TIDM41BM TIDM60KE
RNS Number : 9441A
Royal London
30 March 2017
Press Release
30 March 2017
ROYAL LONDON REPORTS STRONG NEW BUSINESS AND PROFITS GROWTH
Financial highlights
-- New life and pensions business (PVNBP basis)(1) up by 28% to GBP8,686m (2015: GBP6,774m);
-- Funds under management(2) up by 18% to GBP100bn (31 December 2015: GBP85bn);
-- European Embedded Value (EEV) operating profit before tax up
by 16% to GBP282m (2015: GBP244m);
-- IFRS transfer to the unallocated divisible surplus(3) (before
change in basis for Solvency II) increase of GBP116m to GBP241m
(2015: GBP125m);
-- Margin for new life and pensions business of 2.5% (2015: 2.0%);
-- ProfitShare (after tax) up by 63% to GBP114m (2015: GBP70m); and
-- Solvency II Standard Formula basis Investor View(4) surplus
of GBP4.5bn (1 January 2016: GBP3.8bn) and a capital cover ratio of
232% (1 January 2016: 226%) before closed fund restrictions.
New business review
Intermediary new life and pensions business
-- Intermediary Protection business up by 29% to GBP647m (2015:
GBP502m) following the programme last year to bring all of our
protection business under the Royal London brand, and the
introduction of online underwriting.
-- Group Pensions up by 38% to GBP3,872m (2015: GBP2,798m)
reflecting buoyant sales in the market for workplace pensions.
-- Individual Pensions and Drawdown up by 17% to GBP3,778m
(2015: GBP3,227m) due to the continued popularity of the Governed
Retirement Income Portfolios (GRIPs) and the introduction of the
drawdown governance tools for advisers.
Consumer new life and pensions business
-- Consumer sales up by 82% to GBP301m (2015: GBP165m)
reflecting the strength of the direct to consumer propositions and
growth in distribution partnerships.
-- Consumer new business has made a profit for the first time in
2016 and new business margins have increased to 1.4% (2015: (8.8)%)
driven by our prepaid Funeral Plans offered through Co-operative
Funeralcare and Ecclesiastical Insurance.
-- Over 50s Life Cover and Life Insurance products both
continued to perform well; in the three years since launch the Over
50s proposition has achieved a top three position in the
direct-to-consumer market.
-- A key part of our strategy in the Consumer market is to
broaden our distribution networks through partnerships with other
like-minded organisations, and the latest example is our major new
partnership with the Post Office announced in January 2017. We have
become the sole provider of life insurance products to be sold
through 11,500 Post Office outlets and online.
Wealth
-- Royal London Asset Management (RLAM) continued to perform
well, attracting gross inflows of GBP6.7bn (2015: GBP3.1bn) arising
from both Institutional and Wholesale markets. Funds under
management increased to GBP100bn (31 December 2015: GBP85bn), a new
Group record. The increase has in part been helped by rising bond
values reflecting a reduction in interest rates. This is a
particularly strong result in a period of market uncertainty
following the UK referendum on European Union (EU) membership.
-- The Ascentric wrap platform saw assets under
administration(5) increase by 22% to GBP12.3bn (31 December 2015:
GBP10.1bn). The business recorded gross sales of GBP2.3bn (2015:
GBP2.5bn), which maintained its market share.
Review of financial performance
EEV operating profit
Group EEV operating profit before tax increased by 16% to
GBP282m (2015: GBP244m), despite the reduction in market interest
rates, assisted by strong new business profit of GBP223m (an
increase of 63%) particularly in Pensions, Consumer and RLAM,
offset by an impairment to intangible assets of GBP44m. The
impairment charge related to ongoing IT projects to enhance the
Group's service offering through investment in back office
systems.
Margin for new life and pensions business increased to 2.5% in
2016 (2015: 2.0%), due to continued reductions in acquisition and
maintenance unit costs resulting from the increase in volumes of
business sold, and ongoing focus on operational efficiency.
IFRS transfer to unallocated divisible surplus
As a mutual company, all earnings are retained for the benefit
of participating policyholders and are carried forward within the
unallocated divisible surplus. The IFRS transfer to the unallocated
divisible surplus for the year ended 31 December 2016 (before
change in basis for Solvency II and other comprehensive income) was
GBP241m (2015: GBP125m). The IFRS transfer to unallocated divisible
surplus was GBP76m (2015: GBP125m). Our IFRS result also benefits
from the strong trading performance of the Group but was impacted
by the low interest rate environment during 2016.
Capital
Our capital position is robust, reflecting the strength of our
underlying business and effective capital management strategies. We
have a Solvency II Standard Formula basis Total Company ('Investor
View')(4) surplus of GBP4.5bn (1 January 2016: GBP3.8bn) and a
capital cover ratio of 232% (1 January 2016: 226%) before Royal
London Closed Fund ('closed funds') restrictions. After closed fund
restrictions of GBP2.6bn the capital cover ratio was 155% at 31
December 2016 (1 January 2016: 169%). The Royal London Open Fund
('open fund') had an excess surplus of GBP1.9bn (1 January 2016:
GBP2.1bn) and a capital cover ratio of 209% at 31 December 2016 (1
January 2016: 239%).
The majority (78%) of total Own Funds within the open fund is
made up of Tier 1 capital, with subordinated debt valued at
GBP0.8bn, classified as Tier 2 capital. Own Funds within the closed
funds are entirely Tier 1 capital.
ProfitShare
Reflecting the positive performance of the Group in 2016, the
Board has decided to increase ProfitShare (after tax) from GBP70m
in 2015 to GBP114m in 2016.
