9
Capital cover
ratio(2) (A/B)
- 30 June 2017 203% 203% 203% n/a 149%
------------------ -------- -------- ----------- ------------------ --------------
Capital cover
ratio (A/B)(3)
- 31 December
2016 209% 254% 232% n/a 155%
------------------ -------- -------- ----------- ------------------ --------------
Notes
1. Figures presented in the table are rounded, and the capital
cover ratio is calculated based on exact figures.
2. As disclosed in the Solvency and Financial Condition Report
(SFCR), the decrease in the Solvency II capital position between 31
December 2016 and 30 June 2017 is primarily a result of:
o the reduction in the TMTP from 1 January 2017; and
o a new capital add-on agreed with the PRA on 7 March 2017.
3. The 31 December 2016 Solvency II surplus and capital cover
ratios are as presented in Royal London's 2016 Annual Report and
Accounts. These figures were estimates and final figures were
disclosed in the SFCR in May 2017; being a capital cover ratio of
227% and GBP4.4bn surplus (Investor View), and capital cover ratio
of 153% and GBP1.8bn surplus (Regulatory View).
At 30 June 2017, the use of the approved TMTP contributed 31%
towards the Investor View capital cover ratio (9% on the Regulatory
View).
We use the Standard Formula approach for the purposes of
measuring regulatory capital under Solvency II. Royal London
received approval for the use of both the TMTP and the Volatility
Adjustment. We are developing an Internal Model that we plan to
seek approval to adopt in 2019. We already use an internal capital
model for the purposes of monitoring our capital and decision
making across the Group.
3. Other matters
UK referendum on EU membership
We have considered the impact of the UK's decision to leave the
EU 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 are in the process of domiciling a subsidiary in Ireland to
enable our business in the Republic of Ireland to continue to trade
and to mitigate any uncertainty for Royal London from the UK
leaving the EU. We will continue to monitor the implications of the
UK leaving the EU, but expect to continue to trade as normal. We
continue to work on behalf of our customers to provide them with
stability and the best possible long-term returns.
Ratings agencies
In June 2017 Moody's affirmed our existing A2 insurance
financial strength rating and revised its outlook for Royal London
from negative to stable. Moody's announcement stated their
expectation that the impact on Royal London of the UK's decision to
leave the EU will be moderate over the next 12 to 18 months, and
for Royal London to maintain strong capitalisation and
profitability.
In July 2017, Standard and Poor's reaffirmed Royal London's
counterparty credit rating of A, with a stable outlook.
Appendix 1 - EEV basis of preparation
The EEV results presented in this document have been prepared in
accordance with the European Embedded Value Principles (the EEV
Principles) and the EEV Basis for Conclusions issued in April 2016
by the CFO Forum. They provide supplementary information for the
six months ended 30 June 2017 and should be read in conjunction
with the Group's IFRS results. These contain information regarding
the Group's financial statements prepared in accordance with IFRS
issued by the International Accounting Standards Board and adopted
for use in the European Union.
The EEV methodology applied is consistent with the methodology
set out in the Group's Annual Report and Accounts for the year
ended 31 December 2016.
The EEV Principles were designed for use by proprietary
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 have
interpreted the EEV Principles accordingly. The reported embedded
value provides an estimate of Royal London's value to its
members.
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 EEV reporting, goodwill and other intangible
assets (other than VIF) are excluded because they 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
2017 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 2017 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 2017, 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 Annual Report and Accounts for the year ended 31
December 2016.
The results for the six months ended 30 June 2017 and 30 June
2016 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 2016 have been taken from
the Group's 2016 Annual Report and Accounts as delivered to the
Registrar of Companies. The auditors have reported on the 2016
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.
Appendix 3 Reconciliation of the IFRS unallocated divisible
surplus to EEV
6 months 6 months 12 months
to to to 31
30 June 30 June December
2017 2016 2016
GBPm GBPm GBPm
------------------------------------------- ---------------- --------- ----------
IFRS unallocated divisible
surplus 3,516 3,139 3,292
Valuation differences between
IFRS and EEV
- Goodwill and intangible
assets (245) (274) (250)
- Deferred tax valuation
differences (5) (2) (2)
- Subordinated debt at
market value (70) (38) (52)
* Subsidiaries valuation differences (1) (12) (8)
Add items only included on
an embedded value basis
- Valuation of asset management
and service subsidiaries 197 195 137
Other valuation differences 70 2 29
------------------------------------------- ---------------- --------- ----------
EEV 3,462 3,010 3,146
------------------------------------------- ---------------- --------- ----------
Reconciliation of the IFRS transfer to/(deduction from)
unallocated divisible surplus to EEV profit/(loss) for the
period
6 months 12 months
6 months to to to
30 June 30 June 31 December
2017 2016 2016
GBPm GBPm GBPm
----------------------------------- ------------ --------- -------------
IFRS transfer to/(deduction
from) unallocated divisible
surplus 224 (175) (22)
Amortisation of intangible
assets 5 6 30
Differences in valuation
of subsidiaries 67 43 (12)
Change in fair value of
subordinated debt (18) (13) (27)
Movement in valuation differences
for deferred tax assets (3) (1) (1)
Other movements in valuation
bases 41 (17) 11
EEV profit/(loss) for the
period 316 (157) (21)
----------------------------------- ------------ --------- -------------
This information is provided by RNS
The company news service from the London Stock Exchange
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