Royal London ISSUED. 23 December 2016

Transcription

1 ISSUED 23 December 216

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 onshore UK life companies, friendly societies and similar 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 PRA, 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. 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Regular Reports AKG publishes the following additional reports to assist Providers and Intermediaries: AKG Offshore Profile & Financial Strength Reports - covering offshore life companies. AKG Platform Profile & Financial Strength Reports - covering platform operators. AKG DFM Profile & Financial Strength Reports - covering discretionary fund managers. AKG Office With Profits Reports - providing further depth in the assessment of with profits funds. For further details, please contact AKG: Tel: +44 () or akg@akg.co.uk AKG Financial Analytics Ltd (AKG) 216 This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issued report or subsequently issued ratings (at which point the newly issued report or ratings should be used), or until AKG ceases to make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. 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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 Financial Analytics Ltd 23 December 216

3 Index Main Company Page The Royal London Mutual Insurance Society Ltd 3 General Information Distribution Products Service Investment Annual Review Page Group Overview 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. 27 saw the group acquire Investment Funds Direct Ltd, which provides the Ascentric platform and the FundsDirect fund supermarket. In 28, Phoenix Life Assurance Ltd (PLAL) was acquired from Pearl, together with some protection business from Scottish Mutual and Scottish Provident, as well as Scottish Provident International Ltd and the Scottish Provident brand. PLAL and the protection business was transferred into Royal London at the end of 28. There were transfers-in of the business of Royal Liver Assurance Ltd in July 211 and both Royal London (CIS) Ltd) (the company formed to acquire the Co-operative Insurance Society Ltd in July 213) and Royal London Pooled Pensions Company Ltd in December 214. The Co-operative Asset Management Ltd (renamed Royal London Asset Management (CIS) Ltd) was also acquired in July 213. In November 213, Royal London 36 Insurance Company Ltd, the group's offshore operation, was sold in a management buy-out supported by Vitruvian Partners LLP. In 214 Royal London commenced its phased re-branding exercise to bring the majority of its businesses under the Royal London name and this was completed in 216. The group was also re-organised into three divisions: Intermediary, Consumer and Wealth. Royal London is focused on key sectors of the UK financial services market with its primary focus being to provide pension and protection products in the intermediary market. Previously pensions business had been distributed under the Scottish Life brand within Royal London's Intermediary Division. Protection products previously distributed under the Bright Grey and Scottish Provident brands were the final elements to be brought under the Royal London brand. The protection brand operating in the domestic Irish intermediary protection market, acquired as part of Royal Liver, has also been re-branded to Royal London (previously Caledonian Life). Within the Consumer Division, Royal London Plus, formerly Royal London Administration Services, whilst still administering the Royal London branded life and pensions business as well as former United Assurance Group and Royal Liver brands, now also offers a range of products direct to consumers. The Wealth Division consists of the group's investment management arm, Royal London Asset Management (RLAM), which manages funds for external clients, as well as for Royal London, together with Ascentric, the group s platform operation. At 31 December 215, Royal London's IGD surplus was 3.5bn, up 4% from 3.4bn as at 31 December 214. Corporate Structure (simplified) The Royal London Mutual Insurance Society Ltd Royal London Savings Ltd Royal London Management Services Ltd Royal London Asset Management Ltd Investment Funds Direct Ltd The Royal London Unit Trust Managers Ltd Ratings Company Overall Financial Strength Ratings With Profits Non Profit Unit Linked Service Supporting Ratings Image & Strategy Annual Review The Royal London Mutual Insurance Society Ltd B+ AKG Financial Analytics Ltd Page 1 23 December 216

