Royal London Mutual Insurance Society Ltd.

Royal London Mutual Insurance Society Ltd. Primary Credit Analyst: Miroslav Petkov, London (44) 20-7176-7043; miroslav.petkov@spglobal.com Secondary Contact: Simon Ashworth, London (44) 20-7176-7243; simon.ashworth@spglobal.com Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Accounting Considerations Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 1

Rationale Business Risk Profile: Strong Royal London Mutual Insurance Society Ltd. (Royal London) benefits from a strong brand name and sizable share in the U.K. life market, with a focus on pension products. It has adapted its business model and maintained its position throughout a period of continued reforms in the sector. Royal London operates mostly in the U.K. life insurance industry, which carries a low industry and country risk, supported by the U.K.'s strong institutional framework and the life sector's strong track record in asset-liability management. Financial Risk Profile: Strong Royal London maintains significant levels of capital, supplemented by strict capital management policies and resilient earnings. Royal London's capital and earnings are, however, subject to volatility that, for instance, could stem from its large defined benefit pension scheme. In our view, Royal London's mutual status weighs on its financial flexibility because a mutual cannot raise equity capital. Other Factors Enterprise risk management is well embedded with the group and benefits from strong asset-liability management and risk measurement tools. Management has demonstrated a track record of effective strategic repositioning following numerous reforms in the U.K. life market. The mutual's very strong capital position leads us to choose the higher of the two anchors, 'a' and 'a-'. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 2

Outlook: Stable Our outlook on the ratings is stable. Over the next two years we expect Royal London to: Further diversify its product range and sources of profit by increasing the contribution from its asset management and platform businesses, and by continuing to develop its protection and direct-to-consumer propositions; Maintain current new business margins; and Preserve its strong and high quality balance sheet. Downside scenario We could lower the ratings if: Royal London's competitive position and market share deteriorates compared to peers, for example if its brand position were to weaken; We observe a drop in profitability from which we do not anticipate a recovery, for example from increased pressures on prices; We no longer assess capital and earnings as very strong, because of a substantial reduction in capital or a radical change in risk profile; or We lower our opinion of Royal London's financial flexibility, for example because of low fixed-charge coverage ratios. Upside scenario Our assessment of Royal London is constrained by its relatively narrow product profile and lack of geographic diversification compared to higher rated peers across Europe. As a result, we do not expect to raise the ratings during the next two years. Base-Case Scenario Macroeconomic Assumptions U.K. real GDP growth will average 1.1% over 2016-2018. Inflation will increase to 0.9% in 2016 and 2.2% in 2017. Company-Specific Assumptions The value of new business margins to remain around 2%, driven by a more profitable product mix from higher protection and direct-to-consumer sales. Group capital adequacy to remain at least very strong. Earnings (transfer to unallocated divisible surplus) to be at least in the 100 million- 150 million range over the next two years. Leverage ratio to remain below 30% and fixed charge coverage ratio above 4x over the next two years. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 3

Key Metrics 2017f 2016f 2015 2014 2013 Gross Premiums Written ( mil.) 1,300 1,250 1,194 1,218 1,092 Net Income (GBP in m) 100-150 100-150* 125 149 372 Life New Business Margin (%) 2 2 1.6 1.1 1.1 Fixed-charge coverage >4 >4 5.4 6.9 13.4 f--forecast. *Excludes the impact from one-off charge on the adoption of Solvency II. Company Description Royal London is the largest mutual life insurer in the U.K. Most of the group consists of its life insurance operations, although it has a material asset management arm--royal London Asset Management Ltd. (RLAM)--and also sells a small amount of protection business in Ireland. The group had funds under management of 84.5 billion at year-end 2015 (2014: 82.3 billion). This includes a boost of around 20 billion, which it received in 2013 when Royal London bought The Co-operative's life insurance and asset management businesses. Following this acquisition, Royal London went from being the eighth to the fifth largest life insurance company in the U.K. in terms of gross written premiums, according to figures from the Association of British Insurers (ABI; 2013 data). Royal London has consistently been one of the top 10 U.K. life insurers and we expect this to continue. Royal London's main product lines in the U.K. are pensions and protection products sold through intermediaries and positions on multi-tie panels with leading independent financial adviser (IFA) networks. The risk arising from the protection business is mostly reinsured. Royal London's wrap platform, Ascentric, will keep its own brand. As it grows as a specialist wrap provider we expect it to increasingly support Royal London's traditional business lines. Business Risk Profile: Strong Insurance industry and country risk: Low risk Royal London faces low overall industry and country risk because it is mostly exposed to the U.K. life insurance market. We assess the U.K.'s overall insurance industry and country risk as low, supported by our positive opinion of the U.K.'s institutional framework and the life insurance sector's strong track record of minimizing asset-liability mismatches. We consider the U.K.'s life insurance sector to be highly competitive, but believe that, despite this, it has maintained moderate levels of profitability. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 4

