TIDM41BM TIDM60KE
RNS Number : 3214J
Royal London
29 March 2018
Press Release
29 March 2018
ROYAL LONDON REPORTS STRONG NEW BUSINESS AND PROFIT GROWTH AS
CEO CALLS FOR FIVE YEAR MORATORIUM ON CHANGES TO PENSIONS TAX
RELIEF
Trading and financial highlights
-- New life and pensions business (PVNBP basis)(1) up by 38% to GBP12,002m (2016: GBP8,686m);
-- Funds under management(2) up by 14% to GBP114bn (31 December 2016: GBP100bn);
-- European Embedded Value (EEV) operating profit before tax up
by 17% to GBP329m (2016: GBP282m);
-- ProfitShare (after tax) distribution to eligible members rises to GBP142m (2016: GBP114m);
-- Overall new business margins remained broadly in line with
the prior period at 1.8% (2016: 1.9%(4) );
-- IFRS transfer to the unallocated divisible surplus (before
other comprehensive income) increase of GBP111m to GBP352m (2016:
before change in estimate for Solvency II and other comprehensive
income GBP241m); and
-- Solvency II Standard Formula basis Investor View(3) solvency
surplus of GBP5.5bn (31 December 2016: GBP4.5bn) and a capital
cover ratio of 235% (31 December 2016: 232%) before closed fund
restrictions.
New business review
Intermediary business
-- Individual Pensions including Drawdown new business sales(1)
were up by 68% to GBP6,339m (2016: GBP3,778m). Customers continued
to take advantage of the pension freedoms, creating greater demand
for our award-winning investment solutions and income drawdown
product.
-- Group Pensions new business sales(1) were up by 12% to
GBP4,346m (2016: GBP3,872m). In 2017 we were one of the leading
providers of insurance-based new auto-enrolment pension schemes.
Following the completion of the initial auto-enrolment staging
programme in the UK we expect lower sales of workplace pensions in
2018 due to the reduced market size. Our focus will be on
supporting our existing customers through the planned increases in
employer and employee pension contribution rates.
-- Intermediary Protection new business sales(1) increased by
25% to GBP807m (2016: GBP647m). We have become one of the leading
providers in the intermediated retail life assurance market,
growing our market share since rebranding as Royal London in 2015.
We have achieved this through a market-leading and customer-centric
proposition and by continuously improving our service for customers
and advisers. Our focus has been on making it easier for customers
to buy insurance and making the products more accessible to groups
of customers who have historically been underserved by the
insurance industry. It has also been an outstanding year for our
Intermediary Protection business in Ireland; in November 2017 our
successful service transformation won first place for service
excellence in the 2017 Brokers (Adviser) Ireland Excellence Awards
for the first time.
Consumer business
-- Consumer new business sales(1) were up by 36% to GBP408m
(2016: GBP301m). Growth in our Consumer division came from
increasing our brand visibility and offering great value products,
which we believe provide better outcomes than those offered by our
competitors. We are now one of the largest players in the Over 50s
protection market and the only product provider awarded a five star
rating by Fairer Finance.
-- This was the first year of our partnership with the Post
Office and we have been delighted with its success with over 14,000
policies sold during 2017. Our partnerships with Co-operative
Funeral Services and Ecclesiastical Insurance continued to
flourish. We also reached agreement in December 2017 to form a new
partnership with CYBG plc, owner of Clydesdale Bank and Yorkshire
Bank, to offer over 50s life cover to their customers. In 2018 we
will launch our own-branded Funeral Plan, which will expand the
range of products we offer directly to customers to meet funeral
planning needs.
Wealth
-- Royal London Asset Management (RLAM) continued to perform
well, attracting external gross inflows of GBP10.4bn (2016:
GBP6.7bn) arising from both Institutional and Wholesale markets.
Institutional clients such as pension schemes and local
authorities, and Wholesale clients such as wealth managers and
IFAs, continued to buy our fixed income and cash funds. Our
Sustainable range has also gained popularity. Funds under
management(2) increased to GBP114bn (31 December 2016: GBP100bn),
with market conditions more stable in 2017 compared with 2016.
-- We also made good progress in building the business. We
recruited a highly-regarded global equity team, launching two new
global equity funds in 2017. We completed one of the largest ever
launches of a UK property fund in October 2017, with a portfolio of
GBP2.7bn, as well as launching a multi asset credit fund for
institutional investors.
-- The Ascentric wrap platform saw gross inflows increase 22% to
GBP2.8bn (2016: GBP2.3bn). A new, industry-leading charging
structure helped to deliver record inflows into the business in
2017. The new pricing makes it easier for advisers and their
clients to understand total costs. Assets under administration(5)
increased by 17% to GBP14.4bn (31 December 2016: GBP12.3bn).
Review of financial performance
EEV operating profit
Royal London has once again performed strongly, increasing EEV
operating profit before tax by 17% to GBP329m (2016: GBP282m).