This year more than 700,000 members with unit-linked pension
policies will receive their first ProfitShare allocation. We are
delighted to see this expansion of the ProfitShare come to
fruition. As we explained last year, existing with-profits members
will not be disadvantaged by this expansion. The level of our
profits available for distribution has been increased and
with-profits members will benefit from an enhanced annual bonus. We
have allocated a healthy ProfitShare to our with-profits members (a
1.4% addition to asset share) and honoured our commitment to
commence ProfitShare allocations to our pension members. The first
allocation to pension members will be equivalent to 0.18% of the
current value of their pensions.
Phil Loney, Group Chief Executive of Royal London, said:
These results reflect the continued excellent progress of Royal
London in 2016, performing well despite the backdrop of a turbulent
year in politics and markets. It is clear from the sustained track
record of growth that our strategy is working: we are delivering
high-quality products and service; we are investing in our
capabilities, making it easier for advisers to do business with us;
and we are entering new consumer markets to offer better value
where we see that the market is delivering a poor deal for
consumers. As a result, our customers and financial advisers are
increasingly recommending us to others. Our strategy to broaden
distribution networks through partnerships with other like-minded
organisations is coming to fruition. Following our successful
partnerships with the Co-operative and Ecclesiastical, we were able
to announce an important strategic deal with Post Office Money in
January 2017. Royal London is now the sole provider of life
insurance products to the Post Office selling through 11,500
outlets and online.
Royal London is becoming a much bigger and more established
presence in the markets in which we operate. We are now a top-three
new business player in several key areas and Group funds under
management grew to GBP100bn, which is 18% higher than the previous
year. The resulting growth in our revenues has allowed us to
maintain a strong capital position in a volatile world, and to
invest heavily in new technology platforms which will enable the
business to remain agile and competitive into the future.
Royal London's operating profit has also showed strong growth
despite operating in a low interest rate environment which tends to
depress the profitability of insurance products.
This performance has translated into a 63% increase in the
ProfitShare for 2016, to GBP114m enabling us to allocate a healthy
ProfitShare to our with-profits members (a 1.4% addition to asset
share) and to deliver on our commitment to start allocating
ProfitShare to pension members. More than 700,000 pension members
will be receiving a share of the profits that we are announcing
today. This is a feature that is unique to Royal London and one of
which we are justifiably proud.
Royal London now has over one million members. Numbers continue
to increase rapidly as employees who join workplace pension schemes
become members of Royal London, alongside self-employed customers
buying our personal pensions and people using our well-regarded
drawdown product to manage their retirement income.
For quarter of a million Royal London pension savers the
allocation of ProfitShare will effectively wipe more than a third
off their annual management charges. This is a helpful boost to
growth for Royal London customers but it remains the case that,
across the whole of the workplace pensions market, contributions to
pensions are too low. Automatic Enrolment has been an undoubted
policy success but there is no coherent plan to increase
contributions to levels that will produce an adequate income when
those workers retire. The Government has just concluded a review of
the detail of its Auto Enrolment policy, but this key issue was
ignored. We know that for most people an 8% pension contribution,
made by themselves and their employers, falls well short of
providing an adequate level of income in retirement. It is time for
Government to bite the bullet and adopt a clear policy about saving
at realistic levels beyond 8%. Doing so would help to secure an
appropriate level of income in retirement for generations of
pensions savers.
For further information please contact:
Gareth Evans 0207 506 6715
Gareth.evans@royallondon.com 07919 170069
Editor's notes:
Royal London is the largest mutual life, pensions and investment
company in the UK, with Group funds under management of GBP100
billion, around 9.0 million policies in force and 3,253 employees.
Figures quoted are as at 31 December 2016.
1) Present value of new business premiums (PVNBP) is the total
of new single premium sales received in the year plus the
discounted value, at the point of sale, of the regular premiums the
Group expects to receive over the term of the new contracts sold in
the year. The rate used to discount the cash flows in the reported
2016 results have been derived from the swap curve, whereas the
rate used in the 2015 reported results was derived from the gilt
curve.
2) Funds under management represent the total of assets managed
or administered by the Group on behalf of institutional and
wholesale clients, and on behalf of the Group.
3) The IFRS 2016 result consists of IFRS transfer to the
unallocated divisible surplus from the income statement of GBP76m
(2015: GBP125m) plus the change in basis for Solvency II of GBP165m
(2015: GBPnil), and excludes the transfer from the statement of
comprehensive income of GBP(98)m (2015: GBP50m). The change in
basis for Solvency II reflects a one-off charge on the adoption of
Solvency II which is explained on page 20.
4) We have presented a Total Company ('Investor View'), which
comprises the Royal London Open Fund, into which all new business
is written, and seven closed ring-fenced funds from previous
acquisition activity. The Investor View includes the surplus from
the closed funds. Total Company ('Regulatory View') includes a
restriction of GBP2.6bn as a deduction to total Own Funds of
GBP7.9bn, because excess capital in the closed funds is ultimately
for the benefit of those closed fund policyholders. Therefore
closed funds report a zero surplus, with Total Company surplus
equal to the open fund surplus. After the GBP2.6bn restriction, the
Total Company ('Regulatory View') has a capital cover ratio of 155%
at 31 December 2016 (1 January 2016: 169%).
5) Assets under administration represent the total assets
administered on behalf of individual customers and institutional
clients. It includes those assets for which the Group provides
investment management services, as well as those that the Group
administers when the customer has selected an external third-party
investment manager.
6) Solvency II basis of preparation
The Solvency II position has been prepared in accordance with
the Solvency II Directive which came into effect on 1 January 2016
for all insurance entities operating in Europe. Initially we are
using the Standard Formula approach for the purposes of measuring
regulatory capital under Solvency II. However, we are preparing an
internal model that we plan to seek approval to adopt in 2019. We
already use an internal model for the purposes of monitoring our
capital and decision making across the Group. Royal London received
approval for the use of both the Transitional Measure on Technical
Provisions and the Volatility Adjustment. The 2016 Solvency II
results are estimated and not subject to an external audit
opinion.
