Scottish Life ISSUED. October 2012

Transcription

1 ISSUED October 212

2 Introduction Background AKG's Company Profile & Financial Strength Reports are designed to meet the information needs of advisers and analysts 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 Report - providing further depth in the assessment of with profits funds. For further details, please contact AKG: Tel: +44 () or akg@akg.co.uk AKG Actuaries & Consultants Ltd (AKG) 212 This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issued report or subsequently issued ratings (at which point the newly issued report or ratings should be used), or until AKG ceases to make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. Many of the financial statistics in this report are derived from companies' annual returns to the FSA. AKG gratefully acknowledges the permission of Standard & Poor's to extract data from their SynThesys Life database system. AKG Actuaries & Consultants Ltd October 212

3 Index Main Life Company Page The Royal London Mutual Insurance Society Ltd 3 Additional Life Companies Page Royal London 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 Royal London Mutual Insurance Society Ltd. Royal London, 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 Royal London. 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 Royal London at the end of 28. In July 211, there was a transfer-in of the assets and liabilities of Royal Liver Assurance Ltd. Royal London 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 Royal London transferred to Prudential Retirement Income Ltd (PRIL) 1.8bn of annuity business previously sold under the Royal London, 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 Royal London 36º, following the amalgamation of Scottish Life International Insurance Company Ltd and Scottish Provident International Life Assurance Ltd. The group's investment management arm, Royal London Asset Management, manages funds for external clients, as well as for the Royal London funds. Royal London Plus (formerly Royal London Administration Services) focuses on administering the Royal London 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. 211 saw Mike Yardley step down as Chief Executive and replaced by Phil Loney. In July 211, Royal London announced that it had entered into exclusive talks with Co-operative Financial Services (CFS) to acquire its life assurance and asset management businesses. At 31 December 211, Royal London's IGD surplus was up 19% at 1.9bn [21: 1.6bn], reaching 2.1bn by June 212. Corporate Structure (simplified) The Royal London Mutual Insurance Society Ltd Royal London Pooled Pensions Company Ltd Royal London Savings Ltd Royal London Management Services Ltd Royal London 36º Insurance Company Ltd (IoM) Royal London Asset Management Ltd The Royal London Unit Trust Managers Ltd Royal London Administration Services Ltd Phoenix Life Assurance Ltd Royal London Cash Management Ltd Investment Funds Direct Ltd Ratings Company Financial Strength Ratings Overall With Profits Non Profit Unit Linked Service Supporting Ratings Image & Strategy Annual Review The Royal London Mutual Insurance Society Ltd B+ Royal London Pooled Pensions Company Ltd B+ AKG Actuaries & Consultants Ltd Page 1 October 212