Profit contribution from new business was GBP292m in 2017, up 31%
from the previous year reflecting the quality of the new business
we are writing. Profits from managing our existing book of business
(including expected return on opening net worth) increased by
GBP93m to GBP278m. This mainly consists of experience variances of
GBP37m (2016: GBP4m), an overall positive GBP111m (2016: GBP50m)
impact on profit from changing our operating assumptions, mainly
relating to changing our longevity and expense assumptions.
Strategic development costs and other items increased to GBP208m
(2016: GBP82m) as we invested in our business while there was an
impairment to intangible assets of GBP31m (2016: GBP44m). The
impairment charge of GBP31m related to the development of new back
office software in Ascentric and the expected increase in costs
relating to the sophistication of the new system and complying with
MiFID II regulations.
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 (before other comprehensive income) for the year
ended 31 December 2017 was GBP352m (2016: GBP76m). The 2016 results
included a charge for a change in estimate for Solvency II of
GBP165m. The 2016 IFRS transfer to the unallocated divisible
surplus before this charge was GBP241m. Our IFRS result benefits
from the strong trading performance of the Group and continues to
be affected by the low interest rate environment.
Capital
Our capital position remains strong and our Solvency II Standard
Formula basis Investor View(3) solvency surplus was GBP5.5bn (31
December 2016: GBP4.5bn) with a capital cover ratio of 235% (31
December 2016: 232%). The Regulatory View solvency surplus was
GBP2.4bn (31 December 2016: GBP1.9bn) with a capital cover ratio of
159% (31 December 2016: 155%).
The 31 December 2016 Solvency II(6) solvency surplus and capital
cover ratios are as presented in Royal London's 2016 Annual Report
and Accounts. These figures were estimates and final figures were
disclosed in the Solvency and Financial Condition Report (SFCR) for
the year ended 31 December 2016; being a capital cover ratio of
227% and GBP4.4bn solvency surplus (Investor View), and a capital
cover ratio of 153% and GBP1.8bn solvency surplus (Regulatory
View).
ProfitShare
Over recent years we have expanded the reach of ProfitShare to
include thousands more of our members, and in 2017 another 200,000
new members qualified to receive ProfitShare. In 2017 1.2m people
received ProfitShare, compared with 1m in 2016. As a result of
maintaining the level of ProfitShare across our increased
membership base, the total amount paid in ProfitShare has increased
to GBP142m in 2017 (2016: GBP114m).
Phil Loney, Group Chief Executive of Royal London, said:
"In a year full of political and economic uncertainty which
impacted market volatility and consumer spending, we achieved a 17%
increase in EEV operating profit before tax, largely due to strong
sales growth across our businesses. This growth reflects our well
established strategy of continually improving the quality of
products and service offered to our customers, demonstrating our
customer-owned business model.
"As a member-owned business our customers are at the heart of
everything we do. Royal London members and qualifying customers
have received almost a billion pound boost to their policies since
2007 - three quarters of a billion coming from sharing our profits
and the remainder from cumulative investment returns on these
profits. This is a real demonstration of how we make a meaningful
difference to our customers.
"Our 2017 ProfitShare of GBP142m was supported by a record year
for new business backed by strong investment performance, despite a
backdrop of continued political upheaval. Royal London's funds
under management increased to GBP114bn with a record breaking year
for gross sales for our asset management business. A new, unique
all-in charging structure drove strong new sales for Ascentric, our
platform business.
"We also saw strong sales of workplace and individual pensions
while Royal London's drawdown proposition served us well during a
time when low interest rates made this type of product the
retirement vehicle of choice. The completion of the initial stages
of the UK wide auto-enrolment project means that the size of the
workplace pension new business market will reduce in 2018 and we
expect our own workplace pension sales to fall accordingly. In 2018
our primary focus will be on supporting our current workplace
pension customers through the planned increases in employer and
employee contribution levels, whilst continuing to offer a quality
workplace pensions solution for those employers dissatisfied with
their current pension provider.
"Our Protection businesses continued to go from strength to
strength across the board. Our innovative work simplifying the
underwriting journey on streamlined mortgages, was referred to as a
"game-changer" and advisers praised our pioneering work on diabetes
cover. Royal London Ireland had an outstanding year, exceeding
prior year and growing market share to over 16%(7) . Royal London's
consumer business is now one of the top sellers of Over 50s life
cover. We believe this growth was driven by the recognition that
our product is fairer and better value compared to our competitors.
Royal London is the only provider to be awarded a 5* rating for
Over 50s cover by the consumer group Fairer Finance.
"We have continued to be recognised for excellent customer
service across all of our businesses, offering consistently high
quality service to customers and the advisers who work on their
behalf. Our net promoter score, measuring how likely consumers are
to recommend us to friends and family, continued to increase in
2017 and financial advisers have recognised all of Royal London's
businesses as 5 star service providers.