7) Financial calendar
Royal London will hold an investor conference call to present
its 2016 financial results on Thursday 30 March 2017 at 09:00.
Interested parties can register at:
https://cossprereg.btci.com/prereg/key.process?key=PBF7BEFFL
8) Forward-looking statements
This document may contain forward-looking statements with
respect to certain of Royal London's plans, its current goals and
expectations relating to its future financial position. By their
nature, forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances which are
beyond Royal London's control. These include, among others, UK
economic and business conditions, market-related risks such as
fluctuations in interest rates, the policies and actions of
governmental and regulatory authorities, the impact of competition,
the timing, impact and other uncertainties of future mergers or
combinations within relevant industries.
As a result, Royal London's actual future financial condition,
performance and results may differ materially from the plans, goals
and expectations set forth in Royal London's forward-looking
statements. Royal London undertakes no obligation to update the
forward-looking statements.
CONTENTS
In this section Page
1 New business review 7
2 Review of financial performance
8
* Consolidated income statement - EEV basis for the 9
year ended 31 December 2016 9
* Consolidated balance sheet - EEV basis as at 31
December 2016
* EEV operating profit
10
* EEV profit before tax, ProfitShare and change in 11
basis for Solvency II 13
* IFRS consolidated statement of comprehensive income
for the year ended 31 December 2016
* IFRS consolidated balance sheet as at 31 December
2016
* IFRS results 14
* IFRS balance sheet 14
* Investment performance 14
* Staff pension 14
* Solvency II capital position on a Standard Formula
basis 15
3 Other matters
* UK referendum on EU membership 16
* Ratings agencies 16
Appendix 1: EEV basis of preparation 18
Appendix 2: IFRS basis of preparation 20
Appendix 3: Reconciliation of the IFRS unallocated
divisible surplus to EEV 24
1. New business review
Intermediary
PVNBP New business New business
contribution(1) margin
--------------- -------------- ----------------------- ------------------
2016 2015 2016 2015 2016 2015
--------------- ------ ------ ----------- ---------- -------- --------
GBPm GBPm GBPm GBPm % %
--------------- ------ ------ ----------- ---------- -------- --------
Intermediary
--------------- ------ ------ ----------- ---------- -------- --------
Pensions 7,738 6,107 170.6 107.9 2.2 1.8
--------------- ------ ------ ----------- ---------- -------- --------
Protection 647 502 42.8 42.3 6.6 8.4
--------------- ------ ------ ----------- ---------- -------- --------
Consumer
PVNBP New business New business
contribution(1) margin
---------- ------------ ----------------------- ------------------
2016 2015 2016 2015 2016 2015
---------- ----- ----- --------- ------------ -------- --------
GBPm GBPm GBPm GBPm % %
---------- ----- ----- --------- ------------ -------- --------
Consumer 301 165 4.3 (14.6) 1.4 (8.8)
---------- ----- ----- --------- ------------ -------- --------
Wealth
PVNBP(2) New business New business
contribution(1) margin
--------- -------------- ----------------------- ------------------
2016 2015 2016 2015 2016 2015
--------- ------ ------ ----------- ---------- -------- --------
GBPm GBPm GBPm GBPm % %
--------- ------ ------ ----------- ---------- -------- --------
RLAM 6,741 3,146 37.7 22.2 0.6 0.7
--------- ------ ------ ----------- ---------- -------- --------
2016 2015 Change
GBPm GBPm %
%
----------------- ------------ ------------ -------------
RLAM
Net new business, excluding external cash mandates:
------------------------------------------------------------
Inflows 6,741 3,146 114%
----------------- ------------ ------------ -------------
Outflows (4,420) (2,614) 69%
----------------- ------------ ------------ -------------
Net 2,321 532 336%
----------------- ------------ ------------ -------------
Change
Ascentric 2016 2015 %
----------------- ------------ ------------ -------------
Gross sales GBP2.3bn GBP2.5bn (8)%
----------------- ------------ ------------ -------------
Notes on the new business review
1 The new business contribution in the tables above has been
grossed up for tax at 20% (2015: 20%). We have done this to help
compare our results with the results of shareholder-owned life
insurance companies which typically pay tax at 20% (2015: 20%).
2 PVNBP for Wealth relates to gross sales inflows in the
year.
2. Review of financial performance
Consolidated income statement - EEV basis for the year ended 31
December 2016
2016 2015
GBPm GBPm
---------------------------------------- ------- -------
Operating activities
Contribution from new business 223 137
Profit from existing business
- Expected return 90 76
- Operating experience variances 4 3
- Operating assumption changes 50 74
Expected return on opening net worth 41 27
(Loss)/profit on uncovered business (44) 7
Strategic development costs and other
items (82) (80)
---------------------------------------- ------- -------
Total operating profit before tax 282 244
Economic experience variances 395 21
Economic assumption changes (192) 32
Movement in Royal London Group Pension
Scheme surplus (118) 23
Financing costs (46) (43)
---------------------------------------- ------- -------
EEV profit before tax, ProfitShare and
change in basis for Solvency II 321 277
ProfitShare (120) (74)
Change in basis for Solvency II (182) -
EEV profit before tax 19 203
Attributed tax charge (40) (22)
Total EEV (loss)/profit after tax (21) 181
---------------------------------------- ------- -------
Consolidated balance sheet - EEV basis as at 31 December
2016
2016 2015
GBPm GBPm
----------------------------------- ------- -------
Assets
Assets held in closed funds 37,033 31,631
Assets backing non-participating
liabilities 29,882 24,084
Reinsurance assets 8,442 7,528
Assets backing participating
liabilities and net worth 8,759 7,666
Value of in-force business 2,065 2,034
Royal London Group Pension Scheme
surplus - 71
Total 86,181 73,014
----------------------------------- ------- -------
Liabilities
Liabilities in closed funds 37,033 31,631
Non-participating liabilities 29,882 24,084
Reinsured liabilities 8,442 7,528
Participating liabilities 6,129 5,363
Current liabilities 1,523 1,241
Royal London Group Pension Scheme 26 -
deficit
Total 83,035 69,847
----------------------------------- ------- -------
Embedded value
Net worth 1,107 1,062
Value of in-force business 2,065 2,034
Royal London Group Pension Scheme
(deficit)/surplus (26) 71
Total 3,146 3,167
----------------------------------- ------- -------
EEV operating profit
The Group achieved an EEV operating profit before tax of
GBP282m, an increase of 16% (2015: GBP244m) which was driven by new
business sales and changes to our underlying assumptions mainly
regarding consumer behaviour.
