Scottish Life ISSUED. 17 September 2013

Transcription

1 ISSUED 17 September 213

2 Introduction Background AKG's Company Profile & Financial Strength Reports are designed to meet the information needs of advisers in assessing the relative strengths of UK long term Insurers/Providers. Two different styles of report are published by AKG - FULL reports and SHORT reports. A FULL report is produced for each of the leading Provider companies in the market, which participate in the production of the reports. For each remaining Provider company which is covered, a SHORT report is produced. This is a FULL report. Each report collates relevant information from a range of sources such as a company s returns to the FSA, its Report & Accounts and material provided by the companies themselves, and incorporates expert independent assessment. For FULL report companies, the process is augmented by regular meetings and other communications with AKG. PLEASE NOTE: This report should be read in conjunction with AKG's User Guide to AKG's Company Profile & Financial Strength Reports, a copy of which is available on-line at About AKG AKG is an actuarially based consultancy specialising in the provision of ratings, information and market assistance to the financial services industry. Assistance to Provider Companies AKG assists Providers in: Financial Strength analysis, ratings and presentation, Data and information provision, Actuarial consultancy, Distribution consultancy. Assistance to Financial Intermediaries AKG assists intermediaries in: Financial Strength analysis, Best Advice panel services, Data and information provision, Actuarial and technical support. Regular Reports AKG publishes the following additional reports to assist Providers and Intermediaries: AKG Offshore Profile & Financial Strength Reports - covering offshore life assurance companies. AKG Platform Profile & Financial Strength Reports - covering platform operations. AKG Office With Profits Reports - providing further depth in the assessment of with profits funds. AKG Offshore Life Office With Profits Bond Report - providing further depth in the assessment of offshore with profits bonds. For further details, please contact AKG: Tel: +44 () or akg@akg.co.uk AKG Actuaries & Consultants Ltd (AKG) 213 This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issued report or subsequently issued ratings (at which point the newly issued report or ratings should be used), or until AKG ceases to make such a report or ratings available. The report contains assessment based on available information at the date as shown on the report s cover and in its page footer. This includes prior regulatory data which may have an earlier date associated with it, but the report also takes into account all relevant events and information, available to and considered by AKG, which have occurred prior to this stated cover and footer date. Events and information subsequent to this date are not covered within it, but AKG continually monitors and reviews such events and information and where individually or in aggregate such events or information give rise to rating revision an updated report under an updated date is issued as soon as possible. All rights reserved. This report is protected by copyright. This report and the data/information contained herein is provided on a single site multi user basis. It may therefore be utilised by a number of individuals within a location. If provided in paper form this may be as part of a physical library arrangement, but copying is prohibited under copyright. If provided in electronic form, this may be by means of a shared server environment, but copying or installation onto more than one computer is prohibited under copyright. Printing from electronic form is permitted for own (single location) use only and multiple printing for onward distribution is prohibited under copyright. Further distribution and uses of the report, either in its entirety or part thereof, may be permitted by separate agreement, under licence. Please contact AKG in this regard or with any questions: akg@akg.co.uk, Tel +44 () AKG has made every effort to ensure the accuracy of the content of this report and to ensure that the information contained is as current as possible at the date of issue, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this report and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service. AKG Actuaries & Consultants Ltd 17 September 213

3 Index Main Company Page The Mutual Insurance Society Ltd 3 Additional Companies Page Pooled Pensions Company Ltd 7 General Information Distribution Products Service Investment Annual Review Page Group Overview Scottish Life is the intermediary pensions brand of The Mutual Insurance Society Ltd., the UK's largest mutual life office, which operated for many years as a traditional home service insurer, has been transformed following a number of acquisitions. It acquired United Assurance Group in 2 and then, in 21, Scottish Life demutualised and transferred its business to. 27 saw the group acquire Investment Funds Direct Ltd, which provides the Ascentric wrap platform and the FundsDirect fund supermarket. This was followed, in 28, by the acquisition, from Pearl, of Phoenix Life Assurance Ltd (PLAL) together with some protection business from Scottish Mutual and Scottish Provident, as well as Scottish Provident International Ltd and the Scottish Provident brand, for a cost of just under 1bn. PLAL and the protection business was transferred into at the end of 28. In July 211, there was a transfer-in of the assets and liabilities of Royal Liver Assurance Ltd. is focused on key sectors of the UK financial services market, distributing its products and services principally through independent distributors, having closed its face-to-face sales operation in 24. In 26 transferred to Prudential Retirement Income Ltd (PRIL) 1.8bn of annuity business previously sold under the, Scottish Life and United Assurance brands. The Society's twin focus in the intermediary life and pensions market is on providing Scottish Life branded pension products and distributing protection products through both the Bright Grey and Scottish Provident brands. From January 29, Royal London has operated offshore as 36º, following the amalgamation of Scottish Life International Insurance Company Ltd and Scottish Provident International Life Assurance Ltd. The group's investment management arm, Asset Management, manages funds for external clients, as well as for the funds. Plus (formerly Administration Services) focuses on administering the branded life and pensions business as well as former United Assurance Group and Royal Liver brands. Caledonian Life, acquired as part of Royal Liver, is the protection brand operating in the domestic Irish intermediary protection market. At 31 December 212, 's IGD surplus was up over 24% at 2.37bn [211: 1.91bn]. In August 213, the group completed the acquisition of the Co-operative Insurance Society together with Co-operative Asset Management. Corporate Structure (simplified) The Mutual Insurance Society Ltd Pooled Pensions Company Ltd Savings Ltd Management Services Ltd 36º Insurance Company Ltd (IoM) Asset Management Ltd Asset Management (CIS) Ltd The Unit Trust Managers Ltd Administration Services Ltd (CIS) Ltd Cash Management Ltd Investment Funds Direct Ltd Ratings Company Overall Financial Strength Ratings With Profits Non Profit Unit Linked Service Supporting Ratings Image & Strategy Annual Review The Mutual Insurance Society Ltd B+ Pooled Pensions Company Ltd B+ AKG Actuaries & Consultants Ltd Page 1 17 September 213