"The backdrop to much of our business is the political agenda
for longer term saving. The pensions landscape has seen
revolutionary and largely positive changes, but more can be done to
deliver real consumer benefits. Auto-enrolment has enabled millions
of people to contribute to a private pension for the first time,
but the Government's 8% combined contribution target is only a
starting point and contributions need to be increased further over
time. The Government also needs to widen the net to bring in
self-employed people.
"However, there is one area where we need stability. Pensions
tax relief has been subject to no less than six cuts in the last
seven years and we are asking the Government to commit to a five
year moratorium on further changes. This would help to support
consumer confidence in pensions just at the time that employer and
employee contribution rates are set to increase as part of the
auto-enrolment project.
"We continue to work closely with Government on the development
of the Pensions Dashboard, a potential game-changer for consumers.
Government should drive the initiative forward, making it
compulsory for all schemes and pension providers to supply data
that will inform consumer choice."
For further information please contact:
Mona Patel 0203 272 5133
Mona.patel@royallondon.com 07919 171964
Editor's notes:
Royal London is the largest mutual life, pensions and investment
company in the UK, with funds under management of GBP114 billion,
8.8 million policies in force and 3,637 employees. Figures quoted
are as at 31 December 2017.
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
results has been derived from the swap 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. It excludes assets
administered through our platform business.3) 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 GBP3.1bn (31 December
2016: GBP2.6bn) as a deduction from total Own Funds of GBP9.6bn (31
December 2016: 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
GBP3.1bn restriction, the Total Company ('Regulatory View')
reported a capital cover ratio of 159% at 31 December 2017 (31
December 2016: 155%).
4) The 2016 total margin has been updated to exclude cash
mandates.
5) Assets under administration represent the total assets
administered on behalf of individual customers and Institutional
clients through our platform business. 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 capital 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 (TMTP) and the Volatility
Adjustment. Permission to recalculate TMTP was received from the
Prudential Regulation Authority (PRA) in December 2017. The TMTP
stated is estimated and unaudited. The final position will be
reported in the SFCR on 4 May 2018.
7) Source: Milliman Q3 2017 Temperature Gauge results.
8) Financial calendar:
29 March 2018 Financial results for 2017 and conference call*
4 May 2018 2017 Solvency and Financial Condition Report
published on our website
13 June 2018 Annual General Meeting
16 August 2018 Interim financial results
13 November 2018 RL Finance Bonds No 3 plc subordinated debt interest payment date
30 November 2018 RL Finance Bonds No 2 plc subordinated debt interest payment date
* Royal London will hold an investor conference call to present
its 2017 financial results on Thursday 29 March 2018 at 09:00.
Interested parties can register at:
https://cossprereg.btci.com/prereg/key.process?key=P37B46J36
9) 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 8
2 Review of financial performance
9
* Consolidated income statement - EEV basis for the 10
year ended 31 December 2017 10
* Consolidated balance sheet - EEV basis as at 31
December 2017
* EEV operating profit
11
* EEV profit before tax, ProfitShare and change in 12
estimate for Solvency II
* EEV balance sheet
13
* IFRS consolidated statement of comprehensive income 15
for the year ended 31 December 2017
* IFRS consolidated balance sheet as at 31 December
2017
* IFRS results 16
* IFRS balance sheet 16
* Investment performance 16
* Solvency II capital position on a Standard Formula
basis 17
* Movement analysis of capital position 18
* Sensitivities on the capital cover ratio and solvency
surplus 19
3 Other matters
* UK decision to leave the EU 20
* Ratings agencies 20
Appendix 1: EEV basis of preparation 21
Appendix 2: IFRS basis of preparation 22
Appendix 3: Reconciliation of the IFRS unallocated
divisible surplus to EEV 23
1. New business review
Intermediary
PVNBP New business New business
contribution(1) margin
--------------- --------------- ----------------------- ---------------
2017 2016 2017 2016 2017 2016
--------------- ------- ------ ----------- ---------- ------- ------
GBPm GBPm GBPm GBPm % %
--------------- ------- ------ ----------- ---------- ------- ------
Intermediary
--------------- ------- ------ ----------- ---------- ------- ------
Pensions 10,787 7,738 241.6 170.6 2.2 2.2
--------------- ------- ------ ----------- ---------- ------- ------
Protection 807 647 49.8 42.8 6.2 6.6
--------------- ------- ------ ----------- ---------- ------- ------
Consumer
PVNBP New business New business
contribution(1) margin
---------- ------------ ------------------- ---------------
2017 2016 2017 2016 2017 2016
---------- ----- ----- ---------- ------- -------- -----
GBPm GBPm GBPm GBPm % %
---------- ----- ----- ---------- ------- -------- -----
Consumer 408 301 (5.3) 4.3 (1.3) 1.4
---------- ----- ----- ---------- ------- -------- -----
Wealth
PVNBP(2) New business New business
contribution(1) margin
--------- -------------- ------------------- ---------------
2017 2016 2017 2016 2017 2016
--------- ------ ------ --------- -------- ------- ------
GBPm GBPm GBPm GBPm % %
--------- ------ ------ --------- -------- ------- ------
RLAM(3) 6,906 5,065 46.8 37.7 0.7 0.7
--------- ------ ------ --------- -------- ------- ------
2017 2016 Change
GBPm GBPm %
----------------- ------------------- -------- -------
RLAM
Gross and net flows (including cash mandates)(4)
---------------------------------------------------------
Inflows 10,396 6,741 54
----------------- ------------------- -------- -------
Outflows (7,594) (4,420) (72)
----------------- ------------------- -------- -------
Net 2,802 2,321 21
----------------- ------------------- -------- -------
2017 2016 Change
Ascentric GBPm GBPm %
----------------- ------------------- -------- -------
Gross inflows 2,796 2,264 23
----------------- ------------------- -------- -------
Notes on the new business review
1 The new business contribution in the tables above has been
grossed up for tax at 19% (2016: 20%). We have done this to help
compare our results with the results of shareholder-owned life
insurance companies which typically pay tax at 19% (2016: 20%). The
EEV Consolidated income statement has been grossed up at the
applicable tax rates. Overall new business margin of 1.8% (2016:
1.9%) combines Intermediary, Consumer and Wealth and is based on
exact figures.