4 Summary Financial Data (for y/e: 31/12/15) Key Financial Data LT Admissible Assets (by Company) The Royal London Mutual Insurance Society Ltd 's 's 's 32,467,247 62,191,788 63,79,615 Royal London (CIS) Ltd 19,57,363 2,449,12 Royal London Pooled Pensions Company Ltd Total Assets 54,423,622 62,191,788 63,79,615 New Business Data New Single Premiums (by Company) The Royal London Mutual Insurance Society Ltd 's 's 's 1,842,793 2,268,155 3,741,648 Royal London (CIS) Ltd 322, , , ,833 Royal London Pooled Pensions Company Ltd Total (Direct + External Reins) 2,356,868 3,81,981 3,741,648 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 16,112,815 9,28,443 2,94,251 19,218,54 6,944,59 54,423,622 2,49,656 12,285,18 5,923,19 19,363,975 17,839,918 8,996,92 3,246,927 22,568,79 9,539,251 62,191,788 1,22,674 12,722,19 5,875,424 22,811,364 62,191,787 17,314,175 8,663,152 3,258,213 24,65,984 9,238,91 63,79, 's 5,136,487 6,885,566 6,293,81 9,665,287 12,694,74 13,56,133 54,423,622 's 's 1,3,3 11,43,611 5,675,127 24,91,659 63,79,615 Net Inflow (by Company) 's 's 's The Royal London Mutual Insurance Society Ltd -429, ,673 78,586 Royal London (CIS) Ltd -78,739-1,566,26 46,459 Royal London Pooled Pensions Company Ltd Net Inflow(-Outflow) -1,91,961-93,533 78,586 Net Inflow (by payment type) Premiums Death/disability pmts Surrenders Annuity Payments Maturities Net Inflow(-Outflow) 's 3,247,51 417,472 2,67,734 79,682 1,234,583-1,91,961 's 2,721, ,854 2,154,547 49,58 987,182-93,533 's 5,21,531 53,416 3,183,123 6,63 1,195,84 78,586 Net Inflow (by business type) 's 's 's UK Pension Net Inflow(-Outflow) -1,214,668-68,2-48, ,84-89,25 7, ,97-134, ,674-1,91,961-93,533 78,586 UK Pensions Total (Direct + External Reins) New Regular Premiums (by Company) The Royal London Mutual Insurance Society Ltd 18,7 2,246,53 114,359 2,964,646 2,331 2,976 1,673 2,356,868 3,81, ,456 3,592,519 3,741, 's 's 's 253, , ,351 Royal London (CIS) Ltd 25,614 24,31 Royal London Pooled Pensions Company Ltd Total (Direct + External Reins) 279,57 381,7 445,351 New Regular Premiums (by business type) UK Pensions Total (Direct + External Reins) 's 72,881 2,51 59, ,657 6,124 5,49 6,42 279,57 's 381,7 's 53, , ,351 The entire long term insurance business and related assets and liabilities of both Royal London (CIS) Ltd (RLCIS) and Royal London Pooled Pensions Company Ltd (RLPPC) were transferred into The Royal London Mutual Insurance Society Ltd on 3 December 214, with 27.1bn and 3.2bn of net assets and technical liabilities being transferred from RLCIS and RLPPC respectively. RLCIS's and RLPPC's regulatory permissions were subsequently cancelled and both companies ceased to trade. The impact of these transfers can be seen as Long Term Assets within the Society increased by 92% to 62.2bn in 214. There was a small increase to 63.1bn in 215. Group premiums and claims increased by 32% and 79% respectively in 215, leading to a reduced net inflow of 79m [214: 1.bn]. Within this, UK Pensions business saw a net inflow of 71m, with and business lines seeing net outflows of 481m and 142m respectively. Aggregate group single premium new business volumes increased by 21% in 215, whilst new regular premiums saw an increase of 17%. Pensions business continued to dominate, accounting for 91% of overall APE. AKG Financial Analytics Ltd Page 2 23 December 216

