TIDM41BM TIDM60KE TIDM76DO TIDMFJ66
RNS Number : 2865I
Royal London
04 August 2023
Interim Results Announcement 2023 4 August 2023
MEMBERSHIP GROWS AS ROYAL LONDON CONTINUES TO CHAMPION
MUTUALITY
Barry O'Dwyer, Group Chief Executive, commented:
"In the first half of 2023 we delivered good growth in Workplace
Pensions new business and our net inflows increased 25% to over
GBP3.2 billion. This growth, alongside our continued cost
discipline, has helped to deliver a 16% increase in operating
profit.
"As many of our customers continue to come to terms with the
increased cost of living and higher interest rates, our priority
has been to help them navigate these challenges, while building
their long-term financial resilience. In April, we shared GBP155
million in ProfitShare with over 2 million members, and the 120,000
new Workplace Pensions customers we have welcomed since the start
of the year all became members and are eligible for future
ProfitShare allocations.
"Our success in Workplace Pensions is driven by employers
increasingly valuing the benefit as a key way of supporting their
employees' financial wellbeing. As a result, they are choosing to
partner with digital first providers with a strong sense of
purpose. As more and more employers adopt this view, mutuals, like
Royal London, will be a natural choice. Our mutual mindset of
continually focusing on delivering positive enduring change for our
customers and wider society ensures they, and employers and
advisers, continue to place their trust in us."
Highlights
-- Welcomed 479 new workplace pension scheme employers and over 120,000 new workplace pension customers, supporting
them in planning and saving for the future.
-- Our financial wellbeing health check was launched at the end of 2022, and we introduced a new state benefits
calculator to the service this year, enabling customers to identify potential eligibility for c.GBP3.75m per
annum in benefits, entitlements and grants.
-- Our flagship Governed Range attracted net inflows of GBP1.7bn (H1 2022: GBP1.5bn), with assets under management
(AUM) reaching GBP56bn.
-- Paid 99.1% (FY22: 99.4%) of protection claims in the first half of year, paying GBP343m (H1 2022: GBP304m)
supporting over 39,000 customers and their families through life shocks.
-- Reached an agreement with Aegon UK to acquire its closed individual protection book of over 400,000 policies,
increasing the number of protection policies we will look after to over 1.5 million, further strengthening our
position in the UK protection market.
-- Supported financial advisers in meeting their Consumer Duty requirements through a dedicated online hub,
interactive webinars and account support.
-- Royal London Asset Management continued to focus on diversifying investment strategies and driving international
growth, successfully securing its first client mandates in Japan.
-- Investment performance of actively managed funds over three years remains strong despite difficult market
conditions, with 95% of funds outperforming their three-year benchmark (H1 2022: 80%)3.
-- Through our social impact strategy, announced a new GBP1.2m partnership with Cancer Research UK focused on
tackling cancer inequalities.
Financials
Six months Six months
ended ended
30 June 2023 30 June 2022
---------------- ------------------------------------ -------------- --------------
UK GAAP Operating profit before GBP127m GBP109m
tax(4)
----------------
Transfer to/(from) the GBP161m GBP(49)m
fund for future appropriations(5)
----------------
New business Life and pensions new GBP4,865m GBP5,494m
business sales(6)
---------------- ------------------------------------ -------------- --------------
Inflows Gross inflows(7) GBP14,977m GBP12,772m
----------------
Net inflows(7) GBP3,214m GBP2,578m
---------------- ------------------------------------ -------------- --------------
30 June 2023 31 December
2022
---------------- ------------------------------------ -------------- --------------
Funds Assets under management(8) GBP153bn GBP147bn
---------------- ------------------------------------ -------------- --------------
Capital(9) Regulatory View solvency GBP2.6bn GBP2.5bn
surplus
(Solvency II)
======================================================
Regulatory View capital
cover ratio 200% 206%
Investor View solvency GBP2.6bn GBP2.5bn
surplus
Investor View capital
cover ratio 212% 213%
===================================================== ============== ==============
-- Operating profit before tax4 increased by 16% to GBP127m (H1 2022: GBP109m) driven by growth in Workplace
Pensions new business contribution and higher risk free rates which increased the expected returns on our assets.
-- Transfer to the fund for future appropriations (FFA)5 of GBP161m (H1 2022: transfer from FFA (GBP49m)) reflects
the improvement in operating profit and overall investment returns in line with our long-term expectations.
-- Life and pensions new business sales6 of GBP4,865m (H1 2022: GBP5,494m) reduced in value as higher interest rates
decreased the present value of new business premiums. Workplace Pensions new business sales grew 7% after
adjusting for the increase in the discount rate whilst Individual Pensions sales fell as higher interest rates
impacted defined benefit transfer volumes.
-- Net inflows7 increased to GBP3,214m (H1 2022: GBP2,578m) driven by higher external net flows into our Global
Equity strategies.
-- Assets under management8 increased to GBP153bn (31 December 2022: GBP147bn).
-- Capital position remains robust with the Investor View and Regulatory View capital cover ratios9 stable at 212%
(31 December 2022: 213%) and 200% (31 December 2022: 206%), both after taking into account the impact of the
acquisition of the Aegon UK protection book.