2 PVNBP for Wealth relates to gross sales inflows in the period,
excluding external cash mandates which are treated as uncovered
business and not valued on an EEV basis. The 2016 comparative has
been updated to exclude cash mandates.
3 The 2016 margin has been updated to exclude cash mandates.
4 Excludes Channel Islands cash mandates.
2. Review of financial performance
Consolidated income statement - EEV basis for the year ended 31
December 2017
2017 2016
GBPm GBPm
---------------------------------------- ------- -------
Operating activities
Contribution from new business 292 223
Profit from existing business
- Expected return 104 90
- Operating experience variances 37 4
- Operating assumption changes 111 50
Expected return on opening net worth 26 41
Loss on uncovered business (33) (44)
Strategic development costs and other
items (208) (82)
----------------------------------------- ------- -------
Total operating profit before tax 329 282
Economic experience variances 159 395
Economic assumption changes 79 (192)
Movement in Royal London Group Pension
Scheme 73 (118)
Financing costs (46) (46)
----------------------------------------- ------- -------
EEV profit before tax, ProfitShare
and change in estimate for Solvency
II 594 321
ProfitShare (150) (120)
Change in estimate for Solvency II - (182)
EEV profit before tax 444 19
Attributed tax charge (30) (40)
Total EEV profit/(loss) after tax 414 (21)
----------------------------------------- ------- -------
Consolidated balance sheet - EEV basis as at 31 December
2017
2017 2016
GBPm GBPm
---------------------------------- ------- -------
Assets
Assets held in closed funds 37,056 37,033
Assets backing non-participating
liabilities 39,726 29,882
Reinsurance assets 5,384 8,442
Assets backing participating
liabilities and net worth 9,090 8,759
Value of in-force business 2,544 2,065
Royal London Group Pension 47 -
Scheme surplus
Total 93,847 86,181
---------------------------------- ------- -------
Liabilities
Liabilities in closed funds 37,056 37,033
Non-participating liabilities 39,726 29,882
Reinsured liabilities 5,384 8,442
Participating liabilities 6,526 6,129
Current liabilities 1,595 1,523
Royal London Group Pension
Scheme deficit - 26
Total 90,287 83,035
---------------------------------- ------- -------
Embedded Value
Net worth 969 1,107
Value of in-force business 2,544 2,065
Royal London Group Pension
Scheme surplus/(deficit) 47 (26)
Total 3,560 3,146
---------------------------------- ------- -------
EEV operating profit
The Group achieved an EEV operating profit before tax of
GBP329m, an increase of 17% (2016: GBP282m) which was driven by new
business sales, changes to our operating assumptions, and included
a one-off GBP30m benefit arising from release of a counterparty
default reserve following a change to our agreement with BlackRock.
This was partially offset by higher strategic development costs and
other items and an impairment of an intangible asset.
Profit contribution from new business was GBP292m, up 31% from
the previous year (2016: GBP223m). The overall new business margins
remained broadly in line with the prior period at 1.8% (2016:
1.9%), the margins for new pensions business remained at 2.2%
(2016: 2.2%) and the RLAM margins remained at 0.7% (2016: 0.7%).
Protection and Consumer business saw a decrease in margins. The
Protection margins dropped due to pressure from the competitive
market. The negative new business contribution for Consumer was due
to the business still being relatively new. Although Consumer has
grown significantly we have been impacted by the low yield economic
environment, where we are putting mitigating actions in place
through our product redesign, and continuing to scale our business
model. With a growing share in our key chosen market segments we
expect to make further enhancements to profitability metrics during
2018 from our new range of life assurance and funeral plan
products.