Table 1 Industry And Country Risk Insurance sector IICRA Business mix (%) United Kingdom Life 2 99 Ireland Life 3 1 Weighted average IICRA Low Risk 100 Competitive position: Strong, reflecting a robust and sustained market share in individual and workplace pensions, along with strong brand name and reputation in the U.K. life market Royal London has sustained its strong position and market share in the U.K. life market throughout the recent reforms in the industry. It has adapted its business model to the new U.K. pensions and insurance environment while maintaining strong service levels and brand reputation. In addition, Royal London benefits from a strong and long-standing relationship with intermediaries, helped by its focus on the midsize market. Royal London stands out as one of the few major mutual insurance companies still operating in the U.K. The mutual's unique brand reputation provides it with the potential to stand out from its peers and supports our assessment of a strong competition position. We continue to view costs as a key aspect of our assessment of Royal London's competitive position. Significant growth in funds under management (both organically and inorganically) has recently eased this pressure compared with previous years, as seen in stronger margins in the pension business. However, the group is still behind the biggest players in the U.K. market. We expect Royal London to continue monitoring costs to ensure it remains competitive. We believe that the vote in favor of Brexit will not materially affect Royal London's competitive position because the majority of its business is generated from within the U.K. For the group, the most significant change has been the Department of Work and Pensions' announcement in 2015 regarding auto-enrolment pension schemes. The default fund charges of all qualifying schemes are now capped at 0.75% and no commission can be paid. Active member discounts are also no longer permitted (that is, differential charging between members who are contributing to the scheme and those who are not). Royal London reported a 61 million cost in 2014 to comply with the regulation. Additionally, in 2016 the FCA announced a ban on exit fees for new contracts and a 1% cap on exit charges on existing contracts, which would come into force early next year. We expect that the future impact of these caps will be limited unless the charge cap reduces below its current level. As of April 6, 2015, buying an annuity is no longer a requirement for retirees. The change in regulation did not affect Royal London. It has little exposure to annuities and the business written is largely reinsured to Prudential. Conversely, Royal London has seen new sales as a result of the increase in demand for drawdown business. Royal London has so far benefited from the auto-enrolment law that took effect in April 2012. It staged a controlled growth by selecting schemes on profitability and focusing on the midsize market. We expect Royal London to further expand its market share by continuing with its current strategy. Protection sales (present value of new business premiums) increased by 49% in 2015 after consecutive declines of around 21% in 2014 and 15% in 2013. The increase in 2015 was an expected rebound and we don't anticipate a further WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 5