4 Summary Financial Data (for y/e: 31/12/12) Key Financial Data LT Admissible Assets (by Company) The Mutual Insurance Society Ltd Pooled Pensions Company Ltd 's 's 's 25,683,453 28,838,265 29,916,539 2,132,922 2,593,724 2,371,62 Total Assets 27,816,375 31,431,989 32,288,159 New Business Data New Single Premiums (by Company) The Mutual Insurance Society Ltd Pooled Pensions Company Ltd 's 's 's 1,738,816 1,632,849 1,755,441 34,88 275, ,1 Total (Direct + External Reins) 2,79,696 1,98,161 1,892,451 LT Admissible Assets (by asset type) 's 's 's New Single Premiums (by business type) 's 's 's Fixed Interest Equities Property Linked Other Total Assets LT Liabs & Margins (by type) Non Linked Non Profit Non Linked With Profits Accum'lg With Profits Linked Surplus c/f Other liabilities Investment Reserves Total Liabilities/Margins Net Inflow Data 6,771,534 3,445,364 1,339,853 14,17,696 2,151,928 27,816, ,134 5,25,22 3,381,226 14,22,393 99,33 3,47,99 27,816,375 8,64,52 4,18,898 1,622,414 14,951,659 2,234,966 31,431,989 87,762 5,79,188 4,183,35 15,63,193 1,313,136 4,274,676 31,431,989 8,212,12 4,51,68 1,551,444 16,245,915 2,227,18 32,288, 's 's 's 649,36 5,31,599 4,49,112 16,34, ,844 4,989,99 32,288,159 Net Inflow (by Company) 's 's 's The Mutual Insurance Society Ltd Pooled Pensions Company Ltd -45, , ,721-12, , ,65 Net Inflow(-Outflow) -147, , ,371 Net Inflow (by payment type) Premiums Death/disability pmts Surrenders Annuity Payments Maturities Net Inflow(-Outflow) 's 2,767, ,749 1,858,9 8,687 83, ,744 's 2,538, ,87 1,51,157 22,72 98, ,715 's 2,61,96 271,891 2,242,666 23,953 1,22,82-959,371 Net Inflow (by business type) 's 's 's UK Pension Net Inflow(-Outflow) -58, , ,174 45,48 582, ,887-17,46-81, ,38-147, , ,371 Total (Direct + External Reins) New Regular Premiums (by Company) The Mutual Insurance Society Ltd Pooled Pensions Company Ltd 1,62 2,75,585 1,95 1,93,325 2,491 2,931 3,628 2,79,696 1,98,161 1,53 1,887,32 1,892, 's 's 's 193,63 27,89 212,457 Total (Direct + External Reins) 193,63 27,89 212,457 New Regular Premiums (by business type) Total (Direct + External Reins) 's 67, ,449 56, , ,682 5, ,63 's 27,89 's 59, , ,457 Notwithstanding a much increased net outflow of almost 1bn, overall assets within the two life offices increased from 31.4bn to 32.3bn, another all time high. Thus whilst premiums increased by 2.5%, claims increased by 28%, an increase primarily attributable to higher surrenders. At a company level, whilst there was a further increase in the net outflow from the Society itself, the subsidiary Pooled Pension saw a net inflow in 211 of 158m change to a net outflow for 212 of 486m. Aggregate single premium new business volumes across both companies was effectively unchanged from 211 to 212, whilst new regular premiums (solely written within the Society) saw a modest increase of 2.6%. Both the Society and pensions business continued to dominate. During the year there was a small transfer-in of some 3.3m from a subsidiary, GRE Life Ireland Ltd, into the Society. The Society will increase by approximately a further 2bn once the transfer-in of the CIS is completed, expected to be in 214. AKG Actuaries & Consultants Ltd Page 2 17 September 213