4 Summary Financial Data Key Financial Data (for y/e: 31/12/11) LT Admissible Assets (by Company) 's 's 's The Royal London Mutual Insurance Society Ltd 23,998,69 25,683,453 28,838,265 Royal London Pooled Pensions 2,26,252 2,132,922 2,593,724 Company Ltd Total Assets 26,24,321 27,816,375 31,431,989 New Business Data (for y/e: 31/12/11) New Single Premiums (by Company) 's 's 's The Royal London Mutual 1,321,976 1,738,816 1,632,849 Insurance Society Ltd Royal London Pooled Pensions 25,117 34,88 275,312 Company Ltd Total (Direct + External Reins) 1,572,93 2,79,696 1,98,161 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 6,532,5 3,149,343 1,346,299 12,233,881 2,762,748 26,24, ,675 5,464,226 3,619,895 12,446,41 1,41,149 2,315,967 26,24,321 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, 's 's 's 87,762 5,79,188 4,183,35 15,63,193 1,313,136 4,274,676 31,431,989 Net Inflow Data (for y/e: 31/12/11) Net Inflow (by Company) 's 's 's The Royal London Mutual -477,697-45, ,988 Insurance Society Ltd Royal London Pooled Pensions 44,25-12, ,273 Company Ltd Net Inflow(-Outflow) -433, , ,715 Net Inflow (by payment type) Premiums Death/disability pmts Surrenders Annuity Payments Maturities Net Inflow(-Outflow) 's 's 's 2,211,79 279,787 1,569,955 21, , ,672 2,767, ,749 1,858,9 8,687 83, ,744 2,538, ,87 1,51,157 22,72 98, ,715 Total (Direct + External Reins) New Regular Premiums (by Company) 1,524 1,567,33 3,536 1,62 2,75,585 2,491 1,95 1,93,325 2,931 1,572,93 2,79,696 1,98, 's 's 's The Royal London Mutual 177, ,63 27,89 Insurance Society Ltd Royal London Pooled Pensions Company Ltd Total (Direct + External Reins) 177, ,63 27,89 New Regular Premiums (by business type) Total (Direct + External Reins) 's 's 's 76,256 1, , , , ,968 1, , ,63 27,89 Boosted by the business transfer from Royal Liver, overall assets within the two life offices at 31.4bn increased by 13% to another all time high despite an increased overall net outflow of 237m [21: 148m]. The net outflow increased because premiums reduced by more than claims. At a company level, there was a large increase in the net outflow in the Society itself, from 45m to 395m. The subsidiary actually reported a net inflow of 158m as opposed to a net outflow of 12m the previous year. Single premium new business volumes decreased in both companies, whilst new regular premiums (solely written within the Society) increased. Both the Society and pensions business continued to dominate. Net Inflow (by business type) 's 's 's UK Pension Net Inflow(-Outflow) -558,586-58, , ,981 45,48 582,723-19,66-17,46-81, , , ,715 AKG Actuaries & Consultants Ltd Page 2 October 212

5 The Royal London Mutual Insurance Society Ltd Corporate Data Ownership Open to New Business? Mutual Yes Year Established 1861 Head Office Administration Office Website - Consumer Website - IFA Royal London St. Andrew House 1 Thistle Street Edinburgh EH2 1DG Tel: Fax: 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 T D Melville-Ross P Loney S Shone 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 Royal London Mutual Insurance Society Ltd. Royal London 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 Royal London on 1 January 21. In 28, Phoenix Life Assurance Ltd, together with the protection business from Scottish Provident and Scottish Mutual, transferred into Royal London. The business of Royal Liver was transferred-in in July 211. Overall Financial Strength B+ Royal London 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, albeit the loss of Santander's protection and pensions business was something of a setback. Solvency levels are good. Expenses appear under control and the business model should be well placed to operate in a post RDR marketplace. Having acquired Royal Liver, the group is now in exclusive talks with Co-operative Financial Services over a possible transaction, something that could potentially have a further positive impact on the shape and operation of the group, particularly Royal London Plus, the closed book operation at Wilmslow. Reinsurance Approach The Society paid reinsurance premiums totalling 598m in 211 [21: 457m]. The main reinsurance treaties, in terms of premiums ( 324.2m), concern the reinsurance of Scottish Life pensions business to funds managed by other life offices, the largest of which is to BlackRock Life Ltd with ceded reserves totalling 1,5m at 31 December 211. The Society reinsures annuity liabilities with Prudential Retirement Income Ltd (PRIL). During 211 the Society reinsured some 111m of pension annuity premiums with PRIL, giving total reinsured reserves of 738m at the end of 211. In 29 reinsurance of Bright Grey business moved to Gen Re (previously Cologne Re) from Munich Re, with ceded reserves of 44.6m in 211. 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 83.9m) m of reserves written under the Progress brand by Royal Liver are reinsured to Munich Re. Group income protection claims are reinsured with Unum (ceded reserves of 23m). Analysis of Reserves 's 's 's Gross reserves Reinsurance ceded - external Reinsurance ceded - internal Net mathematical reserves Non Profit Business 21,422,151 22,738,328 25,275,583 1,185,212 1,552,137 2,7,41 2,236,939 21,186,19 23,25,542 General Having increased during 28 following the transfer-in of business from Resolution, non profit retained liabilities fell in 29 and 21 with the run off of short term bonds acquired from PLAL and an increasing prevalence of negative reserves on protection business. 423m of the increase in 211 relates to business transferred into the Royal Liver Fund. Non profit remains a relatively small proportion (3.5%) of the overall retained liabilities, due in part to reinsurance of the protection business but primarily as a result of the ongoing reinsurance of annuities with PRIL. Retained non profit liabilities are backed by fixed interest investments and bonds. Non Profit Reserves 's 's 's Total net NP reserves 252, ,348-3, ,675 58, ,169-3, ,134 8,121 63,7 169,571 87,762 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 October 212

