ISSUED 09 JANUARY PROVIDER SECTOR Royal London FINANCIAL STRENGTH ASSESSMENT

Transcription

1 ISSUED 09 JANUARY 2018 PROVIDER SECTOR Royal London FINANCIAL STRENGTH ASSESSMENT

2 Royal London P R O V I D E R S E C T O R ABOUT THIS FINANCIAL STRENGTH ASSESSMENT This AKG report and the analysis and ratings contained within it provide assessment of financial strength and associated considerations. Financial Strength is focused on the ability of a company to deliver ongoing operational capability in the interest of its customers and in line with their fairly held expectations. AKG s perspective in the assessment of financial strength is wholly that of a customer of a product or service. From that foundation, this analysis is specifically designed to inform financial advisers and assist in their required understanding of a company s operational financial strength. Given the underlying customer perspective, the financial strength of companies needs to be focused at an operational level (i.e. the elements and functions of an organisation which operate to specifically deliver and manage a proposition or service to the customer), specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer s perspective it is that company that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers advisers must be met. This contrasts to credit rating, which will be undertaken at group or parent company level where investment or debt placement etc. is made. Further details on how analysis is undertaken is provided at the end of this report and may also be obtained from AKG. TABLE OF CONTENTS Company Analysis Rating & Assessment Commentary... 3 Ratings... 3 Summary... 3 Commentary... 3 Group & Parental Context... 5 Background... 5 Group Structure (simplified)... 5 Company Analysis: The Royal London Mutual Insurance Society Ltd... 6 Basic Information... 6 Operations... 7 Strategy... 9 Key Company Financial Data Guide Introduction Rating Definitions About AKG CONTACT INFORMATION AKG Financial Analytics Ltd, Anderton House, 92 South Street, Dorking, Surrey, RH4 2EW Tel: +44 (0) akg@akg.co.uk Web: Guide AKG Financial Analytics Ltd 2 09 January 2018

3 Royal London P R O V I D E R S E C T O R Rating & Assessment Commentary RATINGS Rating & Assessment Commentary Overall Financial Strength PROVIDER SECTOR B+ VERY STRONG THE ROYAL LONDON MUTUAL INSURANCE SOCIETY LTD Additional Financial Strength and Supporting Ratings Group & Parental Context The Royal London Mutual Insurance Society Ltd Non Profit Financial Strength Unit Linked Financial Strength With Profits Financial Strength Service Image & Strategy Business Performance SUMMARY Company Analysis Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of 106bn, around 9 million policies in force, more than 1 million members and 3,449 employees as at 30 June 2017 was the first year in which both pension and protection products operated under the Royal London brand Performing strongly with both pensions and protection reporting record new business volumes in Market visibility is good, with a positive reputation and Royal London continues to win a number of awards for products and service ProfitShare extended to wider membership in 2017 COMMENTARY Financial Strength Ratings The Royal London Mutual Insurance Society Ltd 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. Solvency coverage on a regulatory basis reduced in, but remained adequate without significant recourse to transitional measures. Guide The acquisition and integration of the Co-operative Group's life company and asset management business has given the group a substantial step up in scale. This, together with the completion of the re-brand should put the group, which has adapted well to the post RDR/Pension Freedoms marketplace, in a good position for future success. The Society's long term business is made up of a mix of with profits, unit linked and non-pofit business, all of which appear to have a good degree of security. The with profits rating shown above applies to the Royal London IB & OB Subfund, which remains open to new business. Lower ratings apply to the other closed with profits funds. AKG Financial Analytics Ltd 3 09 January 2018