Profit contribution from new business was GBP223m, up 63% from
the previous year. For the first time this year, the new business
contribution was discounted using a rate derived from the swap
curve. In previous years a gilt yield derived discount rate was
used. Overall new business margins held up well at 1.7% (2015:
1.6%), benefiting from our increased sales despite the challenging
economic environment. This includes the margins for new life and
pensions business which increased to 2.5% (2015: 2.0%).
Profits from managing existing business increased by GBP5m to
GBP185m. This mainly consists of a GBP28m (27%) increase in
expected return on VIF and net worth due to a change in the
risk-free rate, offset by a profit decrease of GBP24m (32%) from
changing our operating assumptions. We have also changed the
assumptions we use to calculate the profit on our existing
business. This is to reflect our expectation of lower future costs
driven by our effective cost management strategies and the
expectation that we will see a positive impact in the future from
our focus on improving policyholders' experience of dealing with
Royal London. These positive changes have been offset by provisions
for future investment in the business, including a significant
provision for developing our Pensions platform, a change which we
think will enable us to deliver a market leading digital
proposition and deliver better outcomes and experiences for our
customers.
Profit from uncovered business has moved from a profit into a
loss of GBP44m due to significant cost being incurred in 2016
relating to the development of new back office software in
Ascentric. We have recognised an impairment of GBP44m in the
year.
Other items remain broadly consistent with 2015 and include
corporate and other development costs of GBP117m (2015: GBP78m),
strategic development costs of GBP16m (2015: GBP21m) relating to
investment for the future across a number of projects, offset by
positive modelling and other changes of GBP51m (2015: GBP19m).
Corporate and other development costs include provisions of GBP57m
(2015: GBP40m) mainly relating to the cost of servicing historic
remediation and costs we expect to incur meeting the requirements
of regulatory developments. Modelling and other changes include a
GBP21m one-off gain from the closure of the Royal London Group
Pension Scheme (RLGPS) to future accrual.
EEV profit before tax, ProfitShare and change in basis for
Solvency II
EEV profit before tax, ProfitShare and change in basis for
Solvency II was GBP321m (2015: GBP277m). The increase on the
previous year is due to our strong operating performance despite
the low interest rate environment. The low interest rate
environment had an adverse impact on the RLGPS, the funding level
of which decreased by GBP118m (2015: increase of GBP23m) during the
year due to a decrease in the rate used to discount the scheme
liabilities. Low interest rates have also resulted in adverse
economic assumption changes of GBP192m (2015: positive GBP32m),
which has been more than offset with positive economic experience
variances of GBP395m (2015: GBP21m) from investment returns being
better than expected.
The introduction of Solvency II during the year resulted in a
change to the basis used to produce the EEV balance sheet leading
to a GBP182m one-off charge to our embedded value during the year.
The change in basis is explained further in Appendix 1. This charge
has led to an EEV profit before tax of GBP19m for the year (2015:
GBP203m).
IFRS consolidated statement of comprehensive income for the year
ended
31 December 2016
2015
2016 Restated
GBPm GBPm
------------------------------------- ------- -----------
Revenues
Gross earned premiums 1,291 1,194
Premiums ceded to reinsurers (730) (400)
------------------------------------- ------- -----------
Net earned premiums 561 794
Fee income from investment and
fund management contracts 254 255
Investment return 10,864 2,122
Other operating income 76 44
------------------------------------- ------- -----------
Total revenues 11,755 3,215
------------------------------------- ------- -----------
Policyholder benefits and claims
Claims paid, before reinsurance 2,703 2,725
Reinsurance recoveries (507) (470)
------------------------------------- ------- -----------
Claims paid, after reinsurance 2,196 2,255
Increase/(decrease) in insurance
contract liabilities, before
reinsurance 4,545 (1,020)
Reinsurance ceded (548) 122
------------------------------------- ------- -----------
Increase/(decrease) in insurance
contract liabilities, after
reinsurance 3,997 (898)
(Increase) in non-participating
value of in-force business (317) (92)
Increase in investment contract
liabilities 3,974 911
------------------------------------- ------- -----------
Total policyholder benefits
and claims before change in
basis for Solvency II 9,850 2,176
------------------------------------- ------- -----------
Change in basis for Solvency 165 -
II
------------------------------------- ------- -----------
Total policyholder benefits
and claims 10,015 2,176
------------------------------------- ------- -----------
Operating expenses
Administrative expenses 561 477
Investment management expenses 266 238
Amortisation charges and impairment
losses on acquired PVIF and
other intangible assets 120 40
Investment return attributable
to external unit holders 308 22
Other operating expenses 113 75
------------------------------------- ------- -----------
Total operating expenses 1,368 852
------------------------------------- ------- -----------
Finance costs 47 44
------------------------------------- ------- -----------
Result before tax and before
transfer to unallocated divisible
surplus 325 143
------------------------------------- ------- -----------
Tax charge 249 18
------------------------------------- ------- -----------
Transfer to the unallocated
divisible surplus 76 125
------------------------------------- ------- -----------
Result for the year - -
------------------------------------- ------- -----------
IFRS consolidated statement of comprehensive income for the year
ended 31 December 2016 (continued)
2016
2015
Restated
GBPm GBPm
------------------------------------- ------- -----------
Other comprehensive income
------------------------------------- ------- -----------
Items that will not be reclassified
to profit or loss
------------------------------------- ------- -----------
Remeasurements of defined
benefit pension schemes (98) 50
------------------------------------- ------- -----------
(Deduction from)/transfer
to the unallocated divisible
surplus (98) 50
------------------------------------- ------- -----------
Other comprehensive income - -
for the year net of tax
------------------------------------- ------- -----------
Total comprehensive income - -
for the year
------------------------------------- ------- -----------
As a mutual company, all earnings are retained for the benefit
of participating policyholders and are carried forward within the
unallocated divisible surplus. Accordingly, there is no profit or
loss for the year shown in the statement of total comprehensive
income.