6 The Royal London 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. The core fund range was enhanced in 28 and again in 21 and now includes over 14 funds from 23 fund managers. Funds within the Matrix fund range come with added governance as standard. The internal funds are managed by Royal London Asset Management. The Society reinsured unit linked funds of 1,5m as at 31 December 211 [21: 868m]. The majority of this ( 975m) 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 2.6bn of unit linked business in the subsidiary, Royal London Pooled Pension Company Ltd. Linked Reserves 's 's 's Total net linked reserves 1,774,26 8,611,271 35,76 1,421,3 1,89,441 1,64,971 1,256,443 1,838,92 22,475 12,88,359 26,781 12,47,671 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 in-force with profits business. With Profits Business Approach At the end of 211 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 above-listed funds remains open to new business. Around 1.5bn of with profits business was added in July 211 with the creation of the Royal Liver sub-fund. With Profit Reserves 's 's 's Total net WP reserves 3,349,749 5,568,438 13,73 9,48,261 2,947,745 5,467,7 133,881 8,548,697 2,825,423 6,27,796 1,73,89 9,927,19 Profit Sharing Philosophy Royal London, 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 Royal London with profits policyholders. A Mutual Dividend, introduced in 27 and passed in 28, was paid again in 29, 21 and 211. 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 211 the average EBRs were as follows: Royal London IB & OB sub-fund 55%, UF OB sub-fund 3%, Scottish Life Fund 24%, PLAL subfund 41%, Royal Liver sub-fund 34%. The EBR for Royal London policies varied between 27% and 7% according to remaining term. Distribution of Surplus To Policyholders Other Transfers 's 's 's 212,785 3, ,68 3, ,231 4,524 Realistic Balance Sheet 's 's 's Working capital Risk capital margin Realistic excess available 1,687,59 64,739 1,622,77 1,82,297 1,82,297 1,99,141 5,367 1,858,774 Working capital ratio RCM as % of assets Realistic xs available ratio 12.%.5% 11.5% 12.6%.% 12.6% 11.4%.3% 11.1% 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 25% [21: 24%] 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 Royal London IB & OB sub-fund. Lower ratings apply to the other funds. AKG Actuaries & Consultants Ltd Page 4 October 212