4 Royal London P R O V I D E R S E C T O R Rating & Assessment Commentary Group & Parental Context Company Analysis The mutual structure and personality of the business, combined with its healthy financial position faciltitate its 'ProfitShare' programme, which has distributed around 586m to members over the last 7 years. Service Rating For pensions business since the introduction of the pension freedoms changes from April, Royal London saw further growth in demand from advisers and clients across all books of business, particularly for existing drawdown business. This was in addition to increased volumes through the introduction of auto-enrolment, albeit the organisation took a very clear and early selective management approach to this so as to avoid poor quality business. However this spike in activity normalised towards the end of and the Society maintained its reputation for excellent pensions service and support throughout. The Drawdown Governance Service (launched in May ) 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 change and investment made within the customer services division dealing with this product line. Internal and external benchmarks and awards support the view that service performance for the protection line has been improved, with excellence now acknowledged alongside the pension business. Image & Strategy Rating The main events from an image perspective over the past 3 years have been the rebrand of first the pension business from Scottish Life to Royal London and subsequently the protection brands. Within this Royal London 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, Royal London continues to deliver a consistent message and proposition in terms of personal pension/drawdown and group personal pension/auto enrolment. Royal London is looking to benefit from the secondary market that is emerging in the auto-enrolment space. As an acknowledged drawdown specialist, and with a small annuity market presence, the pension freedoms changes introduced in April 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. Across the business, a key focus over recent years has been culture and values. This has both been to deliver a harmonised understanding and approach for staff that have come from different constituent organisations, but are now under a common brand. However, it has also been about increasing the focus on the customer and specifically driving delivery of customer values, with these being encapsulated within the business strategy as value statements. In this way, Royal London looks to give practical form to its mutuality - something which should also aid differentiation. Business Performance Rating was a very good year for Royal London, with the transition to a single brand completed. Guide Life and pensions sales on a present value of new business premiums (PVNBP) basis grew by 28%, the third successive year of growth. Funds under management grew by 18% to 100bn. There was also a 16% increase in EEV operating profit to 282m [: 244m]. The payout under ProfitShare increased by 63% to 114m. Royal London also reported record levels of investment in the business. The Society also continued to fare well in industry awards. AKG Financial Analytics Ltd 4 09 January 2018

5 Royal London P R O V I D E R S E C T O R BACKGROUND Group & Parental Context 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 2000 and then, in 2001, Scottish Life saw the group acquire Investment Funds Direct Ltd, which provides the Ascentric platform and the FundsDirect fund supermarket. In 2008, 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 There were transfers-in of the business of Royal Liver Assurance Ltd in July 2011 and both Royal London (CIS) Ltd) (RLCIS - the company formed to acquire the Co-operative Insurance Society Ltd in July 2013) and Royal London Pooled Pensions Company Ltd (RLPPC) in December. The Co-operative Asset Management Ltd (renamed Royal London Asset Management (CIS) Ltd) was also acquired in July In November 2013, Royal London 360 Insurance Company Ltd, the group's offshore operation, was sold in a management buy-out supported by Vitruvian Partners LLP. In 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. 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 Ltd (RLAM), which manages funds for external clients, as well as for Royal London, together with Investment Funds Direct Ltd (the group s platform operation, which trades as Ascentric). Royal London has six main sites across the UK and Ireland: Bath, Dublin, Edinburgh, Glasgow, London and Wilmslow. At 31 December, Royal London's regulatory Solvency II Capital Requirement Coverage Ratios were 227% and 153% on an Investor and Regulatory basis respectively [1 January : 226% and 169%]. GROUP STRUCTURE (SIMPLIFIED) AKG Financial Analytics Ltd 5 09 January 2018

6 The Royal London Mutual Insurance Society Ltd P R O V I D E R S E C T O R Company Analysis: The Royal London Mutual Insurance Society Ltd BASIC INFORMATION Company Type Composite Insurer Ownership & Control Mutual Year Established 1861 Country of Registration UK Head Office 55 Gracechurch Street, London, EC3V 0RL Contact Key Personnel Role Chairman Group Chief Executive Officer Group Finance Director Chief Risk Officer CEO, Intermediary Business CEO, Consumer Business CEO, RL (CIS) CEO, Wealth Group People Director Group Customer Services Director Group Technology & Change Director Chief Actuary With Profits Actuary Name R L Pennant-Rea P D Loney T W Harris J M Macdonald I Langton J C Toher J Taylor A S Carter N M Riding R A Regan N R Meikle S Cooper B J Murray Company Background The Society as it exists today has developed to encompass a number of other companies and well known brands, as outlined below. The Royal London Mutual Insurance Society Ltd (Royal London) was founded in 1861 as a friendly society, becoming a mutual life insurance company in Royal London acquired the United Assurance Group (UAG) in 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 Scottish Life was founded in 1881 in AKG Financial Analytics Ltd 6 09 January 2018