-- Successfully issued a GBP350m Restricted Tier 1 contingent convertible debt instrument in May, the first of its
kind for a UK insurance mutual, diversifying our overall subordinated debt profile and increasing the Group's
financial flexibility.
Investor Conference call
Royal London will hold an investor conference call to present
its 2023 Interim Financial Results on Friday, 4 August 2023 at
08:30. Interested parties can register here . A copy of the
presentation to investors is available on the Group's website.
For further information please contact:
Lora Coventry, Senior PR Strategy Manager
(lora.coventry@royallondon.com / 07919 170673)
About Royal London
Royal London is the UK's largest mutual life, pensions and
investment company. We provide long-term savings, protection and
asset management products and services in the UK and Ireland. We
work with advisers and customers to protect the standard of living
of this and future generations.
Financial calendar:
-- 4 August 2023 - 2023 Interim Financial Results and Investor Conference Call
-- 6 October 2023 - RL Finance Bonds No 4 plc subordinated debt interest payment date
-- 13 November 2023 - RL Finance Bonds No 3 plc subordinated debt interest payment date
-- 25 November 2023 - RL Finance Bonds No 6 plc subordinated debt interest payment date
-- 29 November 2023 - RL Finance Bonds No 2 plc subordinated debt interest payment date
Editor's notes
1. The information in this announcement relates to The Royal London Mutual Insurance Society Limited ('RLMIS' or
'the Company'), and its subsidiary undertakings, together referred to as 'Royal London' or 'the Group'.
2. The Group assesses its financial performance based on a number of measures, some of which are not defined or
specified in accordance with relevant financial reporting frameworks such as UK GAAP or Solvency II. These
measures are known as alternative performance measures (APMs). APMs are disclosed to provide further information
on the performance of the Group and should be viewed as complementary to, rather than a substitute for, the
measures determined according to UK GAAP and Solvency II requirements. Accordingly, these APMs may not be
comparable with similarly titled measures and disclosures by other companies.
3. Investment performance has been calculated using a weighted average of active assets under management for funds
with a defined external benchmark. Benchmarks differ by fund and reflect their mix of assets to ensure direct
comparison. Passive funds are excluded from this calculation as, whilst they have a place as part of a balanced
portfolio, Royal London believes in the long-term value added by active management.
4. Operating profit before tax represents profit/(loss) before transfer to/(from) the fund for future appropriations
excluding: short-term investment return variances and economic assumption changes; amortisation of goodwill and
other intangibles arising from mergers and acquisitions; ProfitShare; ValueShare; tax; and one-off items of an
unusual nature that are not related to the underlying trading of the Group. Profits or losses arising within the
closed funds are held within the respective closed fund surplus; therefore operating profit represents the result
of the Royal London Main Fund (RL Main Fund).
5. Transfer to/(from) the fund for future appropriations represents the statutory UK GAAP measure 'Transfer
to/(deduction from) the fund for future appropriations' in the technical account within the consolidated
statement of comprehensive income.
6. Life and pensions new business sales represent life and pensions business only and excludes Asset Management and
other lines of business. New business sales are presented as the Present Value of New Business Premiums (PVNBP),
which is the total of new single premium sales received in the period 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 period.
The rate used to discount the cash flows in the reported results has been derived from the opening swap curve at
the start of the financial period for all new business except annuities, where instead the swap rate at the end
of each prior month is used to discount the next month's new business cashflows.
7. Gross and net inflows incorporate flows into Royal London Asset Management ('RLAM') from external clients
(external flows) and those generated from RLMIS (internal flows). External client net inflows represent external
inflows less external outflows, including cash mandates. Internal net inflows from RLMIS represent the combined
premiums and deposits received (net of reinsurance) less claims and redemptions paid (net of reinsurance). Given
its nature, non-linked Protection business is not included.
8. Assets under management (AUM) represent the total of assets actively managed by the Group, including funds
managed on behalf of third parties.
9. The capital cover ratio is calculated as the Group's Own Funds, being the regulatory capital under Solvency II,
divided by the Solvency Capital Requirement (SCR). The 'Regulatory View' solvency surplus and capital cover ratio
restricts each closed fund's surplus to the value of the SCR of that fund. The 'Investor View' equals the RL Main
Fund capital position (excluding ring-fenced funds, which are run on a standalone basis). All capital figures are
stated on a Group Partial Internal Model basis.
10. Figures presented throughout are rounded. The capital cover ratios and new business margins are calculated based
on exact figures.
Business Review
The first half of 2023 saw continued economic uncertainty, with
ongoing geopolitical tensions and persistent cost of living
challenges, along with ongoing recessionary fears. This increased
pressure on customers' household income reinforces the importance
of working closely with independent financial advisers, while also
providing customers with guidance, education and support to help
them navigate the challenges they face.
The value of impartial financial advice in ensuring appropriate
protection cover is in place, and savings and investments are being
managed well, is becoming ever more apparent. We remain strong
advocates for the benefits it provides and continue to innovate
with new technology to support financial advisers in scaling the
provision of advice and guidance to make it more accessible.
The FCA's new Consumer Duty was introduced at the end of July
and aims to raise standards across the industry through an enhanced
focus on customer outcomes across financial services. Our
commitment to delivering good customer outcomes is deeply embedded
in our Purpose and we welcome these changes. Our existing alignment
with the principles means we have been able to adapt to meet the
new obligations while taking steps to help financial advisers embed
the Consumer Duty in their business practises.