7 The Royal London Mutual Insurance Society Ltd Key Financial Data (for y/e: 31/12/11) Capital Resources 's 's 's Long Term Business Liabilities & Margins 29 's 21 's 211 's 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 3,655,412-1,175,72 2,48,34 397, ,644 2,734,9 4,862,142-1,75,86 3,786, , ,77 3,89,2 5,774,443-1,87,45 4,687,38 398,21-381,899 4,73,349 CR outside the fund Capital resources increased by 21% in 211 as investment returns and the impact of the Royal Liver deal exceeded bonus payments and the effect of assumption changes. The Society holds 398m 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 767,675 5,464,226 3,619,895 1,421,3 549,134 5,25,22 3,381,226 12,88,359 87,762 5,79,188 4,183,35 12,47,671 1,49,34 989,415 1,311,934 2,315,967 23,998,69 3,47,99 25,683,453 4,274,676 28,838,265 Changes to valuation bases increased reserves by 36m, mainly due to lower interest rates. GAO provisions total 499m (Royal London 58m, Royal Liver 14m & Scottish Life 427m) [21: total of 378m]. The Society also has a provision of 19m [21: 9m] for pensions mis-selling guarantees. Additionally there is GMP provision of 144m and small provisions totalling 17m (including 2m for Royal Liver) for endowment maturity guarantees. Long Term Business Admissible Assets Fixed Interest Equities Property Linked Other Total Assets 29 's 6,532,5 3,149,343 1,346,299 1,28,474 2,761,93 23,998,69 21 's 6,771,534 3,445,364 1,339,853 11,975,662 2,151,4 25,683, 's 8,64,52 4,18,898 1,622,414 12,359,137 2,233,764 28,838,265 Total assets increased by 12% and, at 28.8bn, reached another all time high, helped by the Royal Liver transfer. There was a 27% increase in fixed interest investments. Unit linked assets remained the most significant holding, accounting for 43% of the total. Key Revenue Items 's 's 's INCOME Premiums 1,961,592 2,426,374 2,263,15 Investment Income 964,89 98, ,987 Investment Increase 761, ,2-363,447 EXPENDITURE Commissions 18,11 178,176 17,13 Policy claims 2,439,289 2,471,773 2,658,3 Expenses 286,818 25, ,48 BUSINESS TRANSFERS 2,257,598 TRANSFER to P&L Free Assets Free Assets (Exc Fin Eng) Financial Engineering Free Assets (Published) 's 's 's 1,26,43 1,597,234 1,95,935 1,26,43 1,597,234 1,95,935 INCREASE in fund 757, ,14 2,27,717 Whilst gross premiums remained at around 2.9bn, a 3% increase in reinsurance premiums led to a 7% reduction in net premiums. With claims increasing by 7.5%, there was a large increase in the net outflow, from 45m to 395m. Whilst commissions continued to reduce, expenses increased, primarily due to a rise in one off costs. The 211 transfer of 2.26bn relates to Royal Liver. Free Asset Ratios % % % FAR (Exc Fin Eng) FAR (Published) CRR Coverage Ratios CRRCR (Exc Fin Eng) CRRCR (Published) % % % Free assets increased again on the back of increased capital resources. An increased CRR, primarily driven by a higher WPICC, meant that both the FAR and the CRR coverage remained at a similar level. Within this, the CRR coverage for the open Royal London fund increased from 469% to 541%. Expense Ratios New business (% APE) Renewal (% reg premiums) Renewal (% p.a. of mean fund) The new business expense ratio reduced on lower acquisition costs. 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 72.1% - new business and 11.3% - renewal as a percentage of regular premiums [21: 76.3% and 11.6% respectively]. AKG Actuaries & Consultants Ltd Page 5 October 212