7 The Royal London Mutual Insurance Society Ltd P R O V I D E R S E C T O R Edinburgh as a proprietary company, becoming a mutual company in On 1 July 2001, Scottish Life demutualised and transferred its business to Royal London. Bright Grey was established in September 2001 and launched to the IFA market, with a phased rollout, from the end of March In 2006, 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 2008, 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 The transfer-in of business from the Co-operative Insurance Society, acquired in 2013 through the newly established company RLCIS, took place on 30 December, together with the transfer of the business from RLPPC. OPERATIONS Governance System and Structure Royal London's Board is committed to 'maintaining high standards of corporate governance and believes that a sound corporate governance framework enables efficient and effective decision making with clear responsibilities, which contribute to achieving Royal London s objectives and delivering long term value to members'. The Board sets 'the company's strategic aims, ensures that the necessary financial and human resources are in place for the company to meet its objectives and reviews management performance. The Board sets the company s values and standards and ensures that its obligations are understood and met'. As a mutual, there are no shareholders and Royal London is owned by its members. The focus of the company is therefore to provide long-term benefit to these members. The company has extended its ProfitShare participation so that more members can share in any profits. The Board uses the AGM to communicate with members and to encourage their participation. The company monitors and assesses its system of governance on an ongoing basis. The Disclosure Committee was established in to review and approve material press releases concerning the performance of the company, as well as review and approve regular reporting required to be submitted to the supervisory authorities as directed by the Board. Its membership includes the Group Chief Executive and the Group Finance Director. Risk Management The Board believes that implementing an effective Risk Management System (RMS) is fundamental to achieving high standards of Governance. A new risk management tool, Archer, was implemented in and was rolled out in This allows Royal London to review and enhance its RMS, and helps to monitor risks to 'ensure that the achievement of Royal London's performance and objectives is not undermined by unexpected events'. The governance structure for risk management is based on the three lines of defence model. Primary responsibility for risk management lies with the business units and specialist operational process functions. A second line of defence is provided by specialist functions that undertake monitoring, challenge and policy setting. The third line of defence is provided by Group Internal Audit, which provides independent assurance. Administration For pensions business since the introduction of the pension freedoms changes from April, 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. The Drawdown Governance Service (launched in May ) and further developments will help advisers further in this area. AKG Financial Analytics Ltd 7 09 January 2018

8 The Royal London Mutual Insurance Society Ltd P R O V I D E R S E C T O R 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. 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. Across the business Royal London is seeking to maximise its investment in technology to drive operational improvements. Thus current platform improvements elsewhere in the group are being also directed into pension and direct propositions to drive further administration efficiency scale and maintain service. Benchmarks 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 and at the same event also received a special Consistent Service Excellence Award for multiple years of consistent, quality online service. At the and 2017 Financial Adviser Service Awards, Royal London again received 5 Star awards for both Pensions and Protection in the Life & Pensions category. saw Royal London named as Company of the Year in the following awards: Money Marketing Financial Services Financial Adviser Online Service Financial Adviser Service Awards Royal London won the Outstanding Achievement award in the 2017 Financial Adviser Service Awards. The Society also holds product ratings from Defaqto & F&TRC and has won specific product and fund awards from Moneyfacts in and Corporate Adviser in Outsourcing None of the key functions are outsourced. 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 There are also outsourcing arrangements in place with HSBC who provide Custodian and Fund Administration Services for RLAM. AKG Financial Analytics Ltd 8 09 January 2018

9 The Royal London Mutual Insurance Society Ltd P R O V I D E R S E C T O R STRATEGY Market Positioning 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. Work on re-establishing any linkages that had been lost has taken place, with previous Scottish Provident supporting firms being the latter stage of this, utilising a segmentation model and targeted marketing campaigns. 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. An accumulating with profits Funeral Bond product, not listed below, was launched in the direct channel in January. Investment Bonds and Savings Plans are also available through this channel. 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 re-platforming exercise and new product development. Growth is predicted for the Irish Market, given demographic and economic indicators and whilst structural change may be required due to Brexit, the business remains an avenue for adjacent growth. Royal London is in the process of establishing a subsidiary in Ireland to enable its business in the Republic of Ireland to continue to trade and to mitigate any uncertainty. 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. A new partnership with Post Office Money was secured in 2017, which saw Royal London become the sole provider of life insurance products to be sold through Post Office outlets and online in Royal London reports that awareness of its brand has increased to 57% of the population. Proposition The range of products written into Royal London as a Society is matched by the single Royal London brand under which they are positioned. These being a range of Pensions and Protection propositions, with support in terms of investment, for the former, from RLAM. The Society also writes a select range of products in the direct channel. 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. In, the last Scottish Provident protection product was rebranded as the new 'Royal London Pegasus Whole of Life plan'. A range of product underwriting enhancements also took place in and AKG Financial Analytics Ltd 9 09 January 2018