5 The Mutual Insurance Society Ltd Corporate Data Company Type Ownership Open to New Business? Composite Insurer Mutual Yes Year Established 1861 Head Office Administration Office Website (Intermediary) St. Andrew House 1 Thistle Street Edinburgh EH2 1DG Tel: Key Personnel Chairman Group Chief Executive Group Finance Director Chief Executive, Intermediary Business Chief Executive, Consumer Business Group Customer Services Director Group IT & Change Director With Profits Actuary Chief Executive RLAM and Group Director Edinburgh & Wilmslow R Pennant-Rea P Loney K Luscombe H McKee J Toher I Langton A Grant S Wilson A S Carter Company Background Scottish Life was founded in 1881 in Edinburgh as a proprietary company, becoming a mutual company in On 1 July 21, Scottish Life demutualised and transferred its business to The Mutual Insurance Society Ltd. was founded in 1861 as a friendly society. It became a mutual life insurance company in 198. It acquired the United Assurance Group (UAG) in 2 and the five life businesses of UAG (Refuge Assurance, United Friendly Insurance, United Friendly Life Assurance, Canterbury Life and Refuge Investments) were transferred into on 1 January 21. In 28, Phoenix Life Assurance Ltd, together with the protection business from Scottish Provident and Scottish Mutual, transferred into. The business of Royal Liver was transferred-in in July 211. The transfer-in of business from the Co-operative Insurance Society, acquired in 213, is expected to be completed in 214. Overall Financial Strength B+ is the largest mutual life and pensions company in the UK. It is producing solid new business results in its chosen sectors and is operating profitably. Solvency levels improved in 212. Expenses appear under control and the business model appears well placed to operate in the post RDR marketplace. The acquisition of the Co-operative Group's life company and asset management business brings the group a substantial step up in scale, which should, once fully integrated, provide further benefits for the group. Reinsurance Approach The Society paid reinsurance premiums totalling 589m in 212 [211: 598m]. The main reinsurance treaties, in terms of premiums ( 3.4m), concern the reinsurance of Scottish Life pensions business to funds managed by other life offices, of which by far the largest the largest treaty is with BlackRock Life Ltd with ceded reserves totalling 1,27m at 31 December 212. Bright Grey and Scottish Provident business is reinsured to Gen Re (with ceded reserves of 48.7m in 212), RGA ( 12.5m), SCOR, Munich Re and Pacific Re. There are also a number of treaties relating to protection business transferred in, having been written either in PLAL, or under the SMA Pegasus or SPL Self Assurance brands, with such reinsurers as Swiss Re, RGA, SCOR, Hannover Re, XL Re, Scottish Re and Munich Re (reserves ceded of 86m). 117m of reserves written under the Progress brand by Royal Liver are reinsured to Munich Re. Historically, the Society reinsured annuity liabilities with Prudential Retirement Income Ltd (PRIL). During 212 the Society reinsured some 148m of pension annuity premiums with PRIL, giving total reinsured reserves of 831m at the end of 212. In July 213 this business was transferred to PRIL. Group income protection claims are reinsured with Unum (ceded reserves of 18.6m). Analysis of Reserves 's 's 's Gross reserves Reinsurance ceded - external Reinsurance ceded - internal Net mathematical reserves Non Profit Business 22,738,328 1,552,137 21,186,19 25,275,583 2,7,41 23,25,542 26,426,762 2,494,26 23,932,52 General Having seen non profit reserves increase in 211 due to the transfer-in of business from Royal Liver, 212 saw overall retained liabilities continue their downward trend, with the run off of short term bonds acquired from PLAL and an increasing prevalence of negative reserves on protection business. Non profit remains a relatively small proportion (2.2%) of the overall retained liabilities, due in part to reinsurance of the protection business but also as a result of the reinsurance of annuities; reinsured with, and subsequently transferred to, PRIL. Retained non profit liabilities are backed by fixed interest investments and bonds. Non Profit Reserves 's 's 's Total net NP reserves 58, ,169-3, ,134 8,121 63,7 169,571 87, , , , ,36 Non Profit Financial Strength The Society's non profit business appears to have a very good degree of security given the reinsurance arrangements, the available capital resources and the volume of in force with profits business. AKG Actuaries & Consultants Ltd Page 3 17 September 213