5 The Royal London Mutual Insurance Society Ltd Corporate Data Company Type Ownership Open to New Business? Composite Insurer Mutual Yes Year Established 1861 Head Office Website 55 Gracechurch Street London, EC3V UF Tel: Key Personnel Chairman R L Pennant-Rea Group Chief Executive P D Loney Group Finance Director T W Harris Group Risk Director J M Macdonald Chief Executive, Intermediary Business I Langton Chief Executive, Consumer Business J C Toher Chief Executive, Wealth A S Carter Group Customer Services Director R A Regan Group Technology & Change Director N R Meikle Director of Policy & external communications S Webb MD, Royal London Platform Services J Taylor Chief Actuary S Cooper With Profits Actuary B J Murray 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. Bright Grey was established in September 21 and launched to the IFA market, with a phased rollout, from the end of March 23. In 26 Royal London transferred 1.8bn of annuity business previously sold under the Royal London, Scottish Life and United Assurance brands to Prudential Retirement Income Ltd (PRIL). 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. The transfer-in of business from the Co-operative Insurance Society, acquired in 213 through the newly established company RLCIS, took place on 3 December 214, together with the transfer of the business from RLPPC. Overall Financial Strength B+ Royal London is the largest mutual life and pensions company in the UK. It is producing good new business results in its chosen sectors and is operating profitably. Capital resources increased in 215, aided by additional subordinated debt. An increase in the CRR, however, led to a reduced CRR coverage. Expenses increased. The acquisition and integration of the Cooperative Group's life company and asset management business is complete and has given the group a substantial step up in scale. This, together with the finalisation of the re-brand to Royal London should put the group, which has adapted well to the post RDR/Pension Freedoms marketplace, in a good position for future success. Reinsurance Approach The Society paid reinsurance premiums totalling 529m in 215 [214: 493m]. The main reinsurance treaties, in terms of premiums ( 496m), concern the reinsurance of pensions business to funds managed by other life offices, of which by far the largest treaty of this type is with BlackRock Life Ltd with ceded reserves totalling 2.2bn at 31 December 215. 'Bright Grey' business is reinsured to Gen Re (with ceded reserves of 84.9m in 215), RGA ( 24.2m), SCOR ( 23.1m) and Munich Re ( 11.4m). 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, Pacific Life Re, Gen Re, Partner Re and Munich Re (reserves ceded of 198m). 64m and 22m of reserves written under the Progress and Caledonian brands by Royal Liver are reinsured to Munich Re, with a further 22m reinsured with Gen Re. The Society reinsures 442m of annuity liabilities with Prudential Retirement Income Ltd (PRIL). In July 213 a block of this business had been transferred to PRIL. Former Scottish Life and Royal London (intermediary) group income protection claims are reinsured with Unum (ceded reserves of 15m). Following the RLCIS transfer, the Society now reinsures 4.2bn of former RLCIS annuities with Swiss Re, XL Re and RGA. Analysis of Reserves 's 's 's Gross reserves Reinsurance ceded - external Reinsurance ceded - internal Net mathematical reserves Non Profit Business 28,286,487 2,428,91 25,857,577 5,2,163 7,481,791 42,538,372 5,545,334 7,341,545 43,23,79 General Retained non profit reserves which had increased by 76% in 214 primarily due to business transferred in from RLCIS, increased by 8% in 215. Despite these increases, non profit remains a relatively small proportion (3%) of the overall retained mathematical reserves, due in part to reinsurance of the protection business and RLCIS annuities, but also as a result of the transfer and ongoing reinsurance of annuities to PRIL. Retained non profit liabilities are backed by fixed interest investments and bonds. Non Profit Reserves 's 's 's UK Pensions Total net NP reserves -54,999 6, , ,77 63,776 1,8,134 13,764 1,22,674 1,135 1,77, ,16 1,3,3 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 Financial Analytics Ltd Page 3 23 December 216