In April we announced we had reached an agreement to acquire
Aegon UK's closed book of individual protection business with over
400,000 policies. Combined with over 1.1m existing protection
customers who already trust Royal London to protect their families
against life shocks, this transaction strengthens our position in
this market. The advised nature of the book makes it a good
strategic fit and reinforces our commitment to supporting and
championing the benefits of impartial advice. Customers' policies
are expected to transfer to Royal London in 2024, subject to the
completion of a court-approved Part VII transfer.
We remain committed to playing our part in moving fairly to a
sustainable world and continue to develop our climate transition
plans to cover in detail how we intend to achieve our climate
ambitions, while also recognising that delivering our ambitions is
dependent on governments and policymakers fulfilling on the
commitments of the Paris Agreement. We have continued to leverage
our position as one of the UK's largest asset managers by engaging
with companies to influence a Just Transition to a sustainable
world and in the last six months we engaged with 19 companies to
improve their plans on the climate transition. We also used our
active voting position and other escalation techniques to progress
our net zero objectives and in the first half of the year voted on
153 climate-related resolutions at Annual General Meetings to
express our views. In June, we published Task Force on
Climate-related Financial Disclosures Reports for all the required
entities of the Group, demonstrating the actions we are taking to
manage climate-related risks and opportunities in our business.
In May, we announced a new GBP1.2m charity partnership with
Cancer Research UK focused on tackling cancer inequalities,
broadening our social impact and charitable giving activities to
include the prevention of life shocks. The partnership will fund
research into hard-to-treat cancers and initiatives to improve the
pathway to early diagnosis, as well as support programmes that
increase cancer awareness in communities.
We co-sponsored a Social Market Foundation report, launched in
June, which raises awareness of the role and benefits mutuals
provide. We are proud of our mutual status and our position of
being able to focus on driving change solely on behalf of our
members and customers. We will continue to use our position to
focus on, and champion, the key issues which will improve their
standard of living now and for future generations.
Our trading performance
UK
We continued to invest in our technology capabilities, further
enhancing our ability to engage customers and support them with
their financial needs. This included a series of enhancements to
our mobile app and financial wellbeing service, including a new
state benefits entitlement calculator. We launched a new Retirement
and Lifestyle Planner: a new digital, financial adviser-branded
tool that helps financial advisers reach new clients and grow their
business.
Our pensions new business sales were GBP4,308m. Workplace
Pensions new business sales grew by 7%, after adjusting the prior
period for the increase in the discount rate that has reduced the
present value of new business premiums, as we welcomed 479 new
workplace pension scheme employers and over 120,000 new scheme
members in a buoyant employment market. We also launched our new
online Transfer Hub, which makes pension consolidation easier for
our customers, boosting the number of execution-only transfers by
169% compared to the same period last year. Individual Pensions
non-defined benefit new business sales grew by 2% following an
increase in tax year-end activity. However, overall, as a result of
higher interest rates significantly impacting defined benefit
transfer business volumes and values, new business sales fell by
12%.
Our flagship investment solution, the Governed Range, attracted
net inflows of GBP1.7bn (H1 2022: GBP1.5bn), with AUM increasing to
GBP56bn (31 December 2022: GBP53bn). The Governed Range is our
range of multi asset funds which supports our pensions proposition
and is where the majority of our Workplace Pensions customers'
funds are invested.
On 10 July 2023 the Government announced an initiative to
encourage workplace pension providers to invest 5% of their assets
in unlisted equities by 2030 to support the growth of companies in
sectors such as life sciences. While we are supportive of the
overall objectives, Royal London has taken a different approach as
we already hold over 10% in unlisted, illiquid assets in our
Governed Range. Much of this is our property portfolio, some of
which is targeted at helping the same early-stage UK companies in
sectors such as life sciences to thrive, by providing the bespoke
infrastructure required.
Protection new business sales reduced to GBP368m as volumes were
in part impacted by cost of living pressures. As a result of the
Consumer Duty, we are seeing increasing interest from some advisers
who traditionally have not focussed on protection, with many now
seeking to write business themselves or refer to a protection
specialist.
Asset Management
Royal London Asset Management ('RLAM'), which manages funds for
our customers and external clients, continues to operate against a
backdrop of considerable economic uncertainty in investment
markets. The impact of persistent inflation has driven volatility
over the first half of the year as markets respond to actions taken
by central banks and governments and the global economy moves away
from a sustained period of low interest rates. This has
particularly impacted fixed income valuations which have fallen
further in the first half of the year.
Despite the market turbulence, our three-year performance track
record remains strong, with 95% of actively managed funds
outperforming their benchmark over the three years to 30 June 2023
(80% over the three years to 30 June 2022). Net inflows also
remained strong over the first half of the year at GBP3.2bn (H1
2022: GBP2.6bn), including GBP2.8bn external flows (H1 2022:
GBP1.5bn). We continue to benefit from our diversified capabilities
and commitment to international client growth, with RLAM
successfully winning its first Japanese client mandate in the
period. Overall assets under management increased to GBP152.9bn (31
December 2022: GBP147.2bn).