8 The Royal London Mutual Insurance Society Ltd New Business Data (for y/e: 31/12/11) Single Regular 's 's New Single Premiums 's 's 's Investment Bonds With Profits Unitised WP Unit Linked 1, Total (Direct + External Reins) 1,524 1,316,916 3,536 1,321,976 1,62 1,734,75 2,491 1,738,816 1,95 1,628,13 2,931 1,632,849 Endowment With Profits Unitised WP Unit Linked Guaranteed Bonds ISA / tax exempt Annuities 6 55 Growth Rate 2.9% 31.5% -6.1% Reins Accepted (Intra-Group) 1,8, 1,6, 1,4, 1,2, 1,, 8, 6, 4, 2, Miscellaneous 53 Protection Whole Life Term With Profits Unitised WP Unit Linked Ordinary Pension 15 5,83 25, New Regular Premiums 's 's 's Total (Direct + External Reins) 76,256 1, ,187 67, , ,63 56, ,968 1,682 27,89 IP Individual 1,94 Growth Rate 38.8% 9.3% 7.% Critical Illness Long Term Care Miscellaneous Pensions 22,82 2,466 Reins Accepted (Intra-Group) 16, 14, 12, 1, 8, 6, 4, 2, Individual CPA Miscellaneous With Profits Unitised WP Unit Linked 66,611 61,629 1,31, ,764 1, ,43 Bulk Transfer Annuities Group Business Pension Life IP Critical Illness Miscellaneous 61,445 5,37 TOTAL DIRECT BUSINESS 1,632,849 27,89 Direct (inc above) External Reins (exc above) ,93 1,682 Intra-Group Reins (exc above) Industrial Branch (inc above) The new business figures shown on this page relate to the Society as a whole and not just to Scottish Life. 211 was a good year in new business terms for the group, which reported a 6% increase in PVNBP up to 3.3bn made up as follows: Scottish Life - 2,251m (up 4%); Bright Grey/Scottish Provident - 393m (up 17%); Royal London Retail - 69m (down 35%); Royal London 36º - 398m (up 21%); Royal London Plus - 173m (down 1%) and Caledonian Life - 7m. New APE for pensions business increased by 7% to 297m - the main contributor here being Group Pensions, which increased by 39% to 111m. New single premiums reduced by 6%, whilst new regular premiums were up by 19%. The Society reports 19% & 27% market shares of the personal pension and insured drawdown markets respectively. The combination of Scottish Provident and Bright Grey, together with consolidation elsewhere, means that the Society now claims, at 17%, the third largest share of the IFA protection market. Protection sales performed reasonably well in a difficult market - Scottish Provident and Bright Grey's combined APE remaining relatively flat at 59.2m, although the ending of the arrangement with Santander saw Retail APE fall from 17.2m to 9.4m. Outside of the Society: Royal London 36º saw APE increase by 22% to 44.8m; RLAM attracted net new assets of 379m a 67% decrease on 21; Royal London Cash Management saw a net outflow of new assets of 355m [21 inflow of 34m] as risk appetites again improved and Ascentric generated 1.3bn of new business [21: 1.2bn]. AKG Actuaries & Consultants Ltd Page 6 October 212

9 Royal London Pooled Pensions Company Ltd Corporate Data Ownership Open to New Business? The Royal London 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 S Shone 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 Royal London, 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 has grown steadily in recent years, albeit its growth has been characterised by a series of relatively large inflows and outflows, some involving the Royal London Staff Pension Scheme. The company remains relatively small within the overall group. 211 saw it declare reduced pre-tax profits of 37k [21: 78k]. The company did not declare a dividend [21 nil]. Whilst premiums reduced by 19%, to 275m, surrenders also reduced by 74% to 117m, which meant that the company recorded a net inflow in 211 of 158m against a net outflow of 12m in 21. Historically maintaining a low level of free assets (not unusual for a purely unit linked operation), 29 saw the company report negative free assets. The security held by the company to cover its regulatory capital matured on 7 December 29 and the proceeds of 3.7m were placed on deposit. Due to FSA market risk and counterparty rules some 2m became inadmissible, resulting in the technical shortfall of 1.1m. The position was rectified on 5 February 21. The company enjoys the security provided by the Royal London Group. Key Financial Data (for y/e: 31/12/11) Long Term Business Admissible Assets Fixed Interest Equities Property Linked Other Total Assets Free Assets Free Assets (Exc Fin Eng) Financial Engineering Free Assets (Published) Free Asset Ratios 29 's 2,25, ,26, 's 2,132, ,132, 's 2,592,522 1,22 2,593, 's 's 's -1,134 1,15 1,28-1,134 1,15 1, % % % FAR (Exc Fin Eng) FAR (Published) CRR Coverage Ratios CRRCR (Exc Fin Eng) CRRCR (Published) 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 % % % 's 2,25, ,26, 's 2,132, ,132, 's 2,592,522 1,22 2,593,724 New Business Data (for y/e: 31/12/11) New Single Premiums 's 's 's Total (Direct + External Reins) Growth Rate Reins Accepted (Intra-Group) 25,117 25, % 34,88 34, % 275, , % New Regular Premiums 's 's 's Total (Direct + External Reins) Growth Rate Reins Accepted (Intra-Group) AKG Actuaries & Consultants Ltd Page 7 October 212