IFRS consolidated balance sheet as at 31 December 2016
2015 1 January 2015
2016 Restated Restated
ASSETS GBPm GBPm GBPm
----------------------------------------------------- -------- --------------- -----------------
Property, plant and equipment 51 42 46
Investment property 5,297 5,036 4,727
Intangible assets 683 832 931
Reinsurers' share of insurance contract liabilities 5,907 5,052 5,174
Pension scheme asset 131 177 128
Current tax asset 3 19 -
Financial investments 74,479 60,129 59,492
Trade and other receivables 788 546 412
Cash and cash equivalents 3,292 2,823 2,736
----------------------------------------------------- -------- --------------- -----------------
Total assets 90,631 74,656 73,646
----------------------------------------------------- -------- --------------- -----------------
LIABILITIES
----------------------------------------------------- --------------------------------------------
Participating insurance contract liabilities 32,709 28,708 29,455
Participating investment contract liabilities 2,154 2,232 2,206
Unallocated divisible surplus 3,292 3,314 3,139
Non-participating value of in-force business (1,217) (910) (818)
----------------------------------------------------- -------- --------------- -----------------
36,938 33,344 33,982
Non-participating insurance contract liabilities 7,860 6,683 6,956
Non-participating investment contract liabilities 31,329 24,984 22,693
----------------------------------------------------- -------- --------------- -----------------
39,189 31,667 29,649
Subordinated liabilities 744 743 640
Payables and other financial liabilities 7,448 5,156 5,544
Provisions 279 224 250
Other liabilities 279 286 316
Liability to external unit holders 5,502 3,145 3,122
Pension scheme liability 26 - -
Deferred tax liability 226 91 91
Current tax liability - - 52
Total liabilities 90,631 74,656 73,646
----------------------------------------------------- -------- --------------- -----------------
IFRS results
The IFRS transfer to the unallocated divisible surplus for the
year ended 31 December 2016, before change in basis for Solvency II
and other comprehensive income, was GBP241m (2015: GBP125m).
Similar to EEV, our IFRS result benefits from the strong trading
performance of the Group and is also impacted by the low interest
rate environment in 2016. The IFRS result is also impacted by the
change in basis for Solvency II of GBP165m and the adverse movement
in the RLGPS of GBP98m. Including the impact of changing basis to
Solvency II and other comprehensive income, the total deduction
from the unallocated divisible surplus for the year ended 31
December 2016 was GBP22m (2015: transfer to the unallocated
divisible surplus of GBP175m).
Consistent with previous periods and as set out in Appendix 3,
there are some differences between the EEV and IFRS results which
include the value of our asset management and service company
subsidiaries (2016 IFRS result higher by GBP12m) and an increase in
the fair value of our subordinated debt (2016 IFRS result higher by
GBP27m). These items were offset slightly by the amortisation of
certain intangibles recognised in IFRS and not EEV (2016 IFRS
result lower by GBP30m).
IFRS balance sheet
Our balance sheet remains strong. Our total investment
portfolio, including investment property, grew by 24% to GBP74.5bn,
a new record for Royal London. Our financial investment portfolio
remains well balanced across a number of financial instruments,
with the majority (77%) in equity securities and fixed income
assets.
Investment performance
We measure our investment returns against benchmarks that we
have constructed from market indices weighted to reflect the asset
mix of each sub-fund. At 31 December 2016 the investments backing
the asset shares of the open fund achieved a return of 13.8%, an
improvement on the 2015 return of 4.1%. Although good in absolute
terms, the result did not meet the benchmark of 14.8%. This
reflects the fact that our investment strategies at the beginning
of 2016 were based on rising interest rates and a slow performance
for the FTSE 100. The vote to exit the EU meant that investment
markets took a very different course.
Staff pension
We announced in 2015 the RLGPS was to close to future accrual
from 31 March 2016. The closure resulted in a one-off gain of
GBP21m that is recognised in our operating profit. The RLGPS scheme
was negatively impacted by the low interest rate environment. A
significant decrease in corporate bond yields used to discount
RLGPS's liabilities, partially offset by a strong investment
performance and lower than expected inflation, resulted in the
scheme ending the year with a deficit of GBP26m (31 December 2015:
GBP71m surplus).
Solvency II capital position on a Standard Formula basis
Our capital position is robust, reflecting the strength of our
underlying business and effective capital management strategies.
The open fund had an excess surplus of GBP1.9bn (1 January 2016:
GBP2.1bn) and a capital cover ratio of 209% at 31 December 2016 (1
January 2016: 239%). The closed funds are also well capitalised
with an excess surplus of GBP2.6bn (1 January 2016: GBP1.7bn) and a
capital cover ratio of 254% (1 January 2016: 213%). The average
capital cover ratio for Royal London is 232% including surplus in
the closed funds (1 January 2016: 226%).