10 The Royal London Mutual Insurance Society Ltd P R O V I D E R S E C T O R 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 8bn 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. Royal London s pension investment proposition offers a range of over 160 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 2012, 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, who uses various multi asset models, experience and expertise to help shape his robust tactical strategy. At the end of there were ten separate funds: Royal London IB & OB, United Friendly OB, United Friendly IB, Refuge Assurance IB, Scottish Life (containing the pre-transfer 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 2011 with the Royal Liver transfer, with 10bn more added with the CIS transfer in. The Royal London with profits fund returned 13.8% in [: 4.1%]. Royal London is a mutual so distributions are 100% to policyholders. The Scottish Life Fund, and the Royal Liver and Royal London (CIS) Subfunds are also both run on a 100:0 basis. For former UAG policies, 90% of the profits go to the UAG policyholders and 10% to the Royal London with profits policyholders. A Mutual Dividend (renamed the Royal London ProfitShare in ) was introduced in 2007, with 114m allocated in [: 70m; : 60m], equivalent to 1.4% of asset share. AKG Financial Analytics Ltd January 2018

11 The Royal London Mutual Insurance Society Ltd P R O V I D E R S E C T O R KEY COMPANY FINANCIAL DATA Last 3 reporting periods up to 31 December Assets Fixed interest 19,875 Equities 7,476 Collectives 821 Property 2,834 Linked 30,782 Derivatives 4,322 Loans and mortgages 21 Reinsurance recoverables 7,983 Cash 1,126 Other 8,865 Total Assets 84,106 Liabilities Technical provisions - nonlife Technical provisions - health (similar to life) 0 (117) Technical provisions - life 35,794 Technical provisions - linked 32,244 Other 9,103 Total Liabilities 77,024 Excess of assets over liabilities Linked assets remained the most dominant, accounting for 37% of the total. Fixed Interest, now at 24% is more significant post transfers. Total funds under management within Royal London increased by 18% from 84.5bn to a record high of 100bn in, and further to 106bn as at 30 June RLAM reported a 114% increase in gross new assets to 6.7bn [: 3.1bn]. Ascentric saw assets under administration increase by 22% from 10.1bn to 12.3bn in and by 9% to 13.4bn as at 30 June Life & Health SLT Technical Provisions Insurance with profit participation 30,186 Linked insurance 32,244 Other life insurance 5,608 Annuities - from non-life health Annuities - from non-life non-health Health insurance (117) Health reinsurance 0 Life reinsurance 0 Total life and health SLT technical provisions ,921 Life Expenses 7,083 Health insurance 3 Insurance with profit participation 126 Linked insurance 189 Other life insurance 233 Annuities - from non-life health Annuities - from non-life non-health Health reinsurance 0 Life reinsurance 0 Other expenses 471 Total life expenses 1, AKG Financial Analytics Ltd January 2018

12 The Royal London Mutual Insurance Society Ltd P R O V I D E R S E C T O R The Society writes a mix of with profits, linked and non-profit business. In term of technical provisions, linked business is the most significant representing 47% of the total. There remains a substantial proportion of, mostly historic, with profits business, which represents 44% of the total, the balance being non profit business. Solvency Capital Requirement (SCR) Market risk 6,993 Counterparty default risk 269 Life underwriting risk 2,257 Health underwriting risk 53 Non-life underwriting risk 0 Diversification (1,606) Intangible asset risk 0 Operational risk 186 Capital add-ons already set 0 Other items (4,683) Solvency capital requirement 3,469 Own Funds Tier 1 unrestricted 4,513 Tier 1 restricted 0 Tier Tier 3 0 Eligible own funds 5,314 Excess of own funds over SCR 1,844 SCR coverage ratio (%) The Royal London Open Fund had own funds of 3.6bn, an SCR of 1.8bn, a surplus of 1.8bn and an SCR ratio of 206% as at 31 December [1 Jan : 239%], Similarly, the closed funds had own funds of 4.3bn, an SCR of 1.7bn, a surplus of 2.6bn and an SCR ratio of 249% [1 Jan : 213%]. This leads to total own funds of 7.9bn, an SCR of 3.5bn, a surplus of 4.4bn and an SCR ratio of 227% [1 Jan ; 226%] on an 'Investor's View' basis. On a regulatory basis, the closed fund surplus is treated as a liability, so reducing total own funds to 5.3bn and a revised SCR ratio of 153% [1 Jan : 169%]. Tier 2 own funds, held in the Open Fund, relates to two tranches of subordinated debt issued in 2013 and. Royal London's SCR is more than covered by Tier 1 Capital. Like a number of its competitors, Royal London makes use of the Transitional Measure on Technical Provisions (TMTP) to smooth the transition from the Solvency I Regime to Solvency II. TMTP primarily benefits the closed funds, but Royal London is not reliant on TMTP to meet its capital requirements. As at 31 December, the use of the TMTP contributed 37% of the Investor View coverage ratio [Regulatory: 10%]. AKG Financial Analytics Ltd January 2018