RLAM continued to win a range of awards in recognition of its
performance success. Key achievements included winning Fixed Income
Manager of the Year - up to EUR100bn AUM (MoneyAge Wealth and Asset
Management Awards), Best Sustainable Fund Manager 2023 - UK
(Ethical Finance Awards) and a range of awards at the Refinitiv
Lipper Fund Awards 2023. We were also awarded Best Asset Management
Company UK 2023 at the Global Business Magazine Awards and Best
Asset Manager UK 2023 at the Global Business and Finance Magazine
Awards, a recognition of our international expansion strategy.
Ireland
Royal London Ireland has continued its strong performance into
2023, with new business sales increasing to GBP110m (H1 2022:
GBP88m) reflecting our continuing market leading status in the
Irish broker protection market and the successful pensions
proposition launch in September 2022. The Irish business announced
its first ValueShare award, Royal London Ireland's equivalent to
ProfitShare, in April 2023, resulting in a policy value uplift of
0.13% for eligible pensions customers. Recent awards included Best
Mortgage Protection Product at the 2023 Association of Irish
Mortgage Advisors Awards and Best Mortgage Protection at the
bonkers.ie National Consumer Awards 2023.
We continue to improve and adapt our protection products and
services, with enhancing customer choice at the forefront of our
decisions. We expect further growth in our pensions proposition as
we embed our new offering, and we will continue to develop it
throughout the remainder of 2023. We are committed to the continued
distribution of our valued products through financial brokers in
Ireland with impartial advice key to ensuring the best customer
outcomes.
Looking ahead
The level of volatility and uncertainty we have seen in recent
periods is expected to continue in the short term as markets and
policymakers respond to persistent levels of high inflation.
Customers will have to continue to navigate the day-to-day impact
of these macroeconomic changes, with further pressure on disposable
income levels as living costs and mortgage repayment and rental
costs continue to increase.
Our support for the impartial adviser community and consistent
strategy ensures we continue to be well positioned to support an
increasing number of customers in the UK and Ireland who are facing
into these challenges, scaling the support we offer through
technology. We will continue to champion a Just Transition to a
sustainable world, whilst broadening the range of assets we invest
in, for example via infrastructure projects which support
early-stage UK companies in sectors including life sciences.
Financial Review
Group operating profit before tax for the six months ended 30
June 2023 increased to GBP127m (H1 2022: GBP109m) reflecting strong
trading in Workplace Pensions and the positive impact of higher
risk free rates on both new and existing business. This was despite
lower asset management revenues as average AUM levels remain lower
than in the first half of 2022.
The transfer to the fund for future appropriations (FFA)
improved to GBP161m (H1 2022: transfer from FFA (GBP49m)) as a
result of the increased operating profits combined with overall
investment returns that were in line with our long-term
expectations compared to the negative economic experience in the
first half of 2022.
In April 2023 we announced the acquisition of Aegon UK's closed
individual protection business comprising over 400,000 customers
across life insurance, critical illness and income protection.
Customers' policies are expected to transfer to Royal London in
2024, subject to the completion of a court-approved Part VII
transfer. In the interim period, Aegon UK will reinsure the
portfolio to Royal London. This acquisition has reduced the
Solvency II Investor View capital cover ratio by 4 percentage
points and in the future will allow us to deliver synergies in our
Protection business.
As part of our active management of the Group's capital
structure, in May 2023 the Group successfully issued a new GBP350m
Restricted Tier 1 ('RT1') contingent convertible debt instrument,
with a concurrent tender offer on the Group's GBP400m Fixed Rate
Reset Callable Guaranteed Subordinated Tier 2 debt due 2043,
resulting in the repurchase and cancellation of GBP302m of the
outstanding notes. The transaction has increased the Group's
financial flexibility by establishing access to the RT1 capital
markets and creating additional Tier 2 capital headroom.
Our capital position remains robust with the Solvency II
Investor View capital cover ratio remaining stable over the period.
The Investor View capital cover ratio was 212% at 30 June 2023 (31
December 2022: 213%) and the Solvency II Regulatory View capital
cover ratio decreased to 200% (31 December 2022: 206%). Our hedging
programme continues to operate as intended.
Group operating profit before tax
The following table shows the Group operating profit for the six
months ended 30 June 2023. Further detail on the Group's segmental
reporting is included in note 2 to the Interim Financial
Statements.
Six months Six months
ended ended
30 June 30 June
2023 2022 Change
GBPm GBPm GBPm
============================================ =========== =========== =======
Long-term business
New business contribution 99 89 10
Existing business contribution 98 87 11
Contribution from AUM and other businesses 45 55 (10)
Business development and other costs (18) (19) 1
Strategic development costs (29) (35) 6
============================================ =========== =========== =======
Result from operating segments 195 177 18
============================================ =========== =========== =======
Corporate costs (29) (31) 2
Financing costs (39) (37) (2)
============================================ =========== =========== =======
Group operating profit before tax 127 109 18
============================================ =========== =========== =======
New business contribution
Life and pensions new business is reported using economic
assumptions set at the start of the reporting period. The increase
in the risk free rate over 2022 therefore significantly impacts the
comparability of new business metrics between 2022 and 2023. The
higher discount rate used in the calculation of PVNBP reduces the
present value of the same premium amount. This impact is most
significant on longer duration businesses which have regular cash
flows, in particular Workplace Pensions and regular premium
Protection business. Conversely, the higher risk free rate improves
Workplace Pensions new business contribution, primarily from the
level of assumed fund growth over the life of the policies.