6 The Mutual Insurance Society Ltd Unit Linked Business Approach Scottish Life currently markets three different types of unit linked pension funds - internal funds, external funds and 'manager of managers' funds. The Retirement Investment Strategy range offers phased switching from specified equity/managed funds into fixed interest/deposit funds. 28 saw Scottish Life relaunch its Managed Strategies, re-branded as Governed Portfolios. These incorporate 9 asset allocation strategies with both time and risk gradings, to offer a range of portfolios which aim to select the most appropriate investments depending upon acceptable levels of risk. Portfolios can be combined so as to produce a range of Lifestyle Strategies. Scottish Life provides a number of tools backed by its Investment Governance process to assist intermediaries in reviewing clients' portfolios. July 213 saw the governed investment solutions extended to include funds from a number of discretionary fund managers, including Cazenove, 7IM, Brooks MacDonald and Rathbones. The core fund range has been changed and enhanced over time (the latest in February 213) and now includes over 16 funds from 29 fund managers. Funds within the Matrix fund range come with added governance as standard. The internal funds are managed by Asset Management. The Society reinsured unit linked funds of 1,37m as at 31 December 212 [211: 1,5m]. The majority of this ( 1,27m) was to BlackRock. The 'manager of managers' funds are managed by Close TEAMS, the 'manager of manager' division of Close Brothers and previously named Escher Asset Management. In addition to the reserves shown below there is an additional 2.4bn of unit linked business in the subsidiary, Royal London Pooled Pension Company Ltd. The Co-op acquisition adds a relatively minor 366m of additional unit linked funds. Linked Reserves 's 's 's Total net linked reserves 1,89,441 1,256,443 22,475 12,88,359 1,64,971 1,54,675 1,838,92 12,439,878 26,781 25,81 12,47,671 13,969,633 Unit Linked Financial Strength The Society's unit linked business is currently its major growth area and it appears to have a very good degree of security given the available capital resources and the volume of inforce with profits business. With Profits Business Approach At the end of 212 there were seven separate funds: Royal London IB & OB, United Friendly OB, United Friendly IB, Refuge Assurance IB, the Scottish Life Fund (containing the pre-transfer Scottish Life with profits business), the PLAL subfund and the Royal Liver sub-fund. Only the first of the abovelisted funds remains open to new business. 1.5bn of with profits business was added in 211 with the creation of the Royal Liver sub-fund, with a further 1.8bn due when the Coop transfer is completed in 214. With Profit Reserves 's 's 's Total net WP reserves 2,947,745 5,467,7 133,881 8,548,697 2,825,423 6,27,796 1,73,89 9,927,19 2,412,371 5,914,57 987,133 9,313,562 Profit Sharing Philosophy, including new Scottish Life branded with profits business, is a mutual, so that distributions are 1% to policyholders. The Scottish Life Fund and the Royal Liver sub-fund are also both run on a 1: basis. For former UAG policies, 9% of the profits go to the UAG policyholders and 1% to the with profits policyholders. A Mutual Dividend was introduced in 27. Asset Allocation There was a major change of investment strategy from 21, when lifestyling was introduced and the degree of hypothecation was increased. At the end of 212 the average EBRs were as follows: IB & OB sub-fund 56%, UF OB sub-fund 3%, Scottish Life Fund 25%, PLAL subfund 34%, Royal Liver sub-fund 38%. The EBR for Royal London policies varied between 24% and 72% according to remaining term. Distribution of Surplus To Policyholders Other Transfers 's 188,68 3,324 's 231,231 4,524 's 282,84 4,872 Realistic Balance Sheet 's 's 's Working capital Risk capital margin Realistic excess available Working capital ratio RCM as % of assets Realistic xs available ratio 1,82,297 1,82, %.% 12.6% 1,99,141 5,367 1,858, %.3% 11.1% 2,26,5 38,87 2,167, %.2% 13.% The RBS above is aggregated across all of the Society's sub funds. The RCM was temporarily eliminated in 21, when the changed investment strategies significantly reduced the risk of capital being required from the open fund to support the closed funds. The working capital ratio within the Royal London IB & OB sub-fund, of 28% [211: 25%] compares very favourably with other life offices. With Profits Financial Strength The Society has taken a number of steps in the last few years to reduce risk. AKG views the with profits business as being secure. The rating shown above applies to the IB & OB sub-fund. Lower ratings apply to the other funds. AKG Actuaries & Consultants Ltd Page 4 17 September 213

7 Key Financial Data (for y/e: 31/12/12) Scottish Life The Mutual Insurance Society Ltd Long Term Business Admissible Assets 21 's 211 's 212 's Long Term Business Liabilities & Margins 21 's 211 's 212 's Fixed Interest Equities Property Linked Other Total Assets 6,771,534 3,445,364 1,339,853 11,975,662 2,151,4 25,683,453 8,64,52 4,18,898 1,622,414 12,359,137 2,233,764 28,838,265 8,212,12 4,51,68 1,551,444 13,875,35 2,226,125 29,916,539 Total assets increased by 4% and, at 29.9bn, reaching another all time high, despite a further net outflow. Unit linked assets remained the most significant holding, accounting for 46% of the total. LT Capital Resources Core tier one capital Tier one waivers Other tier one capital Tier one deductions Total tier one capital Tier two capital Adjustments and deductions Total Capital Resources 's 's 's 4,862,142 5,774,443 6,395,167-1,15,249 5,289, , ,518 5,416,57 CR outside the fund -1,75,86 3,786, , ,77 3,89,2-1,87,45 4,687,38 398,21-381,899 4,73,349 Capital resources grew by 15% in 212, following a 21% increase in 211, as investment returns and the effect of assumption changes exceeded bonus payments. The Society holds 399m of subordinated debt. Non Linked Non Profit Non Linked With Profits Accum'lg With Profits Linked Surplus c/f Other liabilities Investment Reserves Total Liabilities/Margins 549,134 5,25,22 3,381,226 12,88, ,415 3,47,99 25,683,453 87,762 5,79,188 4,183,35 12,47,671 1,311,934 4,274,676 28,838, ,36 5,31,599 4,49,112 13,969, ,789 4,989,99 29,916,539 Changes to valuation bases reduced reserves by a negligible 121m. GAO provisions total 439m ( 47m, Royal Liver 26m & Scottish Life 366m) [211: total of 499m]. The Society also has a provision of 97m [211: 19m] for pensions mis-selling guarantees. Additionally there is GMP provision of 134m and small provisions totalling 15m (including 2m for Royal Liver) for endowment maturity guarantees. Key Revenue Items INCOME Premiums Investment Income Investment Increase EXPENDITURE Commissions Policy claims Expenses 's 's 's 2,426,374 98, ,2 178,176 2,471,773 25,975 2,263,15 981, ,447 17,13 2,658,3 259,48 2,464,95 1,62, , ,649 2,938, ,946 Business Transfers 2,257,598 3,294 LT Free Assets Available Capital Resources Capital Resources Req't (CRR) Free Assets (Published) Financial Engineering Free Assets (Exc Fin Eng) LT Free Asset Ratios 's 's 's 3,89,2 4,73,349 5,416,57 2,292,786 2,797,414 3,41,798 1,597,234 1,95,935 2,374,258 1,597,234 1,95,935 2,374, % % % Transfer to P&L Increase in fund 951,14 2,27, ,995 Whilst gross premiums increased by 6.7%, to around 3.1bn, a 1.5% fall in reinsurance premiums led to an 8.9% rise in net premiums. With claims increasing by 1.6%, driven primarily by increased surrenders, there was a large increase in the net outflow from 395m to 474m. There was an increase in commission payments, somewhat against the recent trend and expenses were again subject to various one-off costs. The transfers relate to Royal Liver in 211 and GRE Life Ireland in 212. FAR (Published) FAR (Exc Fin Eng) LT CRR Coverage Ratios CRRCR (Published) CRRCR (Exc Fin Eng) % % % Free assets increased again on the back of increased capital resources. Despite an increased CRR, primarily driven by a higher WPICC, both the FAR and the CRR coverages improved. Within this, the CRR coverage for the open Royal London fund increased from 54% to 659%. Expense Ratios New business (% APE) Renewal (% reg premiums) Renewal (% p.a. of mean fund) The new business expense ratio was essentially unchanged. The renewal ratios were impacted marginally by increased one off costs. For the Scottish Life and Protection businesses combined, the Society estimates composite ratios of 66.4% - new business and 1.5% - renewal as a percentage of regular premiums [211: 72.1% and 11.3% respectively]. AKG Actuaries & Consultants Ltd Page 5 17 September 213