material increase over the next couple of years. The protection line contributed only around 11% to the European embedded value (EEV) operating profit. The group is facing intense competition on prices from larger peers in this segment. Royal London has started to develop a direct-to-consumer proposition. Although we see it as a positive in terms of diversification, we expect that it will contribute only marginally to the group's profit. Table 2 Royal London Mutual Insurance Society Competitive Position --Year ended Dec. 31-- (Mil. ) 2015 2014 2013 2012 2011 Gross premiums written 1,194 1,218 1,092 1,087 1,076 Change in gross premiums written (%) (2.0) 11.5 0.5 1.0 1.8 Net premiums written 794.0 (576.0) 726.0 682.0 732.0 Change in net premiums written (%) N.M. N.M. 6.5 (6.8) (0.8) Total assets under management * 68,015 66,980 58,579 36,970 35,905 Growth in assets under management (%) 1.6 14.3 58.5 3.0 12.9 Reinsurance utilization (%) 33.5 147.3 33.5 37.6 32.0 Business Segment (% of GPW) Life/health 100.0 100.0 100.0 100.0 100.0 *Assets under management figure excludes third-party assets. N.M.--Not meaningful. Financial Risk Profile: Strong We regard Royal London's financial risk profile as strong, overall. Despite low yields and the company's exposure to equities through its with-profits funds, we expect the flexibility in this product line to enable the group to maintain its very strong capital and earnings. Capital and earnings: Very strong capitalization Royal London benefits from substantial capitalization, relative to the risks it faces. Under our capital model, we assess the capital requirements for U.K. with-profits funds by considering the risk capital margin (RCM), as reported to the U.K. regulator. For closed funds, the RCM is set to zero under U.K. regulations. However, we include a calculation of what the RCM would have been if the funds were not closed, to ensure that these risks are reflected in our assessment. Although the group's mutual status means that the reported net income is zero, we analyze the transfer to unallocated divisible surplus (UDS) as a proxy for profit. We expect the transfer to UDS to be at least 100 million- 150 million a year over the coming years. Low interest rates and market movements remain key sensitivities to our earnings forecasts, and these factors can have a material effect on the transfer. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 6

Table 3 Royal London Mutual Insurance Society--Capital --Year ended Dec. 31-- (Mil. ) 2015 2014 2013 2012 2011 Common equity (ie Unallocated Divisible Surplus) 3,314 3,139 3,005 2,648 2,388 Change in common equity (%) 5.6 4.5 13.5 10.9 3.8 Source: Royal London Mutual Insurance Society Ltd. Annual Report. Table 4 Royal London Mutual Insurance Society--Earnings --Year ended Dec. 31-- (Mil. ) 2015 2014 2013 2012 2011 Total revenues 2,717 1,292 2,206 1,974 2,159 Net income (i.e. transfer to UDS) 125 149 372 260 88 Life: Prebonus pretax earnings/total assets (%) 0.1 0.1 0.1 0.1 0.1 Life: Net expense ratio (%) 66.8 N.M. 90.5 79.9 50.8 Life: Value of new business 157.8 95.3 87.3 108.0 96.0 Life: New business margin (%) 1.6 1.1 1.1 1.9 2.1 Risk position: Moderate, reflecting its sizable pension scheme and indirect exposure to equities through its with-profits funds Our assessment of Royal London's risk position mainly reflects our view that volatility could arise from its sizable pension scheme. It is therefore exposed to longevity and interest rate risks. In addition, we account for the volatility associated with the material amounts of equities held within its with-profits funds. However, we believe that this exposure is mitigated by the flexibility in the funds' bonus structure. Table 5 Royal London Mutual Insurance Society Risk Position --Year ended Dec. 31-- (Mil. ) 2015 2014 2013 2012 2011 Total invested assets 68,015 66,980 58,579 36,870 35,867 Net investment income 1,668 1,625 1,263 1,112 1,132 Net investment yield (%) 2.5 2.6 2.6 3.1 3.3 Net investment yield including realized capital gains/(losses) (%) 2.4 2.6 3.0 3.0 3.6 Net investment yield including all gains/(losses) (%) 2.8 12.1 7.9 8.0 3.6 Investment portfolio composition, including unit-linked business (%) Cash and short-term investments 7.1 6.5 6.9 9.4 8.4 Bonds 42.5 44.5 43.8 39.6 41.6 Equity investments 39.2 37.2 40.1 44.6 42.2 Real estate 7.4 7.1 7.0 6.4 6.3 Loans (%) 0.0 0.0 0.0 0.0 0.0 Other investments (%) 3.7 4.7 2.1 0.0 1.5 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 7