Overall, new business contribution increased to GBP99m (H1 2022:
GBP89m) driven by strong growth in Workplace Pensions sales and our
continued focus on cost control, with acquisition costs being held
at similar levels to the first half of 2022 despite inflationary
cost pressures. New business margin has improved to 2.0% (H1 2022:
1.6%), reflecting the higher proportion of contribution from
Workplace Pensions, which includes the impact of the discount rate
effect.
New business contribution PVNBP New business margin
===================== ============================ ======================== ========================
Six months Six months Six months Six months
Six months
ended ended ended ended Six months ended
30 June 30 June 30 June 30 June ended 30 30 June
2023 2022 2023 2022 June 2023 2022
GBPm GBPm GBPm GBPm % %
===================== ============= ============= =========== =========== =========== ===========
Individual Pensions 40 48 2,402 2,725 1.7 1.8
Workplace Pensions 38 18 1,906 2,025 2.0 0.9
Protection 11 12 368 569 2.9 2.2
Annuities and
other 5 3 79 87 6.8 3.9
===================== ============= ============= =========== =========== =========== ===========
UK 94 81 4,755 5,406 2.0 1.5
===================== ============= ============= =========== =========== =========== ===========
Ireland 5 8 110 88 4.8 8.5
===================== ============= ============= =========== =========== =========== ===========
Total 99 89 4,865 5,494 2.0 1.6
===================== ============= ============= =========== =========== =========== ===========
On a comparable basis ([a]) , sales decreased by 5% with strong
trading in Workplace Pensions and Individual Pensions regular
premium business offset by reductions in defined benefit transfers
as interest rates continued to rise and lower Protection sales that
were partly impacted by cost of living pressures and a single
one-off transfer in H1 2022.
UK
Individual Pensions non-defined benefit business grew by 2% as
we saw increased new business sales around the tax year-end period
following the changes announced to lifetime allowances, whilst
defined benefit transfers reduced by GBP360m compared to H1 2022 as
both transfer values and volumes reduced significantly following
the rise in interest rates. As a result, overall new business sales
declined by 12%, but margin was retained at a similar level to H1
2022.
Workplace Pensions new business sales increased by 7% on a
comparable basis ([a]) as new entrants into existing schemes
remained strong and we saw an increase in new customers joining us
from new schemes. We are also seeing more customers transfer their
pots to their Royal London pension, improving transfer flows. This
increase in new business sales, along with the impact of higher
risk free rates, has more than doubled new business contribution
and improved margins from 0.9% to 2.0%.
Protection new business sales were lower, in part due to the
discount rate change, with H1 2022 boosted by a one-off transfer of
c.GBP100m. New business contribution was maintained following the
actions taken at the end of 2022 to exit the Over 50s life
insurance market and to manage the cost base. These actions have
resulted in an increase in new business margin to 2.9%.
Annuities and other business sales decreased slightly with
higher market interest rates contributing to lower average policy
sizes.
Ireland
New business sales increased, primarily due to new pensions
sales following the successful launch of the product in September
2022. New business margin reduced to 4.8% (H1 2022: 8.5%)
reflecting the higher relative cost of the pensions product whilst
we grow its scale.
Existing business contribution
Existing business contribution increased to GBP98m (H1 2022:
GBP87m), the components of which are shown in the table below.
Six months Six months
ended ended
30 June 30 June
2023 2022 Change
GBPm GBPm GBPm
============================================= =========== =========== =======
Expected return 96 54 42
Experience variances and assumption changes 6 6 -
Modelling and other changes (4) 27 (31)
============================================= =========== =========== =======
Total 98 87 11
============================================= =========== =========== =======
Expected return increased to GBP96m (H1 2021: GBP54m) primarily
as a result of the increase in risk free rates at the start of the
year.
Experience variances and assumption changes were a credit of
GBP6m (H1 2022: GBP6m). There have been no significant experience
variances in H1 2023 versus our long-term assumptions.
The impact of modelling and other changes in the period was a
charge of GBP4m. We continue to expand our ring-fenced Matching
Adjustment portfolio, which now totals GBP0.8bn, to support our
annuity proposition. A gain of GBP3m was recognised in H1 2023 (H1
2022: gain of GBP18m) following the transfer of a further block of
existing annuity business due to an increase in the discount rate
used to value these liabilities in order to reflect the illiquidity
premium relating to the backing assets.
Contribution from AUM and other businesses
Contribution from AUM and other businesses decreased to GBP45m
(H1 2022: GBP55m) as average levels of AUM, whilst higher than in
the second half of 2022, remained lower than in the comparative
period, combined with a planned increase in costs as we continue to
build new capabilities in RLAM.
Business development and other costs
Business development costs were GBP18m (H1 2022: GBP19m) as we
continue to improve the customer experience in the UK, in
particular through automating claims processes, increasing mobile
app functionality and integrating our financial wellbeing
service.
Strategic development costs
Strategic development costs of GBP29m (H1 2022: GBP35m)
represent the ongoing investment we are making across our
businesses. It comprises GBP20m of continued investment in our UK
pensions business, GBP6m in Asset Management as our enhancement of
RLAM's core infrastructure and systems moves towards
implementation, and GBP3m in Ireland related to the ongoing
development of the pension proposition launched in 2022.