Profits from managing existing business increased by GBP93m to
GBP278m (2016: GBP185m). This mainly consists of a GBP33m increase
in experience variances and an increase of GBP61m (122%) from
changing our operating assumptions. The key change in assumptions
is an update to longevity assumptions, reflecting latest forecasts
that future life expectancy will not improve by as much as
previously predicted. Other demographic assumptions have been
updated in line with our latest experience. These changes resulted
in an overall increase in our EEV operating profit, particularly in
our Protection business, partly offset by the impact of updating
our persistency assumptions on Group Pensions business. We also
changed our assumptions to reflect our expectation of lower future
unit costs following the successful growth in new business
sales.
Uncovered business generated an overall loss of GBP33m (2016:
GBP44m) mainly due to significant cost being incurred in 2017
relating to the development of new back office software in
Ascentric. We have recognised an impairment of GBP31m in the year
(2016: GBP44m) reflecting the expected increase in costs relating
to the sophistication of the new system and complying with MiFID II
regulations.
Strategic development costs and other items increased to GBP208m
(2016: GBP82m), which related primarily to providing for future
change such as IFRS 17 and MiFID II and upgrading of our premises.
Other items include provisions relating to the costs of servicing
historic remediation and expected costs associated with setting up
a new legal entity in Ireland to mitigate any uncertainty from the
UK leaving the European Union (EU). We also continued to make
further provision for developing our Pensions platform, a change
which we believe will enable us to deliver a market leading digital
proposition and deliver better outcomes and experiences for our
customers. These costs are offset by a one-off GBP30m benefit from
a restructure of our arrangement with BlackRock resulting in the
release of a counterparty default reserve.
EEV profit before tax, ProfitShare and change in estimate for
Solvency II
EEV profit before tax, ProfitShare and change in estimate for
Solvency II was GBP594m (2016: GBP321m). The increase on the
previous year is due to our strong operating performance,
investment return being better than expected at the start of the
year and positive changes to economic assumptions, and the Royal
London Group Pension Scheme (RLGPS) moving from a deficit to a
surplus. The RLGPS which is now closed to future accrual, benefited
from improved economic conditions and saw an increase in its IAS 19
funding level of GBP73m in 2017 (2016: decrease of GBP118m). The
2016 EEV profit before tax and ProfitShare is stated before an
accounting charge of GBP182m arising on the alignment of our EEV
methodology to Solvency II requirements (refer to Appendix 1 for
further information).
EEV balance sheet
During the first half of 2017 the reinsurance agreement with
BlackRock was changed to move our investment with BlackRock Life
Limited to investments in other BlackRock funds. This change
resulted in a GBP2.6bn reclassification on the EEV balance sheet; a
reduction in 'Reinsurance assets' with a corresponding increase in
'Assets backing non-participating liabilities' and aligned impacts
on the liability side of the balance sheet.
IFRS consolidated statement of comprehensive income for the year
ended 31 December 2017
2017 2016
GBPm GBPm
------------------------------------- ------- -------
Revenues
Gross earned premiums 1,239 1,291
Premiums ceded to reinsurers (265) (730)
------------------------------------- ------- -------
Net earned premiums 974 561
Fee income from investment and
fund management contracts 297 254
Investment return 6,031 10,864
Other operating income 64 76
------------------------------------- ------- -------
Total revenues 7,366 11,755
------------------------------------- ------- -------
Policyholder benefits and claims
Claims paid, before reinsurance 2,665 2,703
Reinsurance recoveries (519) (507)
------------------------------------- ------- -------
Claims paid, after reinsurance 2,146 2,196
(Decrease)/increase in insurance
contract liabilities, before
reinsurance (114) 4,545
Reinsurance ceded 581 (548)
------------------------------------- ------- -------
Increase in insurance contract
liabilities, after reinsurance 467 3,997
Increase in non-participating
value of in-force business (271) (317)
Increase in investment contract
liabilities 3,215 3,974
------------------------------------- ------- -------
Total policyholder benefits
and claims before change in
estimate for Solvency II 5,557 9,850
------------------------------------- ------- -------
Change in estimate for Solvency
II - 165
------------------------------------- ------- -------
Total policyholder benefits
and claims 5,557 10,015
------------------------------------- ------- -------
Operating expenses
Administrative expenses 561 561
Investment management expenses 321 266
Amortisation charges and impairment
losses on acquired PVIF and
other intangible assets 92 120
Investment return attributable
to external unit holders 192 308
Other operating expenses 141 113
------------------------------------- ------- -------
Total operating expenses 1,307 1,368
------------------------------------- ------- -------
Finance costs 47 47
------------------------------------- ------- -------
Result before tax and before
transfer to unallocated divisible
surplus 455 325
------------------------------------- ------- -------
Tax charge 103 249
------------------------------------- ------- -------
Transfer to the unallocated
divisible surplus 352 76
------------------------------------- ------- -------
Result for the period - -
------------------------------------- ------- -------
IFRS consolidated statement of comprehensive income for the year
ended 31
December 2017 (continued)
2017 2016
GBPm GBPm
------------------------------------- ------- -------
Other comprehensive income
------------------------------------- ------- -------
Items that will not be reclassified
to profit or loss
------------------------------------- ------- -------
Remeasurements of defined benefit
pension schemes 82 (98)
------------------------------------- ------- -------
Transfer to/(deduction from)
the unallocated divisible surplus 82 (98)
------------------------------------- ------- -------
Other comprehensive income for - -
the period net of tax
------------------------------------- ------- -------
Total comprehensive income for - -
the period
------------------------------------- ------- -------
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 period shown in the statement of total comprehensive
income.