10 Distribution Method Royal London's primary focus is on intermediaries as its principal means of distribution (having closed its face-to-face salesforce in 24) and this is the focus for Scottish Life. However, Royal London does also incorporate a bancassurance arm mainly for protection business, albeit its agreement with Santander ended in 211. Scottish Life, the largest of the Royal London 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. Distribution Split Regular Premium % IFAs Image and Strategy Single Premium % Royal London's strategy is to operate as a multi-brand specialist manufacturer, with four main strands: Intermediary Life & Pensions onshore through Scottish Life, Bright Grey, Scottish Provident and offshore through Royal London 36º, investment though RLAM and Ascentric, and bancassurance and closed book administration through Royal London 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 consideration, having been inherited as part of the Royal Liver acquisition. The primary 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. 211 saw Royal London complete the long running acquisition of the business of Royal Liver, in a mutual to mutual transaction. Others, such as the ongoing CFS deal may follow. 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 Royal London Group. In line with the parent's branding, the operation espouses a brand aspiration of "pensions that make financial sense". Scottish Life continues to maintain its stance on writing profitable business and championing its Financial Adviser's Fee (FAF) approach in the run up to RDR and this stance bodes well for Scottish Life's future positioning. However, Scottish Life is also demonstrating a good understanding of the broader changes and challenges currently on the horizon, such as the introduction of auto enrolment, and it has been honing its focus and staff capability in positioning for this as well as maintaining competitive momentum in 211/212 in the run up to these changes. Products 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 Royal London are now either reinsured to, or 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 Royal London Mutual Insurance Society Ltd Investment Bond Savings Plan Pension Products Written in The Royal London 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 Royal London Mutual Insurance Society Ltd Group Life Money Purchase Final Salary (incl. Wind Up) Group Stakeholder Group Personal Pension Plan AKG Actuaries & Consultants Ltd Page 8 October 212

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. 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 Finance & Technology Research Centre 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. 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 Royal London 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 Royal London increased from 42.2bn to 46.1bn in 211 [3 June 212: 47bn]. Whilst RLAM saw net new business of 379m, a 67% reduction on 21, the vast majority of funds under management still relate to the life business. Royal London Cash Management saw negative net new assets of 355m [21 positive 34m], disadvantaged by improved risk appetites. The Royal Liver deal brought with it around 2.3bn of funds under management. If completed, the Co-operative Financial Services deal would add a further 2bn. Annual Review Royal London remains well positioned and focused on its particular markets. It was a good year on a number of measures: overall new business volumes were up, as were profits. Solvency levels remain good. Although the ending of the Santander deal in July 211,was a set back, the integration of Bright Grey and Scottish Provident delivers a protection business of real scale, which is well placed to exploit opportunities in the bancassurance arena and beyond. Scottish Life continues to be highly regarded as a pensions specialist. Within the wrap space, Ascentric's assets under administration increased to 3.7bn and further to 4.3bn as at 3 June 212. EEV operating profit increased to 334m in 211 [21: 243m], although 97m arose from the Royal Liver acquisition. EEV profit after tax and a mutual dividend of 88m [21: 85m] reduced to 122m [21: 228m] impacted by adverse economic conditions. 211 marked Royal London's 15th anniversary. The acquisition of Royal Liver was completed in July and the Royal London Foundation was launched, aiming to help people in UK communities. MoneyVista, an online personal financial planning service was, launched. Caledonian Life was relaunched in Ireland. Having celebrated 15 years in existence, the Society, which has been transformed significantly in recent years, looks set to develop further, including the potential CFS deal. AKG Actuaries & Consultants Ltd Page 9 October 212

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 October 212

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 October 212

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 212