Corporate and financing costs
Corporate costs of GBP29m (H1 2022: GBP31m) include the costs of
Group-wide regulatory change development, strengthening of IT
security and restructuring. Financing costs represent the interest
payable on the Group's subordinated debt which increased to GBP39m
(H1 2022: GBP37m), following the issuance of a new RT1 instrument
in 2023.
Reconciliation of operating profit before tax to transfer
to/(from) the FFA
The transfer to the FFA was GBP161m (H1 2022: transfer from FFA
(GBP49m)) reflecting increased operating profit and positive
economic movements compared to the prior period.
Six months Six months Change
ended ended GBPm
30 June 30 June
2023 2022
GBPm GBPm
=============================================== =========== =========== ========
Group operating profit before tax 127 109 18
Economic movements 57 (338) 395
Amortisation of goodwill arising from
mergers and acquisitions 1 1 -
Profit/(loss) before tax and before transfer
to/(from) the fund for future appropriations 185 (228) 413
=============================================== =========== =========== ========
Tax attributable to long-term business (24) 179 (203)
=============================================== =========== =========== ========
Transfer to/(from) the fund for future
appropriations 161 (49) 210
=============================================== =========== =========== ========
Economic movements
Economic movements were a credit of GBP57m (H1 2022: charge of
GBP338m), as investment portfolio returns were in line with our
longer-term expected return assumptions.
Assets under management
Assets under management increased to GBP153bn (31 December 2022:
GBP147bn) boosted by positive net inflows of GBP3bn as well as
market gains of GBP3bn.
Gross inflows Net inflows
================ ======================== ========================
Six months Six months Six months Six months
ended ended ended ended
30 June 30 June 30 June 30 June
2023 2022 2023 2022
GBPm GBPm GBPm GBPm
================ =========== =========== =========== ===========
External flows 10,203 7,898 2,771 1,468
Internal flows 4,774 4,874 443 1,110
Total 14,977 12,772 3,214 2,578
================ =========== =========== =========== ===========
External net inflows were GBP2.8bn (H1 2022: GBP1.5bn),
primarily driven by net inflows of GBP2.3bn across our Global
Equity strategies as well as GBP0.7bn net inflows to cash and
government bonds strategies. This was partially offset by net
outflows of GBP0.4bn in our Sustainable fund range (H1 2022:
GBP0.3bn net inflow) despite strong relative performance during the
period following the relatively lower investment returns
sustainable funds experienced in 2022.
Internal net inflows decreased to GBP0.4bn (H1 2022: GBP1.1bn)
following an increase in regular withdrawals on policies in
drawdown, with more customers accessing their pensions and an
overall increase in average drawdown value.
Strength of our capital base
We continue to prioritise active management of our capital base,
as maintaining the strength of our capital position is vital to
ensuring that we have the capital to fund further growth and to
give peace of mind to our customers that we can meet our
commitments to them.
In common with others in the industry, we present two views of
our capital position: an Investor View for analysts and investors
in our subordinated debt, and a Regulatory View where the closed
funds' surplus is excluded as a restriction to Own Funds.
The table below sets out the capital position and key Solvency
II metrics on a Partial Internal Model basis for the Group.
Key metrics 30 June 2023 31 December
2022
------------------------------------- ------------- ------------
Regulatory View solvency surplus GBP2,624m GBP2,483m
Regulatory View capital cover ratio 200% 206%
Investor View solvency surplus GBP2,624m GBP2,483m
Investor View capital cover ratio 212% 213%
===================================== ============= ============
Our hedging strategy continues to ensure the stability of our
capital position through periods of market volatility.
In May, we issued GBP350m 10.125 per cent. Fixed Rate Reset
Perpetual Restricted Tier 1 ('RT1') Contingent Convertible Notes,
the first time the Group has accessed the RT1 capital market. This
issuance improved the Group's funding flexibility and created
additional Tier 2 capital headroom. At the same time, we completed
a tender offer of our GBP400m Tier 2 2043 Notes, with GBP302m
having been successfully redeemed. The net impact of the RT1
issuance and the tender results in a 2 percentage point increase in
both ratios.
Both the Investor View and Regulatory View ratios have remained
relatively stable over H1 2023, with the movement in the period
reflecting the acquisition of Aegon's protection book and the
impact of the RT1 issuance and Tier 2 tender.
Solvency II reform
The proposed reform to Solvency II ('Solvency UK') should allow
capital to be used more effectively, whilst continuing to ensure
that customers are protected and providing simplification to
processes for insurers in key areas such as Internal Model change
and reporting. Exact details of the new regime are subject to PRA
consultation. The risk margin reform is expected to be implemented
in 2023 with other reforms coming in 2024. Overall, we expect an
increase in the capital cover ratio from the proposed reduction in
risk margin in HMT's draft Statutory Instrument, although some of
the benefit will be offset by a reduction in the Solvency II
transitional measures. On the basis that the changes are
implemented as proposed in Consultation Paper 12/23 issued by the
PRA, a 60-65% reduction in the risk margin alongside a
recalculation of the TMTP is expected to result in an increase in
Investor View cover ratio of 10-15 percentage points, dependent on
economic conditions at the point of implementation.