The majority (78%) of total Own Funds within the open fund is
made up of Tier 1 capital, with subordinated debt valued at
GBP0.8bn, classified as Tier 2 capital. Own Funds within the closed
funds are entirely Tier 1 capital.
In common with many in the industry, we present two cover
ratios. An 'Investor View' for analysts and investors in our
subordinated debt, which does not restrict the surplus in the
closed funds, and a 'Regulatory View' where the closed funds'
surplus is treated as a liability.
31 December Royal Royal Total Closed Total Company
2016 London London Company Fund Restriction (Regulatory
Open Closed (Investor View)
GBPbn Fund Funds View)
------------------ -------- -------- ----------- ------------------ --------------
Own Funds:
Tier 1 2.8 4.3 7.1 - 7.1
Tier 2 0.8 - 0.8 - 0.8
------------------ -------- -------- ----------- ------------------ --------------
Total Own Funds 3.6 4.3 7.9 - 7.9
Closed funds
restriction(1) - - - (2.6) (2.6)
------------------ -------- -------- ----------- ------------------ --------------
Adjusted Own
Funds (A) 3.6 4.3 7.9 (2.6) 5.3
------------------ -------- -------- ----------- ------------------ --------------
Solvency Capital
Requirement
(B) 1.7 1.7 3.4 - 3.4
------------------ -------- -------- ----------- ------------------ --------------
Surplus 1.9 2.6 4.5 (2.6) 1.9
Capital cover
ratio(2) (A/B) 209% 254% 232% n/a 155%
------------------ -------- -------- ----------- ------------------ --------------
1 January 2016
Capital cover
ratio (A/B) 239% 213% 226% n/a 169%
------------------ -------- -------- ----------- ------------------ --------------
Notes
The 31 December 2016 figures are estimated and have not been
subject to an external audit opinion.
The 31 December 2016 figures assume the Transitional Measures on
Technical Provisions (TMTP) has not been recalculated at 31
December 2016.
The 1 January 2016 ratios are taken from data in Royal London's
opening Solvency II Balance Sheet submission to the PRA in May
2016.
(1) After Risk Margin and Solvency Capital Requirement (SCR),
but including TMTP.
(2) Figures presented in the table are rounded, and the capital
cover ratio is calculated based on exact figures.
The 31 December 2016 figures assume a capital add-on agreed with
the PRA that became effective on 1 January 2016. On 7 March 2017 a
new capital add-on was agreed with the PRA, mainly as a result of
the lower risk free curve applicable at 31 December 2016. The
Investor and Regulatory capital ratios at 31 December 2016 based on
the new add-on would have been 208% and 150% respectively.
The Solvency II position has been prepared in accordance with
the Solvency II Directive which came into effect on 1 January 2016
for insurance entities operating in Europe. We have adopted the
Standard Formula approach for the purposes of measuring regulatory
capital under Solvency II. Royal London received approval for the
use of both the Transitional Measure on Technical Provisions and
the Volatility Adjustment.
At 31 December 2016, the use of the approved Transitional
Measure on Technical Provisions contributed 37% to the Investor
View cover ratio (10% on the Regulatory View).
The Investor View cover ratio has increased over the year from
226% to 232%, largely as a result of an improvement in the closed
funds. The improvement in the closed fund surplus is not recognised
in the Regulatory View.
The capital cover ratio is sensitive to changes in economic and
demographic assumptions. As an indication, at 31 December 2016, a
change in equities of 25% would impact the Investor View cover
ratio by an estimated +/- 1% and a change in interest rates of
50bps would impact this cover ratio by an estimated +/- 13%.
3. Other matters
UK referendum on EU membership
We have considered the impact of the UK's decision to leave the
European Union and are confident that there is no significant
impact to the operations or the capital of the Group. The Group
maintains a very strong capital position. We will continue to
monitor the implications of the vote to leave, but expect to
continue to trade as normal.
Since the vote outcome, we have seen a period of market and
currency volatility for the UK. We continue to work on behalf of
our customers to provide them with the best possible long-term
returns.
Ratings agencies
Following the referendum vote in favour of the UK leaving the EU
and the change in the outlook of the UK's Aa1 sovereign rating to
negative from stable in June 2016, Moody's took ratings actions on
a number of UK life insurers, including Royal London. In June
Moody's reduced its outlook for Royal London from stable to
negative citing fears that the UK economy would suffer in the
medium term. However, in August 2016, Standard and Poor's went on
to reaffirm Royal London's counterparty credit rating of A, with a
stable outlook.
Appendix 1 - EEV basis of preparation
The EEV results presented in this document have been prepared in
accordance with the European Embedded Value Principles (the EEV
Principles) and the EEV Basis for Conclusions issued in April 2016
by the CFO Forum. They provide supplementary information for the
year ended 31 December 2016 and should be read in conjunction with
the Group's IFRS results. These contain information regarding the
Group's financial statements prepared in accordance with IFRS
issued by the International Accounting Standards Board and adopted
for use in the European Union. Following the introduction of
Solvency II on 1 January 2016 the EEV Principles have been revised
to permit, but not require, the use of projection methods and
assumptions consistent with Solvency II. The Group has made a
number of changes to its EEV methodology as a result of Solvency
II, as set out below.
The EEV Principles were designed for use by proprietary
companies to assess the value of the firm to its shareholders. As a
mutual, Royal London has no shareholders. Instead we regard our
members as the nearest equivalent to shareholders and have
interpreted the EEV Principles accordingly. The reported embedded
value provides an estimate of Royal London's value to its
members.