8 The Mutual Insurance Society Ltd New Business Data (for y/e: 31/12/12) Single 's Regular 's New Single Premiums 's 's 's Investment Bonds With Profits Unitised WP Unit Linked Total (Direct + External Reins) 1,62 1,734,75 2,491 1,738,816 1,95 1,628,13 2,931 1,632,849 1,53 1,75,31 3,628 1,755,441 Endowment Guaranteed Bonds With Profits Unitised WP Unit Linked ISA / tax exempt 95 Annuities Growth Rate 31.5% -6.1% 7.5% Reins Accepted (Intra-Group) 1,8, 1,6, 1,4, 1,2, 1,, 8, 6, 4, 2, Miscellaneous Protection 225 New Regular Premiums 's 's 's Whole Life With Profits Unitised WP Unit Linked 13 7,759 67, , , ,968 1,682 59, ,386 5,333 Term Ordinary Pension 28, Total (Direct + External Reins) Growth Rate 193,63 9.3% 27,89 7.% 212, % IP Individual 1,328 Reins Accepted (Intra-Group) Critical Illness Long Term Care Miscellaneous Pensions Individual CPA Miscellaneous With Profits Unitised WP Unit Linked 68,139 63,323 1,392, , ,894 1, ,2 Bulk Transfer Annuities Group Business Pension Life IP Critical Illness Miscellaneous 64,812 4,49 TOTAL DIRECT BUSINESS 1,755, ,458 Direct (incl above) External Reins (excl above) Intra-Group Reins (excl above) 9 1 3,628 5,333 Industrial Branch (incl above) 16, 14, 12, 1, 8, 6, 4, 2, The new business figures shown on this page relate to the Society as a whole and not just to Bright Grey and Scottish Provident. 212 was a good year in new business terms for the group, which reported a 7% increase in PVNBP up to 3.5bn made up as follows: Scottish Life - 2,438m (up 8.3%); Bright Grey/Scottish Provident - 482m (up 22.6%); m (down 8.5%); Plus - 28m (up 2.2%) and Caledonian Life - 32m (up 357%). New APE for pensions business increased by 4% to 31m - the main contributor here being Group Pensions, which increased by 8% to 12m. New single premiums increased by 7.5%, whilst new regular premiums were effectively unchanged. The Society reports 11.5% & 2.9% market shares of the individual and group pension markets respectively. The combination of Scottish Provident and Bright Grey, together with consolidation elsewhere, means that the Society now claims approximately 16% of the intermediated protection market. Protection sales performed well in a difficult market - Scottish Provident and Bright Grey's combined APE increased by 13%. from 59.5m to 67.4m, a particularly good result given the ending of the arrangement with Santander saw Retail APE fall to nil. Outside of the Society: 36 saw APE unchanged at 44.7m; RLAM attracted net inflows of 282m, a 26% reduction on 211; Cash Management saw a net inflow of 583m [211: 355m outflow], and Ascentric generated 1.2bn of new business [211: 1.3bn]. AKG Actuaries & Consultants Ltd Page 6 17 September 213