The broadening of the eligibility requirements for the Matching
Adjustment ('MA') portfolio to allow the inclusion of assets with
'highly predictable' cash flows should help widen the potential
range of investments used to back annuities. We do not expect any
significant impact on our current MA portfolio or capital ratios
from the MA changes given the size of our portfolio.
Balance sheet
Royal London's balance sheet position is robust. Our total
investment portfolio increased in value to GBP107.3bn (31 December
2022: GBP104.4bn), as a result of increases in fair value primarily
in equity and bond asset classes. At 30 June 2023, GBP787m of
assets were ring-fenced (31 December 2022: GBP733m) to back
annuitant liabilities of GBP742m (31 December 2022: GBP691m). The
ring-fenced portfolio of assets includes a mix of corporate bonds,
gilts, cash and commercial real estate loans.
Our financial investment portfolio remains well diversified
across a number of financial instrument classes, with the majority
invested in equity securities and fixed income assets.
A significant portion of our debt securities portfolio is in
high-quality assets with a credit rating of 'A' or above. In our
non-linked portfolio, 78% (31 December 2022: 80%) of our non-linked
debt securities and 67% (31 December 2022: 68%) of our non-linked
corporate bonds had a credit rating of 'A' or better at 30 June
2023. There have been no significant defaults in our corporate bond
portfolio.
Statement of directors' responsibilities
The Interim Results Announcement, including the Interim
Financial Statements, is the responsibility of, and has been
approved by the directors.
In preparing the Interim Financial Statements, the
directors:
-- select suitable accounting policies and then apply them consistently;
-- state whether applicable United Kingdom Generally Accepted Accounting Practice (UK GAAP) has been followed,
subject to any material departures disclosed and explained in the Interim Financial Statements;
-- make judgements and accounting estimates that are reasonable and prudent; and
-- prepare the Interim Financial Statements on the going concern basis unless it is inappropriate to presume that
the Company will continue in business.
They are responsible for such internal controls as they
determine are necessary to enable the preparation of Interim
Financial Statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Company and the Group and to prevent and detect fraud
and other irregularities.
The directors are also responsible for keeping adequate
accounting records that are sufficient to show and explain the
Group's transactions and disclose with reasonable accuracy at any
time the financial position of the Group.
Principal risks and uncertainties
The Board reviewed the principal risks and uncertainties facing
the Group in March 2023 when the 2022 Annual Report and Accounts
(ARA) was published. This review took account of the challenging
economic conditions and the evolving geopolitical and regulatory
environment. The Board considers that they have not changed
significantly from those set out in the 'Principal risks and
uncertainties' section of the Strategic Report within the 2022 ARA
(royallondon.com/about-us/our-performance/investor-relations/).
The risks and uncertainties continue to be monitored and managed
through our risk management system, including those related to the
economy and Royal London's key markets, which are impacted by cost
of living pressures, and the political and regulatory
environment.
Forward-looking statements
Royal London may make verbal or written 'forward-looking
statements' within this announcement, with respect to certain
plans, its current goals and expectations relating to its future
financial condition, performance, results, operating environment,
strategy and objectives. Statements that are not historical facts,
including statements about Royal London's beliefs and expectations
and including, without limitation, statements containing the words
'may', 'will', 'should', 'continue', 'aims', 'estimates',
'projects', 'believes', 'intends', 'expects', 'plans', 'seeks' and
'anticipates', and words of similar meaning, are forward-looking
statements. The statements are based on plans, estimates and
projections as at the time they are made and involve unknown risks
and uncertainties. These forward-looking statements are therefore
not guarantees of future performance and undue reliance should not
be placed on them.
By their nature, forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances,
some of which will be beyond Royal London's control. Royal London
believes factors could cause actual financial condition,
performance or other indicated results to differ materially from
those indicated in forward-looking statements in the announcement.
Potential factors include but are not limited to: the war in
Ukraine; UK and Ireland economic and business conditions; future
market-related risks such as higher interest rates; sustained high
levels of inflation and the performance of financial markets
generally; the policies and actions of governmental and regulatory
authorities (for example new government initiatives); the impact of
competition; the effect on Royal London's business and results
from, in particular, mortality and morbidity trends, lapse rates
and policy renewal rates; and the timing, impact and other
uncertainties of future mergers or combinations within relevant
industries. These and other important factors may, for example,
result in changes to assumptions used for determining results of
operations or re-estimations of reserves for future policy
benefits.
As a result, Royal London's future financial condition,
performance and results may differ materially from the plans,
estimates and projections set forth in Royal London's
forward-looking statements. Royal London undertakes no obligation
to update the forward-looking statements in this announcement or
any other forward-looking statements Royal London may make.
Forward-looking statements in this announcement are current only at
the date on which such statements are made. This announcement has
been prepared for the members of Royal London and no one else. None
of Royal London, its advisers or its employees accept or assume
responsibility to any other person and any such responsibility or
liability is expressly disclaimed to the extent not prohibited by
law.