EEV methodology - impact of Solvency II
The Group's EEV results were previously prepared using the PRA's
realistic balance sheet regime. Although that regime was replaced
by Solvency II with effect from 1 January 2016, the Group is
continuing to apply a basis for preparing its EEV results which is
consistent with the former realistic regime. In particular, the
Group has continued to apply the margins of prudence within
assumptions and the definition of contract boundaries in a
consistent way to the previous realistic regime.
As a result of the introduction of Solvency II, a number of
changes have been made to the basis which is used to produce the
EEV balance sheet to more closely align with the methodology used
for Solvency II. The main changes are to use a swap curve to
discount cash flows compared to a gilt curve used previously; a
change in the methodology to reserve for reinsurer default; and
consequential changes to the methodology for calculating the value
of in-force business (VIF). Note that the swap curve includes an
adjustment for the risk of default in line with the Solvency II
credit risk adjustment but excludes the Solvency II volatility
adjustment.
The effect of these adjustments has been recognised in the
current period with no restatement of prior periods as the
adjustments are treated as a change in estimate. The total impact
is a reduction in the VIF of GBP346m and an increase in the net
worth of GBP164m, resulting in a net reduction in the Group's
embedded value of GBP182m. This net impact has been included within
the EEV income statement as a separate line item.
EEV operating profit
The definition of EEV operating profit follows the same
principles as IFRS operating profit, with the exception of those
items which are recognised under IFRS but are excluded from EEV as
they cannot be recognised for regulatory purposes. Most notably,
IFRS operating profit includes amortisation and impairment of
intangibles whereas in EEV reporting, goodwill and other intangible
assets (other than VIF) are excluded because they are not permitted
to be recognised for regulatory purposes.
Appendix 2 - IFRS basis of preparation
The financial statements of the Group and the Parent company
('the financial statements') have been prepared in accordance with
International Financial Reporting Standards (IFRS) and
Interpretations issued by the IFRS Interpretations Committee (IFRS
IC) as adopted for use in the European Union. The financial
statements have also been prepared in accordance with those parts
of the Companies Act 2006 applicable to companies reporting under
IFRS.
The financial statements have been prepared on the historical
cost basis as modified by the inclusion of certain assets and
liabilities at fair value as permitted or required by IFRS. The
accounting policies are reviewed for appropriateness each year.
These policies have been applied consistently to all periods
presented in these financial statements, unless otherwise
stated.
Accounting policy change - change in presentation of insurance
and participating investment contracts
i. Overview of the change in presentation
On 1 January 2016 a new regulatory regime for EU insurers,
Solvency II, came into force. Under this new regime there have been
changes to how the Group calculates the liabilities for its
insurance and investment contracts for regulatory purposes. As a
consequence of these changes to regulatory reporting the Group has
reviewed its IFRS accounting policy for insurance and participating
investment contract liabilities. The conclusion of this review was
that the Group will continue to apply the former UK GAAP standard
FRS 27, 'Life Assurance', which was adopted on transition to IFRS.
However the Group has decided to make changes to how it applies FRS
27 in order to align with the requirements of Solvency II. For this
reason the changes are considered to provide reliable and more
relevant information. Further detail is given below.
ii. Methodology - change in accounting estimate
Under FRS 27, the participating liabilities are measured using
the PRA's realistic balance sheet (RBS) regime. The Group has made
changes to the methodology used to calculate the realistic value of
its insurance and participating investment contract liabilities to
more closely align with the way that they are calculated for
Solvency II. In accordance with IFRS (IAS 8) these changes have
been treated as a 'change in accounting estimate', which is
required to be recognised in the current year with no restatement
of prior year comparatives. The total impact of the change is a
charge of GBP165m, which has been shown in the 2016 consolidated
statement of comprehensive income as a separate line item. This is
made up of a charge of GBP170m resulting from the use of a swap
curve to discount cash flows, rather than the gilt curve used
previously, offset by a credit of GBP5m which results from other
minor modelling changes made to align with Solvency II.
iii. Presentation - change in accounting policy
In addition to the methodology change noted above, the Group has
changed the presentation of its insurance and participating
investment contracts to more closely align with the way that they
are presented under Solvency II. This has resulted in items
previously included in the negative liability, the
'non-participating value of in-force business' now being deducted
from the related liabilities. Further detail is given below. There
is no change to the unallocated divisible surplus.
Under IFRS (IAS 8) this presentation change is a 'change in
accounting policy' which has to be applied by restating the
comparative figures previously presented. The items that have been
restated are:
-- the 'non-participating insurance contract liabilities' and
the 'reinsurers' share of insurance contract liabilities' were
previously presented in accordance with the RBS. The RBS
presentation, as applied to IFRS, showed them within the balance
sheet in the following lines:
o the line items 'non-participating insurance contract
liabilities' and 'reinsurers' share of insurance contract
liabilities' were included on the more prudent 'regulatory' basis.
This resulted in a higher value than the 'realistic' value.
o the negative liability the 'non-participating value of
in-force business' included an amount which represented the
elimination of the prudence in the regulatory basis over and above
the realistic value.
For the new presentation both the 'non-participating insurance
contract liabilities' and the 'reinsurers' share of insurance
contract liabilities' have been shown net of the regulatory
prudence previously included within the 'non-participating value of
in-force business'. These changes are shown as adjustment 1 in the
table on page 22.
-- the 'non-participating value of in-force business' also
previously included the value of the inter-fund administration and
asset management arrangements in place between the open fund and
certain closed funds. As permitted by FRS 27, where these items can
be attributed to specific participating liabilities they can be
deducted from those liabilities and the liabilities can be shown
net. This item can be attributed to participating liabilities and
therefore the 'participating insurance contract liabilities' and
the 'participating investment contract liabilities' are now shown
net of this value. This change is shown as adjustment 2 in the
table on page 22.