6 The Royal London Mutual Insurance Society Ltd Unit Linked Business Approach Royal London s pension investment proposition offers a range of over 16 funds from 29 fund managers, including Royal London Asset Management (RLAM). Customers have two main options: They can invest in one of the risk-graded portfolios or lifestyle strategies from the Governed Range. Alternatively, they can create and manage their own investment strategy by selecting from the range of funds. The Governed Portfolios are a range of nine mixed-asset portfolios which are suitable for different risk categories and terms to retirement. Customers can invest in any of the nine Governed Portfolios individually or combined in Target Lifestyle Strategies. In 212, Royal London launched 5 Governed Retirement Income Portfolios (GRIPs) specifically for customers taking income. Royal London takes a proactive role in the governance of the investment proposition via its Investment Advisory Committee (IAC). This is made up of four Royal London Group directors along with two independent representatives, and they provide an ongoing formal review of the investment proposition helping advisers deliver a compliant service to clients. The IAC delegate the tactical asset allocation strategy to Trevor Greetham, Head of Multi Asset at RLAM. Trevor uses various multi asset models, experience and expertise to help shape his robust tactical strategy. The Society reinsured unit linked funds of 2,212m as at 31 December 215 [214: 2,9m]. The majority of this ( 2,18m) was to BlackRock Life. Linked Reserves 's 's 's UK Pensions Total net linked reserves 1,541,487 14,97,227 19,85 16,467,799 1,443,179 1,318,787 21,35,595 23,566,341 17,59 16,53 22,811,364 24,91,659 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 215 there were ten separate funds: Royal London IB & OB, United Friendly OB, United Friendly IB, Refuge Assurance IB, Scottish Life (containing the pretransfer Scottish Life with profits business), PLAL With- Profits, Royal London (CIS) Ordinary and Industrial Life, Royal London (CIS) With-Profits Stakeholder, Royal London (CIS) With-Profits Pension and Royal Liver Assurance. Only the first of the above-listed funds remains open to new business. 1.5bn of with profits business was added in 211 with the Royal Liver transfer, with 1bn more added with the CIS transfer in 214. With Profits Reserves 's 's 's UK Pensions Total net WP reserves 2,62,386 5,769,82 873,513 8,75,71 4,62,562 13,143,422 12,73,6 76,349 4,343,14 585,981 18,524,333 17,2,127 Profit Sharing Philosophy Royal London is a mutual so distributions are 1% to policyholders. The Scottish Life Fund, and the Royal Liver and Royal London (CIS) Subfunds 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 (renamed the Royal London ProfitShare in 214) was introduced in 27, with 7m allocated in 215 [214: 6m]. 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 215 the average EBRs were as follows: Royal London IB & OB Subfund 64%, UF OB Subfund 36%, Scottish Life Fund 24%, PLAL Subfund 4%, Royal Liver Subfund 47%. The EBR for the Royal London (CIS) Subfund varies from % to 67% depending on product type. The EBR for Royal London policies varied between 29% and 76% according to remaining term. Distribution of Surplus To Policyholders Other Transfers 's 626,969 5,472 's 285,561 5,8 's 696,778 6,443 Realistic Balance Sheet 's 's 's Working capital Risk capital margin Realistic excess available 2,453,652 2,453,652 2,764,355 14,778 2,749,576 2,9,896 2,9,896 Working capital ratio RCM as % of assets Realistic xs available ratio 14.4%.% 14.4% 6.9%.% 6.9% 7.5%.% 7.5% The RBS above is aggregated across all of the Society's Subfunds. The working capital ratio within the Royal London IB & OB Subfund, of 31% [214: 3%], 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 Subfund. Lower ratings apply to the other funds. AKG Financial Analytics Ltd Page 4 23 December 216

7 The Royal London Mutual Insurance Society Ltd Key Financial Data (for y/e: 31/12/15) Long Term Business Admissible Assets 213 's 214 's 215 's Long Term Business Liabilities & Margins 213 's 214 's 215 's Fixed Interest Equities Property Linked Other Total Assets 7,775,676 4,795,236 1,331,587 16,323,618 2,241,13 32,467,247 17,839,918 8,996,92 3,246,927 22,568,79 9,539,251 62,191,788 17,314,175 8,663,152 3,258,213 24,65,984 9,238,91 63,79,615 Total assets, which increased by 92% to an all time high in 214, mainly due to the transfers in, increased further in 215. Linked assets remained the most dominant, accounting for 39% of the total [214: 36%], although Fixed Interest, now at 27% [214: 29%], are more significant post transfers. 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 9,644,52 13,918,837 14,682, ,332 13,747, ,275-28,341 14,282,329 CR outside the fund -939,182 8,74,87 639,578-24,949 9,13,499-1,3,729 12,888,18 64, ,146 13,366,385 There are two tranches of subordinated debt; 397m and 348m (both after expenses) issued in 213 and m (nominal) of debt had been issued in 25, with 154m purchased in 213 and the remainder redeemed at par in 215. Capital resources increased by 4.3bn in 214, mainly due to the business transfers, and by a further 916m in 215. Non Linked Non Profit Non Linked With Profits Accum'lg With Profits Linked Surplus c/f Other liabilities Investment Reserves Total Liabilities/Margins 684,77 4,86,791 3,897,32 16,467,799 1,22,674 12,722,19 5,875,424 22,811,364 1,3,3 11,43,611 5,675,127 24,91,659 1,455,523 6,885,566 6,293,81 5,11,738 12,694,74 13,56,133 32,467,247 62,191,787 63,79,615 GAO provisions total 1,458m (Royal London 62m, Royal Liver 3m, Scottish Life 563m and RLCIS 83m) [214: total of 2,24m]. The Society also has a provision of 11m [214: 113m] for pensions mis-selling guarantees. Additionally there is a GMP provision of 199m and a reserve of 76m in respect of the cost of the Solvency II Transformation Project. Key Revenue Items INCOME Premiums Investment Income Investment Increase EXPENDITURE Commissions Policy claims Expenses 's 's 's 2,529,95 1,72,269 1,73, ,157 2,958, ,48 3,246,395 1,257,42 1,437,551 15,324 2,583, ,183 5,21,531 1,795, ,6 145,933 4,942,945 46,582 Business Transfers 13,832,285 Transfer to P&L LT Free Assets Available Capital Resources Capital Resources Req't (CRR) Free Assets (Published) Financial Engineering 's 's 's 9,13,499 13,366,385 14,282,329 6,354,839 9,976,386 1,747,493 2,748,659 3,389,999 3,534,836 Increase in fund 1,931,336 16,71, ,92 Premiums increased by 55% in 215, driven by increased new business volumes. With claims increasing by 91%, there was a reduced net inflow of 79m [214: 663m]. Commissions increased by 39%. Expenses increased by 48%, mainly due to increased non-acquisition costs. The transfers relate to RLCIS and RLPPC in 214. Free Assets (Exc Fin Eng) 2,748,659 3,389,999 3,534,836 Expense Ratios LT Free Asset Ratios % % % FAR (Published) FAR (Exc Fin Eng) LT CRR Coverage Ratios % % % New business (% APE) Renewal (% reg premiums) Renewal (% p.a. of mean fund) The new business expense ratio reduced as the increase in new business exceeded the growth in the associated costs. The renewal expense ratios increased, impacted by increased nonacquisition expenses. CRRCR (Published) CRRCR (Exc Fin Eng) Free assets increased from 3.4bn to 3.5bn, partly due to additional subordinated debt. This figure excludes free assets of 9.5bn retained within the Closed funds, which is for the benefit of policyholders. The CRR coverage reduced slightly, but the restriction on Closed funds is a factor. AKG Financial Analytics Ltd Page 5 23 December 216