9 Pooled Pensions Company Ltd Corporate Data Company Type Ownership Open to New Business? Life Insurer The Mutual Insurance Society Ltd Yes Year Established 1971 Key Personnel Group Chief Executive Chief Executive, RLAM and Group Director Group Finance Director Director Director P Loney A S Carter K Luscombe D J Bird V A Muir Company Background The company was established as The Scottish Life Pensions Annuity Company Ltd, in 1971, to act as a specialist unitlinked group pensions subsidiary providing managed fund facilities for pension schemes. Following Scottish Life's acquisition by, the company was renamed in 22. Business is written directly (rather than reinsured from elsewhere in the group). It currently offers a range of eleven fixed income and cash funds. New business volumes reduced in 211. Overall Financial Strength B+ The company remains relatively small within the overall group and whilst it has grown steadily in recent years, 212 saw total assets fall by 8.6% despite improved investment markets. Premiums reduced substantially, down by 5% to 137m, whilst surrenders increased markedly, up 432% to 623m. The result was a net outflow of 486m [211: 158m inflow; 21: 12m outflow], showing again how lumpy business has tended to be for this company. Solvency improved slightly and the company declared marginally higher pre-tax profits of 4k [211: 37k]. It did not declare a dividend [211: nil]. The company enjoys the security provided by the Royal London Group. Key Financial Data (for y/e: 31/12/12) Long Term Business Admissible Assets Fixed Interest Equities Property Linked Other Total Assets LT Free Assets Available Capital Resources Capital Resources Req't (CRR) Free Assets (Published) Financial Engineering Free Assets (Exc Fin Eng) LT CRR Coverage Ratios CRRCR (Published) CRRCR (Exc Fin Eng) Long Term Business Liabilities & Margins Non Linked Non Profit Non Linked With Profits Accum'lg With Profits Linked Surplus c/f Other liabilities Investment Reserves Total Liabilities/Margins New Business Data 21 's 2,132, ,132, 's 2,592,522 1,22 2,593, 's 2,37,565 1,55 2,371, 's 's 's 4,55 3,4 3,56 2,984 1,15 1,28 1,132 1, ,84 1, ,116 1, % % % 21 's 2,132, ,132, 's 2,592,522 1,22 2,593, 's 2,37,565 1,55 2,371,62 New Single Premiums 's 's 's 34,88 275, ,1 Total (Direct + External Reins) 34,88 275, ,1 Growth Rate 36.3% -19.2% -5.2% Reins Accepted (Intra-Group) New Regular Premiums 's 's 's Total (Direct + External Reins) Growth Rate Reins Accepted (Intra-Group) AKG Actuaries & Consultants Ltd Page 7 17 September 213

10 Distribution Method 's primary mechanism to date has been the intermediary channel as its principal means of distribution (having closed its face-to-face salesforce in 24) and this is the focus for Scottish Life. However, whilst this intermediary focus is likely to continue for the provision of the Scottish Life pension offering, an increasing diversification via the direct consumer channel is also to be pursued. has also operated a bancassurance arm mainly for protection business, albeit its agreement with Santander ended in 211. Scottish Life, the largest of the business units, has a segmented approach to the intermediary market and continued efforts are directed towards this end. For Scottish Life the key segment for pensions business is high value intermediaries and high value group business, targeting corporate business and middle range individuals, who are advised largely by high net worth intermediaries, Nationals and EBCs. Some potential market opportunity had been restricted by the company's approach to initial commission. However, despite the slow pace of market change, the Society stuck to its early approach and its current success is a clear vindication of this strategy. A robust positioning for auto-enrolment similarly positions the organisation positively for potential in this space. Distribution Split IFAs Regular Premium % Single Premium % Image and Strategy 's strategy is to operate as a multi-brand specialist manufacturer, with three main strands: Intermediary Life & Pensions onshore through Scottish Life, Bright Grey, Scottish Provident and offshore through 36º, investment though RLAM and Ascentric, and closed book administration through Plus. To this can be added, to some degree, the small domestic Irish operation Caledonian Life, which, whilst not significant in scale terms, is proving a positive element for future growth, having been inherited as part of the Royal Liver acquisition and retained since. 211 saw complete the long running acquisition of the business of Royal Liver, and then a similarly long gestation Co-operative acquisition followed in 213. The primary strategic objective is to increase value for the benefit of members by growing profitable specialist manufacturing financial services business. In 21 the group introduced a "Financial Sense" strap line to its brand identification. The Scottish Life brand is well established and respected in the intermediary market as a specialist pensions provider and this is how it operates within the larger Group. Products/Proposition Overall Product Philosophy Scottish Life branded pension products are designed to meet 'benefits led' intermediary requirements identified by detailed research amongst IFAs and EBCs. The aim is to provide competitively priced and flexible products and services that meet the needs of significant market sectors serviced by IFAs and EBCs. Scottish Life launched its Pension Portfolio proposition with this in mind in December 26, including an integrated SIPP service. Having launched its Riley bond in 26, this was withdrawn in October 28 in the face of market conditions. In December 27 Scottish Life launched its Income Release product, a new "capped drawdown" facility, fully integrated within Pension Portfolio. 28 saw Scottish Life enhance its investment proposition with the launch of Governed Portfolios, a governed range of risk graded investment portfolios, including lifestyling, within a comprehensive ongoing governance package. This is available for both individual and the group pension products at no additional charge. There is additional flexibility for advisers to tailor the proposition to fit with their own business model. All new pension annuities within are now written directly by Prudential Retirement Income Limited. The list below only identifies products marketed under the Scottish Life brand. Products Currently Marketed Investment Products Written in The Mutual Insurance Society Ltd Investment Bond Savings Plan Pension Products Written in The Mutual Insurance Society Ltd Individual Stakeholder Phased Retirement / Income Drawdown Personal Pension Plan Executive Pension Plan Trustee Investment Plan SIPP Transfer Plan - Personal Pension Transfer Plan - Buyout Bond Group Products Written in The Mutual Insurance Society Ltd Group Life Money Purchase Final Salary (incl. Wind Up) Group Stakeholder Group Personal Pension Plan In 212 announced that it intended to review its overall brand strategy. This follows a strategic review which has taken place since the appointment of Phil Loney as CEO and an increasing strategic accent toward d2c opportunities and the organisation's mutual persona. AKG Actuaries & Consultants Ltd Page 8 17 September 213