The value remaining within the 'non-participating value of
in-force business' is the present value of future profits on
non-participating investment contracts and the value of future
transfers from the Group's 90:10 with-profits funds. These items
cannot be attributed to specific participating liabilities and
therefore their presentation has not changed.
The adjustments to the balance sheet presentation set out above
result in a reclassification between line items within the
statement of comprehensive income, shown as adjustment 3 in the
table on page 23. There is no net impact on the statement of
comprehensive income or the result for the period.
The following tables show the restatement of the Group balance
sheet and the consolidated statement of comprehensive income for
the above presentational changes.
IFRS consolidated balance sheet 31 December 2015
-----------------------------------------------------------------------
As previously reported Impact of change in presentation Restated
GBPm GBPm GBPm GBPm
------------------------------------------- ----------------------- ----------------------------------- ---------
Assets
Reinsurers' share of insurance contract
liabilities 5,302 (250)(1) - 5,052
Other assets not impacted by the change 69,604 - - 69,604
------------------------------------------- ----------------------- ----------------- ---------------- ---------
Total assets 74,906 (250) - 74,656
------------------------------------------- ----------------------- ----------------- ---------------- ---------
Liabilities
Participating insurance contract
liabilities 28,874 - (166)(2) 28,708
Participating investment contract
liabilities 2,326 - (94)(2) 2,232
Unallocated divisible surplus 3,314 - - 3,314
Non-participating value of in-force
business (1,526) 358(1) 258(2) (910)
Non-participating insurance contract
liabilities 7,291 (608)(1) - 6,683
Non-participating investment contract
liabilities 24,982 - 2(2) 24,984
Other liabilities not impacted by the
change 9,645 - - 9,645
------------------------------------------- ----------------------- ----------------- ---------------- ---------
Total liabilities 74,906 (250) - 74,656
------------------------------------------- ----------------------- ----------------- ---------------- ---------
Notes on the IFRS restatement:
1 This adjustment is to show the non-participating insurance
contract liabilities and the reinsurers' share of reinsurance
liabilities at their 'realistic' value. Previously the
non-participating insurance contract liabilities and the
reinsurers' share of reinsurance liabilities were shown at their
'regulatory' value with the difference between the regulatory and
realistic values of GBP358m included within the non-participating
value of in-force business. The adjustment moves the GBP358m from
the non-participating value of in-force business and nets GBP608m
from the non-participating insurance contracts liabilities and
GBP250m from the reinsurers' share of insurance contract
liabilities.
2 This adjustment is the presentational change to move the value
of inter-fund administration and asset management arrangements of
GBP258m from the non-participating value of in-force business and
to net GBP166m of this value from the participating insurance
contract liabilities, GBP94m from the participating investment
contract liabilities and GBP2m to non-participating investment
contract liabilities.
IFRS consolidated statement of 31 December 2015
comprehensive income
------------------------------------------------------------------------
As previously reported Impact of change in presentation(3) Restated
GBPm GBPm GBPm
-------------------------------------------- ----------------------- ------------------------------------ ---------
Total revenues 3,215 - 3,215
-------------------------------------------- ----------------------- ------------------------------------ ---------
Policyholder benefits and claims
Claims paid, after reinsurance 2,255 - 2,255
Decrease in insurance contract liabilities,
before reinsurance (948) (72) (1,020)
Reinsurance ceded 160 (38) 122
-------------------------------------------- ----------------------- ------------------------------------ ---------
Decrease in insurance contract liabilities,
after reinsurance (788) (110) (898)
Increase in non-participating value of
in-force business (194) 102 (92)
Increase in investment contract liabilities 903 8 911
-------------------------------------------- ----------------------- ------------------------------------ ---------
Total policyholder benefits and claims 2,176 - 2,176
Total operating expenses 852 - 852
Finance costs 44 - 44
-------------------------------------------- ----------------------- ------------------------------------ ---------
Result before tax and transfer to the
unallocated divisible surplus 143 - 143
Tax 18 - 18
Transfer to the unallocated divisible
surplus 125 - 125
-------------------------------------------- ----------------------- ------------------------------------ ---------
Result for the year - - -
-------------------------------------------- ----------------------- ------------------------------------ ---------
Notes on the IFRS restatement:
3 The changes to the consolidated statement of comprehensive
income are the movement between the adjustments made to the 31
December 2015 and the 31 December 2014 balance sheets. The net
effect on both balance sheets is nil and therefore there is no
overall net effect on the consolidated statement of comprehensive
income.
Appendix 3 Reconciliation of the IFRS unallocated divisible
surplus to EEV
2015
2016 Restated
GBPm GBPm
------------------------------------------- ------ ----------
IFRS unallocated divisible surplus 3,292 3,314
Valuation differences between
IFRS and EEV
- Goodwill and intangible assets (250) (280)
- Deferred tax valuation differences (2) (1)
- Subordinated debt at market
value (52) (25)
* Subsidiaries valuation differences (8) (16)
Add items only included on an
embedded value basis
- Valuation of asset management
and service subsidiaries 137 156
Other valuation differences 29 19
------------------------------------------- ------ ----------
EEV 3,146 3,167
------------------------------------------- ------ ----------
Reconciliation of the IFRS (deduction from)/transfer to
unallocated divisible surplus to EEV (loss)/profit for the year
2015
2016 Restated
GBPm GBPm
------------------------------------------- ------ ----------
IFRS (deduction from)/transfer
to unallocated divisible surplus (22) 175
Amortisation of intangible assets 30 (7)
Differences in valuation of subsidiaries (12) (1)
Change in realistic value of subordinated
debt (27) 17
Movement in valuation differences
for deferred tax assets (1) (4)
Other movements in valuation bases 11 1
EEV (loss)/profit for the year (21) 181
------------------------------------------- ------ ----------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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