8 The Royal London Mutual Insurance Society Ltd New Business Data (for y/e: 31/12/15) Single 's Regular 's New Single Premiums 's 's 's Investment Bonds With Profits Unitised WP Unit Linked Endowment With Profits Guaranteed Bonds Unitised WP Unit Linked 146,51 ISA / tax exempt 15 Annuities Miscellaneous Total Investment 147,457 1,78 Protection Whole Life Term IP Critical Illness Long Term Care Miscellaneous With Profits Unitised WP Unit Linked Ordinary Pension Individual 49 1,654 23, ,181 25,12 6,145 Total Protection 58,627 Pensions Individual CPA Miscellaneous With Profits Unitised WP Unit Linked 23 7,429 3,82, , ,262 CPA (Impaired Life) Bulk Transfer Annuities Total Pensions 3,325, ,211 Group Business Pension Life IP Critical Illness Miscellaneous 268, ,432 Total Group Business 268,718 3,436 TOTAL DIRECT BUSINESS 3,741, ,352 4 UK Pensions Total (Direct + External Reins) Growth Rate 2,58 1,838,44 2,331 1,842,793 5.% 1,426 2,263,753 2,976 2,268, % 147,456 3,592,519 1,673 3,741, % Reins Accepted (Intra-Group) 4,, 3,5, 3,, 2,5, 2,, 1,5, 1,, 5, New Regular Premiums 's 's 's UK Pensions Total (Direct + External Reins) Growth Rate 5, ,743 6, , % 36,83 315,159 5,49 357, % 53, ,774 6,42 445, % Reins Accepted (Intra-Group) 4, 35, 3, 25, 2, 15, 1, 5, saw the group again report a healthy overall increase in PVNBP (4%) up from 4.8bn to 6.8bn with increased Pensions business of 6,17m (up 37%), Protection of 52m (up 49%) and Consumer sales of 165m (up 385%). New APE for pensions business increased by 38% to 745m, with life business increasing by 84% to 68m. New single premiums increased by 65%, whilst new regular premiums increased by 25%. Royal London has become a leading Auto Enrolment provider in the market. The Society reports market share, for the advised markets they are active in, of 13% of the Individual pensions market and just over 1% of the Group DC market. In 215, Royal London experienced strong growth in its UK Protection business through strengthened propositions and customer/adviser engagement and saw market share increase by 4.1% to 11.4%. Outside of the Society, RLAM generated 3.1bn of gross new business inflows [214: 3.8bn]. Ascentric achieved net new assets of 1.1bn, with assets under administration increasing by 13% to 1.1bn. Direct (incl above) External Reins (excl above) Intra-Group Reins (excl above) 1,673 6,42 Industrial Branch (incl above) AKG Financial Analytics Ltd Page 6 23 December 216