11 Service Approach Scottish Life has a very strong reputation for service in its chosen pensions market. It built its way back into this position through a concentrated period of reconstruction which followed some major service problems experienced early in the new millennium. The reconstruction effort has included major reshaping of how and where operations are conducted. As a result teams in Wilmslow now handle individual business, with staff in Edinburgh focused on Group business. Across all sites Scottish Life has sought to instil and continues to drive a new culture, with changes to recruitment, engagement and reward. A refreshed training approach now delivers a one stop basis to solving customer enquiries. Indeed considerable activity in enhancing staff engagement, clarity and cross-activity interaction has taken place over the last two years, all of which are designed to contribute to an ever more able workforce to meet the challenges of pension provision in a significantly changing environment. Evidence of consistently high standards, now apparent from the internal metrics, is supported by external awards, confirming the positive perception. Scottish Life also enjoys an excellent reputation for technical expertise and support. This position will be even more important in the medium term as the business manages the capacity challenge of autoenrolment. Allied to this, the organisation's early structural approach to the profile of auto-enrolment business it will accept appears to be helping it in a market where behavioural effects are demonstrating challenging and ever changing characteristics. e-business Scottish Life has a good reputation for its e-business offering and believes technology is a core part of its proposition. Evidence shows more intermediary businesses taking advantage of technological solutions such as illustrations and online scheme payments. Over recent years Scottish Life has won numerous awards for its e-business offering, including 'eee' ratings from FTRC and other accolades. Further development is anticipated as technology and an evolving digital strategy form part of the operation's short to medium term priorities, in recognition of emerging market dynamics. Service Standards & Awards Scottish Life has again become well respected in the intermediary market for service, a fact ably demonstrated through a number of industry service awards, including 5 star Financial Adviser Service Awards. In 212 there were also a number of pensions specific awards including a MoneyFacts award for 'Best Pensions Service'. Outsourcing Some specialist aspects of SIPP administration for Pension Portfolio are outsourced to Capita, as is all the ex-resolution onshore business transferred from Pearl in late 28. Investment Overall Approach Scottish Life's internal funds are managed by Asset Management (RLAM). RLAM is committed to a philosophy of active management, based on the view that market information is not always efficient and that anomalies can be exploited through effective research. A blend of different investment styles underpin this philosophy and the pursuit of added value to clients. Fixed interest and property managers adopt a more team-based, valuation-driven approach, whereas equity fund managers are given greater discretion to follow their unique investment styles, relevant to the markets they operate in. RLAM has a strong long-term record in managing fixed interest portfolios, and its cash management division (Royal London Cash Management) is the largest UK manager of segregated cash mandates with around 6bn of cash under management. Historically, equity performance had been less successful. This is an area that RLAM has been addressing in recent years and there is evidence of significant improvement, with the team winning awards and many managers obtaining Citywire ratings. There is a customer agreement with RLAM, laying down parameters for investment policy. Unit linked funds are invested with a view to maximising returns within the stated overall objectives of the specific funds. Funds Under Management Total funds under management within increased from 46.2bn to 49.8bn in 212 [31 March 213: 5bn]. Whilst RLAM saw net new business of 282m, a 26% reduction on 211, the vast majority of funds under management still relate to the life business. Cash Management saw positive net new assets of 582m [211 negative 355m]. The Co-operative Financial Services acquisition adds around 2bn. Annual Review remains well positioned and focussed on its particular markets. It was a good year on a number of measures: overall new business volumes were up, as were profits and solvency levels. The integration of Bright Grey and Scottish Provident is continuing, delivering a protection business of real scale, notwithstanding the loss, in July 211, of the Santander deal. Scottish Life continues to be highly regarded as a pensions specialist, claiming an increased market share in a flat market. Within the wrap space, Ascentric's assets under administration increased to 5.1bn and further to 5.9bn as at 31 March 213. In the Irish market, the relaunched Caledonian claims 6% of the Irish protection market and 1% of the broker protection market [211: 4% and 4% respectively]. EEV operating profit increased to 246m in 212 [211: 334m, a figure which included 97m from the Royal Liver acquisition]. EEV profit after tax increased to 225m [211: 122m] impacted by adverse economic conditions. A mutual dividend of 88m was allocated [211: 88m]. Notwithstanding the above highlights, 212 was also notable for the continuing progress towards the acquisition of Cooperative Insurance and its asset management business - originally announced in July 211 and finally completed in August 213, brining with it another 2bn of assets and a step change in size for the Group. AKG Actuaries & Consultants Ltd Page 9 17 September 213