IFRS consolidated balance sheet as at 31 December 2017
2017 2016
ASSETS GBPm GBPm
----------------------------------------------------- -------- ----------
Property, plant and equipment 53 51
Investment property 6,103 5,297
Intangible assets 606 683
Reinsurers' share of insurance contract liabilities 5,326 5,907
Pension scheme asset 186 131
Current tax asset 5 3
Financial investments 83,328 74,479
Trade and other receivables 651 788
Cash and cash equivalents 3,061 3,292
----------------------------------------------------- -------- ----------
Total assets 99,319 90,631
----------------------------------------------------- -------- ----------
LIABILITIES
----------------------------------------------------- -------- ----------
Participating insurance contract liabilities 33,154 32,709
Participating investment contract liabilities 2,214 2,154
Unallocated divisible surplus 3,726 3,292
Non-participating value of in-force business (1,488) (1,217)
----------------------------------------------------- -------- --------
37,606 36,938
Non-participating insurance contract liabilities 7,301 7,860
Non-participating investment contract liabilities 38,847 31,329
----------------------------------------------------- -------- --------
46,148 39,189
Subordinated liabilities 745 744
Payables and other financial liabilities 7,225 7,448
Provisions 282 279
Other liabilities 271 279
Liability to external unit holders 6,785 5,502
Pension scheme liability - 26
Deferred tax liability 222 226
Current tax liability 35 -
Total liabilities 99,319 90,631
----------------------------------------------------- -------- --------
IFRS results
The IFRS transfer to the unallocated divisible surplus for the
year ended 31 December 2017, before other comprehensive income, was
GBP352m (2016: GBP76m including the impact of the change in
estimate for Solvency II of GBP165m). Similar to EEV, our IFRS
result benefits from the strong trading performance of the Group
and better than expected investment returns. Other comprehensive
income included the positive movement in the Group's pension
schemes of GBP82m (2016: charge of GBP98m), with RLGPS moving from
a deficit to a surplus. Including other comprehensive income, the
total transfer to the unallocated divisible surplus for the year
ended 31 December 2017 was GBP434m (2016: deduction from
unallocated divisible surplus of GBP22m).
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 (2017: IFRS result higher by GBP5m (2016: IFRS result
higher by GBP12m)) and an increase in the fair value of our
subordinated debt (2017: IFRS result higher by GBP82m (2016: IFRS
result higher by GBP27m)). These items were offset slightly by the
amortisation of certain intangibles recognised in IFRS and not EEV
(2017: IFRS result lower by GBP11m (2016: IFRS result lower by
GBP30m)).
IFRS balance sheet
Our balance sheet remains robust. Our total investment
portfolio, including investment property, was GBP79.8bn in 2016 and
increased by 12% to GBP89.4bn in 2017. Our financial investment
portfolio continues to be well balanced across a number of
financial instruments, with the majority 84% in equity securities
and debt and fixed income securities.
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 2017 the investments backing
the asset shares of the Open Fund achieved a return of 9.5% (2016:
13.8%) against a benchmark of 9.0% (2016: 14.8%). Investment
returns for Royal London policyholders were strong, both in
absolute terms and in relation to benchmarks. Performance was
boosted by buoyant stock markets, which reached new highs during
the year, and continued positive performance from UK and overseas
equities, corporate bonds and property. However returns on
government bonds fell behind the significant returns seen in 2016
as yields remained relatively stable in 2017.
Solvency II capital position on a Standard Formula basis
Our capital position remains strong, reflecting the strength of
our underlying business and effective capital management
strategies. The Investor View capital cover ratio for Royal London
is 235% including surplus in the closed funds (31 December 2016:
232%(3) ). The increase in the surplus and capital cover ratios
between 31 December 2016 and 31 December 2017 is due to an increase
in Own Funds driven by strong operational performance and positive
changes to the risk margin and TMTP, offset by an increase in the
Solvency Capital Requirement mainly due to strong new business
sales.
We use the Standard Formula approach for the purposes of
measuring regulatory capital under Solvency II. Royal London
received approval for the use of both the TMTP and the Volatility
Adjustment. We are developing an Internal Model that we plan to
seek approval to adopt in 2019. We already use an internal capital
model for the purposes of monitoring our capital and decision
making across the Group.