13 The Royal London Mutual Insurance Society Ltd P R O V I D E R S E C T O R Gross Life Premiums Written By Line of Business Health insurance 28 Insurance with profit participation 464 Linked insurance 5,618 Other life insurance 705 Annuities - from non-life health Annuities - from non-life non-health Health reinsurance 0 Life reinsurance 0 Total gross life premiums written 0 0 6,816 Gross Life Premiums Written By Country Home country 6,757 Country 1 59 Country 2 0 Country 3 0 Country 4 0 Country 5 0 Other countries 0 Total gross life premiums written saw the Society again report a healthy overall increase in Life and Pensions PVNBP up 28% from 6.8bn to 8.7bn. Within this, Pensions business increased by 27%, up from 6.1bn to 7.7bn, with the Society remaining a major player in the workplace pensions and auto-enrolment space. Protection increased by 29% from 502m to 647m with the Society building on the positive momentum started in and benefitting from the introduction of online underwriting. Consumer sales were up by 82% from 165m to 301m, driven by sales of pre-paid funeral plans and Over 50s Life Cover. Royal London reported the following market shares in the fourth quarter of (based on a range of available sources in 2017): Protection %; Individual Pensions - 19%; Income Drawdown - 9.5%; Workplace pensions - 8%; Over 50s direct % and Funeral Plans - 37%. A relatively small amount of business, gross written premiums of 59m in, was written in Ireland, with Royal London reporting a 15.6% [: 14.3%] new business share of the broker individual protection market in. Outside of the Society, the PVNBP of Wealth business, written by RLAM and Ascentric, more than doubled from 3.1bn to 6.7bn. Profit Profit (loss) before taxation Taxation (207) (18) (249) Profit (loss) after taxation Other comprehensive income Dividends Retained profit (loss) Life Business Flows 6,816 Net life premiums earned 3,246 5,022 6,076 Net life claims incurred (2,584) (4,943) (4,624) Net flow of business ,452 Profits shown above are on an IFRS basis. Operating profit before tax on an European Embedded Value (EEV) basis, which Royal London believes is the most meaningful basis on which to manage its business, rose by 16% to 282m [: 244m], mainly driven by the new AKG Financial Analytics Ltd January 2018

14 The Royal London Mutual Insurance Society Ltd P R O V I D E R S E C T O R business sales and changes to underlying assumptions mainly regarding consumer behaviour. Profit contribution from new business was 223m, up 63% from the previous year. Net written premiums increased by 21% in to 6.1bn, driven by increased new business volumes. With claims reducing by 6% to 4.6bn, there was a much increased net inflow of 1.5bn [: 79m]. There was a 63% increase in the mutual dividend, the Royal London ProfitShare, from 70m to 114m, amounting to a 1.4% addition to asset share. In 2017, ProfitShare was extended to the 700,000 members holding unit linked pensions policies, equivalent to 0.18% of the value of the policy on 1 April For the past five years Royal London has been working to improve its IT systems, and such work is ongoing. In total, since the Board has approved, or is in the process of considering, transformation projects worth around 500m. AKG Financial Analytics Ltd January 2018