Financial flexibility: Adequate, but limited by mutual status We consider that Royal London's mutual status weighs on its financial flexibility because a mutual cannot raise equity capital. As a result, Royal London's main source of external funding is debt issuance, and the group has an established track record of subordinated debt issuance, including a successful issue in late 2013 and 2015. We expect fixed-charge coverage to remain above 4x for the next two years. Table 6 Royal London Mutual Insurance Society Financial Flexibility --Year ended Dec. 31-- (x) 2015 2014 2013 2012 2011 Fixed-charge coverage 5.4 6.9 13.4 9.7 3.9 Other Assessments We regard Royal London's enterprise risk management (ERM) and management and governance practices as neutral factors to the ratings. Liquidity is excellent. Enterprise risk management: Adequate with strong risk controls Risk management is well embedded within the group. It is an important part of the normal decision-making process and is incorporated in the annual strategic and business planning process. The group risk appetite statement is set by the board and reviewed annually. There is a well-established risk governance structure consisting of the group risk committee, insurance committee, capital management committee, and credit and market risk monitoring committee. Our view of Royal London's approach to asset liability management (ALM) is positive. ALM processes are used to ensure that RLAM have set appropriate investment parameters for each fund. RLAM, in turn, has a comprehensive set of investment risk controls. Exposure to mortality and, to a lesser extent, morbidity experience is limited through reinsurance with highly rated reinsurers. Significant longevity risk reduction measures have been taken in recent years, including addressing the risk arising from the Co-operative Insurance Society annuity book. However, Royal London is still exposed to a significant level of longevity risk stemming from its own pension scheme. From 2014, the group placed some focus on conduct and end-consumer risks. We view this as positive and consistent with its peers. Management and Governance: Satisfactory, aiming to build on mutual status Our assessment of management and governance is supported by a relatively low appetite for financial risk, a robust range of financial standards, and a robust track record of achievements. Strategic positioning We take a positive view of Royal London's recent ability to grow its protection sales, as well as its long-term strategic intent to diversify distribution so that it is less dependent on intermediaries. In our view, this makes sense within the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 8

context of the U.K. market, where the use of intermediaries is declining. Royal London somewhat lags its largest competitors in terms of scale, and its strategy is designed to handle this while building on its position as the largest mutual insurer in the U.K. We expect it to continue to improve cost effectiveness and to increase its assets under management thanks to the greater scale achieved by recent acquisitions. Organizational effectiveness We have a positive view of management's expertise and experience. It has successfully implemented a significant number of challenging initiatives and positively adapted the business to a changing environment. The acquisition and integration of the businesses formerly owned by the Co-operative group has been recently completed. Financial management We consider Royal London's financial management to be strong. Business mix and pricing are closely monitored to optimize capital resources and margins. Appetite for interest rates is low, consistent with peers, and appetite for equities exposure is in line with our expectations given the reasonable expectations of with-profits policyholders. Policyholder payouts are actively managed. Capital is maintained at a strong level, relative to risk, and the company is focused on its efficient allocation. Liquidity: Excellent, thanks to ample sources We regard Royal London's liquidity as exceptional, owing to the strength of available liquidity sources. Mechanisms for managing liquidity risk include maintaining forecasts of cash requirements and adjusting assets to meet those requirements. Accounting Considerations The accounts have been prepared under IFRS (International Financial Reporting Standards) since 2006, with supplementary embedded value (EV) reporting based on EEV principles. We have used EV earnings to analyze Royal London's operating performance. The group grosses up its reported value of new business figures at the main corporation tax rate to enable comparison with proprietary companies, even though this tax rate does not apply to Royal London. This means that the reducing corporation rate may skew year-on-year comparisons. The accounting policies do not raise any rating concerns. Related Criteria And Research Related Criteria Insurers: Rating Methodology, May 7, 2013 Enterprise Risk Management, May 7, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 9

Related Research U.K. Life Insurance Industry And Country Risk Overall Remains Low, Despite Brexit Outcome, July 12, 2016 Brexit Uncertainty Should Not Affect U.K. Insurance Ratings, July 11, 2016 Ratings On U.K. Insurers Unaffected By Implementation Of Insurance Act 2015, Aug. 15, 2016 Ratings Detail (As Of August 26, 2016) Operating Company Covered By This Report Royal London Mutual Insurance Society Ltd. Counterparty Credit Rating Local Currency Domicile A/Stable/NR United Kingdom *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@spglobal.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 26, 2016 10

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