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 2017 Royal Royal Total Closed Total Company
London London Company Fund Restriction (Regulatory
GBPbn Open Closed (Investor View)
Fund Funds View)
------------------ -------- -------- ----------- ------------------ --------------
Own Funds:
Tier 1 3.4 5.3 8.7 - 8.7
Tier 2 0.9 - 0.9 - 0.9
------------------ -------- -------- ----------- ------------------ --------------
Total Own Funds 4.3 5.3 9.6 - 9.6
Closed funds
restriction - - - (3.1) (3.1)
------------------ -------- -------- ----------- ------------------ --------------
Adjusted Own
Funds (A) 4.3 5.3 9.6 (3.1) 6.5
------------------ -------- -------- ----------- ------------------ --------------
Solvency Capital
Requirement (B) 1.9 2.2 4.1 - 4.1
------------------ -------- -------- ----------- ------------------ --------------
Surplus 2.4 3.1 5.5 (3.1) 2.4
Capital cover
ratio(2) (A/B)
- 31 December
2017 226% 243% 235% n/a 159%
------------------ -------- -------- ----------- ------------------ --------------
Capital cover
ratio(3) (A/B)
- 31 December
2016 209% 254% 232% n/a 155%
------------------ -------- -------- ----------- ------------------ --------------
Notes
1. The 31 December 2017 figures are estimated and are unaudited.
The final figures will be presented in the 2017 SFCR to be
published on our website on 4 May 2018.
2. Figures presented in the table are rounded, and the capital
cover ratio is calculated based on exact figures.
3. The 31 December 2016 Solvency II surplus and capital cover
ratios are as presented in Royal London's 2016 Annual Report and
Accounts. These figures were estimates and final figures were
disclosed in the SFCR in May 2017; being a capital cover ratio of
227% and GBP4.4bn surplus (Investor View), and capital cover ratio
of 153% and GBP1.8bn surplus (Regulatory View) before post balance
sheet events.
The Open Fund had an excess surplus of GBP2.4bn at 31 December
2017 (31 December 2016: GBP1.9bn) and a capital cover ratio of 226%
at 31 December 2017 (31 December 2016: 209%). The closed funds are
also well capitalised with a surplus of GBP3.1bn at 31 December
2017 (31 December 2016: GBP2.6bn) and a capital cover ratio of 243%
(31 December 2016: 254%). The Regulatory View capital cover ratio,
which does not recognise surplus in the closed funds, was 159% at
31 December 2017 (31 December 2016: 155%).
The majority (79%) (31 December 2016: 78%) of total Own Funds
within the Royal London Open Fund is made up of Tier 1 capital,
with subordinated debt valued at GBP0.9bn (31 December 2016:
GBP0.8bn) classified as Tier 2 capital. Own Funds within the closed
funds are entirely Tier 1 capital.
Movement analysis of capital position
The following table sets out an analysis of movement in the
Investor View solvency surplus and capital cover ratio between 2016
and 2017:
Solvency Surplus Capital Cover
Ratio (Investor
View)
(Investor (%)
View)
(GBPbn)
------------------------------- ----------------- -----------------
31 December 2016 (published
in the 2016 Annual Report
and Accounts (ARA)) 4.5 232
Estimation difference between
2016 ARA and 2016 SFCR (0.1) (5)
31 December 2016 (published
in the 2016 SFCR) 4.4 227
Adjustments to opening 2017
solvency position(1) (0.5) (25)
1 January 2017 (published
in the 2016 SFCR) 3.9 202
------------------------------- ----------------- -----------------
Operating assumption changes
and experience variances (0.0) (6)
Economic assumption changes
and experience variances 0.5 13
ProfitShare (0.1) (3)
Recalculation of TMTP at
31 December 2017 (estimated
and unaudited) 1.3 32
Other variances (0.1) (3)
------------------------------- ----------------- -----------------
31 December 2017 (estimated) 5.5 235
------------------------------- ----------------- -----------------
1. Post balance sheet events disclosed in the 2016 SFCR included
the first reduction in the TMTP applicable on 1 January 2017 and a
capital add-on agreed with the PRA on 7 March 2017, which increased
as a result of a fall in the risk free rate. The table assumes the
capital add-on was applied at the same time as the step down in
TMTP.
The solvency surplus has increased to GBP5.5bn at 31 December
2017 (31 December 2016: GBP4.5bn), and the capital cover ratio
(Investor View) has increased to 235% at 31 December 2017 (31
December 2016: 232%) primarily as a result of:
-- A recalculation of the TMTP which reflects a significant
reduction in the risk free rate since the TMTP was last
recalculated at 31 December 2015; and
-- Positive economic experience driven by positive investment returns, particularly equities.
Royal London has received approval from the PRA to recalculate
the TMTP at 31 December 2017; the position set out reflects the
latest available estimate which is unaudited. The final capital
position at 31 December 2017 will be set out in the SFCR in May
2018.