9 Distribution Method Having operated with a number of specifically targeted pension and protection brands and elements of segmented distribution in respect of each of these, for a number of years, Royal London has now moved to an integrated approach for the adviser market. This sees its pension offering, both individual and group, previously distributed through the intermediary market under the Scottish Life brand and the protection brands of Scottish Provident and Bright Grey all interface with the adviser market through a single Royal London brand and distribution infrastructure. Royal London also has a separate D2C business with a different suite of propositions. In pensions Royal London continues to target retail financial advisers, identifying particularly robust and profitable firms with new model focus. In protection, where the business has faced challenges in its proposition and service in recent years, the business has maintained strong distribution links. This has enabled it to rebuild and now grow out of the difficulties it has faced. Further work on restabilising any linkages that had been lost is now underway, with previous Scottish Provident supporting firms being the latter stage of this, utilising a segmentation model and targeted marketing campaigns. Royal London also has a small but growing broker distributed business in the Republic of Ireland. This also transitioned to the Royal London brand, having previously operated under the Caledonian Life name, as well as recently undertaking a replatforming exercise and new product development. A set of positive new business figures across both the pension and protection product ranges and continued strong performance in awards suggests that the overall proposition maintains significant traction with advisers. Distribution Split Advised sales Direct Sales Regular Premium % Single Premium % Image and Strategy The main events from an image perspective over the past 2 years have been the rebrand of first the pension business from Scottish Life to Royal London and subsequently the protection brands. Within this it is now leveraging more of the capability and propositions available within the wider Group, including RLAM from an investment solutions perspective. Royal London has undertaken significant investment in Corporate Sponsorship and Television Advertising to promote its brand. From a pensions strategy and business perspective it continues to deliver a consistent message and proposition in terms of personal pension/drawdown and group personal pension/auto enrolment. As an acknowledged drawdown specialist, and with a small annuity market presence, the pension freedoms changes introduced in April 215 have generally fallen positively for Royal London. In protection, Royal London has revitalised its strategy and is now seeing strong growth through improved propositions, pricing strengthened data analytics and online experience and is targeting further growth over the next 5 years. With success in this now evident, further activity including improved analytics and developments with predictive underwriting for example are underway as part of a strategy to deliver ongoing momentum and growth. Products/Proposition Overall Product Philosophy Royal London Intermediary protection offers a range of options including life cover, critical illness cover, income protection and unemployment cover. Pension Portfolio is Royal London s flagship individual pension product targeting regular premium and single premium/consolidation business. Income Release is the flagship income drawdown solution. Royal London was able to facilitate Flexi Access Drawdown and Uncrystallised Fund Pension Lump Sums (UFPLS) across its pension product range from 6 April 215. An accumulating with profits Funeral Bond product, not listed below, was launched in the direct channel in January 215. Investment Bonds and Savings Plans are also available through this channel. Products Currently Marketed Protection Products Critical Illness Income Protection Term Assurance (incl. Family Income Benefit) Relevant Life Protection Business Protection Whole of Life (including Over 5s cover) Pension Products Individual Stakeholder Phased Retirement / Income Drawdown Personal Pension Plan Trustee Investment Plan SIPP Group Products Group Life Money Purchase Final Salary Group Stakeholder Group Personal Pension Plan Product Awards and Benchmarks At the Financial Adviser Life & Pensions Awards 215, Royal London was winner of Pension Provider of the Year, Individual Pension Provider of the Year, Group Pensions Provider of the Year and Auto Enrolment Provider of the Year. In 215 it was named as Company of the Year at the Money Marketing Financial Services Awards and was also winner of Best Group Pension Provider and, for the 4th year running, Best Income Drawdown Provider in the Investment, Life & Pensions Moneyfacts Awards. In 215, Royal London s Retirement Solutions Group Personal Pension received a Five Star Auto Enrolment Rating from Defaqto. Scottish Provident was also named as Best Critical Illness Provider at the Investment Life and Pensions Awards. AKG Financial Analytics Ltd Page 7 23 December 216