12 Guide to AKG Ratings Financial Strength Ratings - Introduction The aim of AKG s financial strength ratings is to assist IFAs and others to assess the relative strengths of individual provider companies. AKG s concept of financial strength starts with the fundamental issue of a company s ability to meet all of its guaranteed payments to policyholders, but extends beyond this by aiming to factor in the degree to which a policyholder s expectations are likely to be met - or even exceeded - in the long-term. For performance-related products, where the eventual return generally depends largely upon a company s success in consistently delivering superior investment performance, and in containing expense charges, a company s ability to meet expectations is likely to be heavily dependent upon whether or not it is able to sustain its operations in the relevant market, and whether or not it can maintain, or improve, its competitive position. As a result, AKG believes that, ideally, the evaluation of financial strength should depend upon the type of product under consideration. A particular company may be judged as very strong in the context of one particular product line, but it may be weaker in another context. An illustration of this concept is a company that currently only markets unit linked business, but which has a very small closed block of with profits business, written many years ago. Such a company may be judged as good for unit linked business, whilst considered poor in respect of with profits business. Since the inception of AKG s Company Profiles and Financial Strength Reports, AKG has consistently promoted and developed the concept of providing financial strength ratings separately for each of the three major product categories - With Profits, Non Profit and Unit Linked. All AKG s financial strength ratings should be used with care, since even the more detailed approach described above represents something of a simplification. To illustrate this point, for example, the 'Non Profit' category covers a multiplicity of different products. It is clear that slightly different criteria should be used for, say, short-term policies with fully guaranteed terms (e.g. Guaranteed Bonds), than for longer-term policies with terms that can be varied at the company's discretion (e.g. Renewable or Reviewable Term). AKG assesses financial strength using consistent methodology and objective measures wherever possible, and based on the detailed analysis of the company s particular strengths and weaknesses. The objectives and criteria for each of the financial strength ratings are summarised below: With Profits Financial Strength Rating The objective is to assess the overall strength of the company s with profits funds. The initial concern is the company's ability to meet its ongoing guaranteed, or promised, commitments, i.e. existing sum assured and bonuses. However, the company's ability to continue to compete successfully in the with profits market is also particularly relevant, given that closed funds are sometimes bad news for policyholders. In such situations, overall expenses tend to increase as a proportion of the fund and investment performance may well deteriorate. These, together with other factors, may make it difficult for companies in such situations to maintain competitive bonus rates at future declarations, although existing declared bonuses are not affected (other than possibly by MVRs). The main criteria taken into account are: capital base and free asset position, with profits realistic balance sheet position, the amount of with profits business in-force, parental strength (and likely attitude towards supporting the company), and image and strategy. NOTE: More detailed analysis of with profits companies is included in AKG s Office With Profits Report. Excellent Very good Good Adequate Poor Not rated Non Profit Financial Strength Rating The objective is to assess the company's ability to meet all guaranteed payments arising from such contracts as term plans, annuities etc. The main criteria taken into account are: free assets, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), and image and strategy. Excellent Very good Good Adequate Poor Not rated AKG Actuaries & Consultants Ltd 17 September 213

13 Guide to AKG Ratings Unit Linked Financial Strength Rating Whilst this is essentially a non profit line, and the primary objective is to assess the company's ability to meet all guaranteed payments arising, AKG also seeks to take into account the extent to which the company is likely to be able to sustain its unit linked operations, and whether or not it is likely to be able to maintain, or improve, its competitive position. Thus strategic issues are also relevant, because of their bearing on the quality of investment management offered, and because of companies' rights to increase charges etc. The main criteria taken into account are: free assets, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), typical fund performance achievements, and image and strategy. Overall Financial Strength Rating The objective is to provide a simple broad-brush indication of the general financial strength of a company. In addition to an assessment of the company s ability to meet all of its guaranteed payments to policyholders, AKG also aims to factor in the degree to which policyholders expectations are likely to be met - or even exceeded - in the long-term. This involves an assessment of a company s ability to survive in its current form for the long term. The overall rating inherently reflects the mix of business in-force within the company, since different types of policyholder have different expectations, and the company s particular strengths and weaknesses in respect of its key product areas. The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of business in-force): capital base and free asset position, with profits realistic balance sheet position, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), typical fund performance achievements, and image and strategy. A B+ B B- C D Excellent Very good Good Adequate Poor Not rated Superior Very strong Strong Satisfactory Weak Very Weak Supporting Ratings - Introduction Supporting ratings are provided only in full reports, and are assessed at the brand level. AKG assesses three key supporting areas, using consistent methodology and objective measures wherever possible. The aim is to assist IFAs and others to consider the relative merits of the brands that they deal with. AKG's objectives and criteria for each of these ratings are summarised below: Service Rating The objective is to assess the quality of the organisation's service to the intermediary market in respect of the brand concerned. Criteria taken into account include: performance in surveys, awards and benchmarking exercises (external and internal), the organisation's philosophy, service charters, the extent of investments designed to improve service, and feedback from intermediaries. Image and Strategy Rating The objective is to assess the effectiveness of the means by which the organisation currently positions itself to distribute its products for the brand concerned and the plans it has to maintain and/or develop its position. Criteria taken into account include: overall trends in the company s market share position, brand visibility and reputation, feedback from intermediaries and industry commentators, and AKG s view of the company s general strategy. Excellent Very good Good Adequate Poor Not rated Excellent Very good Good Adequate Poor Not rated Annual Review Rating This is an end of year view for the last year for which Report and Accounts, returns to the FSA, etc., are available, together with comment on any significant post-balance sheet events. It is an assessment of how the brand has fared against its peers, and how it is perceived externally. Criteria taken into account include: increase/decrease in market shares, expense containment, publicity - good or bad, press or market commentary, regulatory fines, and competitive position. Excellent Very good Good Adequate Poor Not rated AKG Actuaries & Consultants Ltd 17 September 213

14 AKG Actuaries & Consultants Ltd Anderton House, 92 South Street Dorking, Surrey RH4 2EW Tel No: +44 () Fax No: +44 () AKG is an actuarially based consultancy specialising in the provision of ratings, information and market assistance to the financial services industry AKG Actuaries & Consultants Ltd 213