Sensitivities on the capital cover ratio and solvency
surplus
The capital cover ratio is sensitive to changes in economic and
demographic assumptions. The following table sets out various
sensitivities of the capital cover ratio based on different
possible scenarios:
Scenario Solvency Solvency
Surplus Surplus
(Regulatory (Investor
View) View)
(GBPm) (GBPm)
------------------------------------ ------------- -----------
SII Solvency Surplus - 31 December
2017 2,401 5,540
------------------------------------ ------------- -----------
25% decrease in all equity
investments (41) 30
25% decrease in property prices
(commercial and residential) (69) (37)
100bps rise in interest rate
(parallel shift)(1) 124 (602)
100bps fall in interest rate
(parallel shift)(1, 6) (255) 3
50bps increase in government
bond yields(2) (93) (285)
100bps widening in credit spreads
(all ratings) 157 150
20% of assets downgrading to
the next credit quality rating(3) (3) (11)
50bps increase in inflation(4) (38) 14
25% fall in GBP exchange rates
(against all other currencies)(5) (19) 38
------------------------------------ ------------- -----------
Notes:
1. Interest rate sensitivities assume government bond yields and
the European Insurance and Occupational Pensions Authority (EIOPA)
risk free rate move by the same amount. Interest rates are allowed
to be negative.
2. The government bond yield sensitivity assumes risk free rates
and other yields remain constant.
3. The asset credit downgrade sensitivity applies to the
liabilities only and not asset values. The calibration of the
Fundamental Spreads by sector, rating and term is assumed to be
unchanged.
4. Inflation change is calculated as real interest rates less
nominal interest rates.
5. This sensitivity assumes an increase to the value of assets
held in currencies other than GBP by 33% in GBP terms.
6. The results of this stress assume that additional management
actions are implemented to ensure that the direction of the lapse
risk in the Solvency II Standard Formula remains unchanged.
Sensitivities presented in the table are consistent with the
PRA's SS7/17: Solvency II: Data collection of market risk
sensitivities, which is available at
https://www.bankofengland.co.uk/pra/Documents/publications/ss/2017/ss717.pdf.
3. Other matters
UK decision to leave the EU
We have considered the impact of the UK's decision to leave the
EU and are confident that there will be no significant impact to
the operations or the capital strength of the Group. The Group
maintains a very strong capital position.
We are in the process of establishing a subsidiary in the
Republic of Ireland to enable our existing business there to
continue to trade after the UK leaves the EU. This mitigates any
uncertainty for Royal London from the UK leaving the EU. We will
continue to monitor the implications of the UK leaving the EU, but
expect we will trade as normal. We continue to work on behalf of
our customers to provide them with stability and the best possible
long-term returns.
Ratings agencies
In June 2017 Moody's affirmed our existing A2 insurance
financial strength rating and revised its outlook for Royal London
from negative to stable. Moody's announcement stated their
expectation that the impact on Royal London of the UK's decision to
leave the EU will be moderate over the next 12 to 18 months, and
for Royal London to maintain strong capitalisation and
profitability.
In July 2017, Standard and Poor's reaffirmed 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 2017 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.
The EEV methodology applied is consistent with the methodology
set out in the Group's Annual Report and Accounts for the year
ended 31 December 2017.
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.
Change in estimate for Solvency II
The introduction of Solvency II during 2016 resulted in a change
in estimate used to produce the EEV balance sheet to more closely
align with the methodology used for Solvency II. The main changes
were 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). The effect of
these adjustments was recognised in 2016 with no restatement of
prior periods as the adjustments were treated as a change in
estimate. The total impact on 2016 was 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.
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.
Appendix 3 - Reconciliation of the IFRS unallocated divisible
surplus to EEV
2017 2016
GBPm GBPm
----------------------------------------- ------ ------
IFRS unallocated divisible surplus 3,726 3,292
----------------------------------------- ------ ------
Valuation differences between IFRS
and EEV
- Goodwill and intangible assets (239) (250)
- Deferred tax valuation differences (6) (2)
- Subordinated debt at market value (134) (52)
- Subsidiaries valuation differences (2) (8)
Add items only included on an embedded
value basis
- Valuation of asset management
and service subsidiaries 126 137
Other valuation differences 89 29
----------------------------------------- ------ ------
EEV 3,560 3,146
----------------------------------------- ------ ------
Reconciliation of the IFRS transfer to/(deduction from)
unallocated divisible surplus to EEV profit/(loss) for the
period
2017 2016
GBPm GBPm
------------------------------------------ ------ ------
IFRS transfer to/(deduction from)
unallocated divisible surplus 434 (22)
------------------------------------------ ------ ------
Amortisation of intangible assets 11 30
Differences in valuation of subsidiaries (5) (12)
Change in fair value of subordinated
debt (82) (27)
Movement in valuation differences
for deferred tax assets (4) (1)
Other movements in valuation bases 60 11
EEV profit/(loss) for the period 414 (21)
------------------------------------------ ------ ------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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