15 Royal London P R O V I D E R S E C T O R INTRODUCTION Guide For over 20 years AKG has particularly focused on the financial strength requirements of financial advisers, who when acting on behalf of their clients, need to ascertain a company's ability to deliver sustained provision. From this customer perspective, the financial strength of companies needs to be focused at an operational level, specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer s perspective it is that company (not some higher corporate entity) that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers advisers must be met. It is also important to understand the sector approach (comparative peer groups) that is adopted in financial strength assessment and rating process. At AKG, this is again driven by the end customer perspective and the fact that assessment is designed solely for this purpose, i.e. as a component in helping customers advisers to select between comparable companies competing to deliver relevant products or services. AKG s focus and approach has remained consistent over the years since it commenced assessment and rating support for the market. However, coverage, format and presentation has rightly evolved over this period, in line with the needs and expectations of assessment and rating users in the market. And AKG considers further changes on a continual basis. Further details including an explanation of what is included in the assessment reports and coverage can be found online at AKG s process for assessment and rating is to use a balanced scorecard of measures and comparative information, relevant to the companies contained within each peer group. This is gathered via Public Information only for non-participatory assessments and public information plus company interactions with companies for participatory assessments. Further details on AKG s process can be found at This includes further information on the different participatory and non-participatory basis and for companies wishing to learn more about participatory assessment AKG is pleased to outline this and welcomes contact. This is a participatory assessment. RATING DEFINITIONS Overall Financial Strength Rating The objective is to provide a simple indication of the general financial strength of a company from the perspective of those financial advisers who when acting on behalf of their clients need to ascertain a company's ability to deliver sustained operational provision of products or services. The overall rating inherently reflects the mix of business within the company, since different types of customer or policyholder have different requirements and expectations, and the company may have particular strengths and weaknesses in respect of its key product or service areas. However, it also takes account of comparison across the sector in which it is assessed. The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of business in-force): capital and asset position, expense position and profitability, any specifically onerous elements such as guarantees, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic position and rationale, brand and image, AKG Financial Analytics Ltd January 2018

16 Royal London P R O V I D E R S E C T O R typical fund performance achievements or product / service features, its operating environment and ability to withstand external forces. Rating Scale A B+ B B- C D Superior Very Strong Strong Satisfactory Weak Very Weak Not applicable 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 to customers, 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). This is from the perspective of those financial advisers who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of with profits funds, products or propositions. Its comparison is with other companies within the assessment sector that offer or have with profits business. The main criteria taken into account are: capital and asset position, expense position and profitability, 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 UK Life Office With Profits Reports. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Unit Linked Financial Strength Rating The objective is to provide a simple indication of the unit linked financial strength of a company, where it currently offers unit linked business or has existing unit linked business within it. This is from the perspective of those financial advisers who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of unit linked products or propositions. Its comparison is with other companies within the assessment sector that offer or have unit linked business. The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic position and rationale, brand and image, typical fund performance achievements or product / service features, its operating environment and ability to withstand external forces. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Non Profit Financial Strength Rating The objective is to provide a simple indication of the non profit financial strength of a company, where it currently offers or has existing products and propositions such as term assurance and annuities. This includes the company s ability to meet all guaranteed payments arising from such products, but also the company s wider ability to deliver sustained operational provision of such non profit products or propositions. Its comparison is with other companies within the assessment sector that offer or have non profit business. AKG Financial Analytics Ltd January 2018

17 Royal London P R O V I D E R S E C T O R The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic position and rationale, brand and image, product / service features, its operating environment and ability to withstand external forces. Rating Scale Excellent Very Good Good Adequate Poor Not Rated 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. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Image & 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. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Business Performance Rating This review is an assessment of how the company and the brand has fared against its peers, and how it is perceived externally. Effectively this is how it has performed recently in the market. Whilst it will include performance indicators from the most recent available statutory reporting (report and accounts and SFCRs in the case of insurance companies, for example) it will also draw on other recent key performance elements before and after such disclosure, up to the point at which the assessment is undertaken. 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. Rating Scale Excellent Very Good Good Adequate Poor Not Rated AKG Financial Analytics Ltd January 2018

18 Royal London P R O V I D E R S E C T O R ABOUT AKG AKG is an independent organisation. Originally established as an actuarial consultancy AKG has, for over 20 years, specialised in the provision of assessment, ratings, information and market assistance to the financial services industry. As the market has evolved over this period, the range of entities considered by AKG has expanded. Consequently, AKG has brought additional skill sets into its operations. This has meant the inclusion of accounting, corporate finance, IT and market intelligence experience, alongside actuarial resources, to deliver an expanded professional capability. Today AKG s core purpose is in the provision of financial analysis and review services to support the wider financial services sector and its customers. AKG Financial Analytics Ltd (AKG) 2018 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 (0) 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 January 2018

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