10 Service Approach For pensions business since the introduction of the pension freedoms changes from April 215, Royal London has seen further growth in demand from advisers and clients across all books of business, particularly for existing drawdown business. Initially this volume was managed by Royal London in a variety of ways including the redeployment of staff from other areas who were trained on new at retirement conversations, use of overtime and a continuous review of customer conversations and coaching of staff to reduce talk time and increase call capacity. However this spike in activity normalised towards the end of 215. The Drawdown Governance Service (launched in May 215) and further developments will help advisers further in this area. As part of the strategy to restore the respective protection market shares initially of Bright Grey and Scottish Provident and now under the single Royal London brand there has been a period of changes made within the customer services division dealing with this product line. Royal London is carrying out ongoing work/development of its underwriting and associated processes with the objective of delivering additional new business capacity and operational efficiency. This follows the successful introduction of UnderwriteMe as the strategic underwriting platform for all protection business. e-business From an individual pension perspective advisers can access a risk profiling tool, an income planning tool and a new At Retirement tool. Advisers can also make use of an online new business tracker service which provides support for the case management of individual policies with Royal London. From a corporate pension perspective Royal London offers access to a salary exchange calculator, an auto enrolment designer and a scheme risk profiler. A range of online protection tools are available to advisers including an affordability calculator, an instant cover calculator, a relevant life calculator and a lifestyle calculator, a definitions search tool, suitability report tool, IHT calculator, business protection calculator and relevant life policy calculator. Further support with identifying the right trust for the client and compiling a 'reasons why' letter is also provided. Service Standards & Awards Royal London has been a serial gatherer of industry service awards in recent years. Royal London received 5 stars for online service in Life and Pensions for the ninth year running at the FTAdviser Online Service Awards 215 and at the same event also received a special Consistent Service Excellence Award for multiple years of consistent, quality online service. At the 216 Financial Adviser Service Awards, Royal London again received 5 Star awards for both Pensions and Protection in the Life & Pensions category. 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 Internal funds are managed by 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 underpins 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. Integration with RLAM CIS has been completed, with some ethical and sustainable funds being retained. RLAM has a strong long-term record in managing fixed interest portfolios, and its cash management division (formerly Royal London Cash Management, which has been integrated into RLAM) is the largest UK manager of segregated cash mandates with around 8.2bn 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 82.3bn to 84.5bn in 215, and further to 93.8bn as at 3 June 216. RLAM reported 3.1bn of gross new assets [214: 3.8bn]. Ascentric saw assets under administration increase from 8.9bn to 1.1bn in 215. Annual Review 215 was a good year for Royal London as it continued its transition towards a single brand, completed in 216. The Society also continued to fare well in industry awards. New business volumes were up within all three divisions. Royal London continued to be highly regarded as a pensions specialist, claiming an increased market share. Within the platform space, Ascentric's assets under administration increased to 1.1bn. In the Irish market, Royal London increased its market share, claiming 15.8% of the Irish broker protection market in 215. Scottish Provident/Bright Grey were rebranded Royal London towards the end of 215 and following strategic changes has continued to see improvements in business volumes throughout 215 into 216. This has resulted in an increase in market share within the intermediated market. Royal London issued new debt of 35m and repaid old debt of 246m in 215. Its CRR coverage fell slightly, although surplus retained in the Closed funds is a factor here. EEV operating profit before tax and exceptional items increased by 11% to 244m [214: 22m], benefitting from the record level of new business. A mutual dividend, the Royal London ProfitShare, of 7m was allocated [214: 6m]. ProfitShare is to be extended to a wider range of customers and members, starting in 217 with those holding unit linked pensions policies. AKG Financial Analytics Ltd Page 8 23 December 216

11 AKG Financial Analytics Ltd 23 December 216

12 Guide to AKG Ratings Financial Strength Ratings - Introduction The aim of AKG s financial strength ratings is to assist advisers 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 Financial Analytics Ltd 23 December 216

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 advisers 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 PRA, 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 Financial Analytics Ltd 23 December 216

14 AKG Financial Analytics Ltd Anderton House, 92 South Street Dorking, Surrey RH4 2EW Tel No: +44 () Fax No: +44 () AKG is an independent organisation specialising in the provision of assessment, ratings, information and consultancy to the financial services industry AKG Financial Analytics Ltd 216