The Royal London Mutual Insurance Society Limited is registered
in England and Wales (99064) at 80 Fenchurch Street, London, EC3M
4BY. www.royallondon.com
Interim Financial Statements
Consolidated statement of comprehensive income (unaudited)
for the period ended 30 June 2023
Group
================================================ =====================================================
Technical account - long-term business Six months Six months
ended ended Year ended
30 June 30 June 31 December
2023 (unaudited) 2022 (unaudited) 2022
GBPm GBPm GBPm
================================================ ================== ================== =============
Gross premiums written 602 580 1,176
Outwards reinsurance premiums (126) 287 320
================================================ ================== ================== =============
Earned premiums, net of reinsurance 476 867 1,496
Investment income 4,629 951 1,455
Other income 296 328 640
================================================ ================== ================== =============
Total income 5,401 2,146 3,591
================================================ ================== ================== =============
Claims paid
Gross claims paid (1,488) (1,395) (2,863)
Reinsurers' share 303 273 540
Change in provisions for claims
Gross amount (17) (20) (62)
Reinsurers' share 7 3 29
================================================ ================== ================== =============
Claims incurred, net of reinsurance (1,195) (1,139) (2,356)
================================================ ================== ================== =============
Change in long-term business provision,
net of reinsurance
Gross amount 930 6,205 9,469
Reinsurers' share (186) (774) (1,346)
================================================ ================== ================== =============
744 5,431 8,123
Change in technical provision for linked
liabilities, net of reinsurance (1,997) 5,288 5,758
================================================ ================== ================== =============
Change in technical provisions, net
of reinsurance (1,253) 10,719 13,881
================================================ ================== ================== =============
Change in non-participating value of
in-force business 261 72 141
================================================ ================== ================== =============
Net operating expenses (426) (264) (581)
Investment expenses and charges (157) (145) (301)
Unrealised losses on investments (2,342) (11,481) (14,475)
Other charges (104) (136) (289)
================================================ ================== ================== =============
Total operating expenses (3,029) (12,026) (15,646)
================================================ ================== ================== =============
Profit/(loss) before tax and before
transfer to/(deduction from) the fund
for future appropriations 185 (228) (389)
================================================ ================== ================== =============
Tax attributable to long-term business (24) 179 227
Transfer to/(deduction from) the fund
for future appropriations 161 (49) (162)
================================================ ================== ================== =============
Balance on technical account - long-term - - -
business
================================================ ================== ================== =============
Other comprehensive income, net of tax:
Remeasurement of defined benefit pension
schemes 18 14 (106)
Foreign exchange rate movements on translation
of Group entities (6) 4 10
Transfer to/(deduction from) the fund
for future appropriations 12 18 (96)
================================================ ================== ================== =============
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
fund for future appropriations. Accordingly, the total
comprehensive income for the period is always GBPnil after the
transfer to or deduction from the fund for future
appropriations.
Consolidated balance sheet (unaudited)
as at 30 June 2023
Group
===================================== ====================================================
30 June 30 June 31 December
2023 (unaudited) 2022 (unaudited) 2022
GBPm GBPm GBPm
===================================== ================== ================== ============
ASSETS
===================================== ================== ================== ============
Intangible assets
Goodwill 21 24 21
Negative goodwill (35) (42) (37)
====================================== ================== ================== ============
(14) (18) (16)
Other intangible assets 136 107 123
====================================== ================== ================== ============
122 89 107
Non-participating value of in-force
business 2,736 2,405 2,474
Investments
Land and buildings 115 152 122
Other financial investments 32,702 36,816 33,462
====================================== ================== ================== ============
32,817 36,968 33,584
Assets held to cover linked
liabilities 74,516 69,352 70,857
Reinsurers' share of technical
provisions
Long-term business provision 3,047 3,807 3,234
Claims outstanding 160 128 153
Technical provisions for linked
liabilities (49) (48) (51)
====================================== ================== ================== ============
3,158 3,887 3,336
Debtors
Debtors arising out of direct
insurance operations 56 53 50
Debtors arising out of reinsurance
operations 89 68 62
Other debtors 2,670 1,157 2,231
====================================== ================== ================== ============
2,815 1,278 2,343
Other assets
Deferred taxation 13 - 27
Tangible fixed assets 27 16 19
Cash at bank and in hand 639 623 677
====================================== ================== ================== ============
679 639 723
Prepayments and accrued income
Deferred acquisition costs on
investment contracts 77 100 87
Other prepayments and accrued
income 55 47 37
====================================== ================== ================== ============
132 147 124
Pension scheme asset 222 362 207
Total assets 117,197 115,127 113,755
====================================== ================== ================== ============
LIABILITIES
====================================== ======== ======== ========
Subordinated liabilities 1,382 1,334 1,335
Fund for future appropriations 3,924 3,978 3,751
Technical provisions
Long-term business provision 30,383 34,588 31,344
Claims outstanding 400 342 384
======================================= ======== ======== ========
30,783 34,930 31,728
Technical provisions for linked
liabilities 74,341 69,183 70,622
Provisions for other risks
Deferred taxation - 46 -
Other provisions 172 199 187
======================================= ======== ======== ========
172 245 187
Creditors
Creditors arising out of direct
insurance operations 271 280 271
Creditors arising out of reinsurance
operations 1,675 2,045 1,781
Amounts owed to credit institutions 83 97 52
Other creditors including taxation
and social security 4,509 2,970 3,938
======================================= ======== ======== ========
6,538 5,392 6,042
Accruals and deferred income 57 65 90
Total liabilities 117,197 115,127 113,755
======================================= ======== ======== ========
Notes to the Interim Financial Statements
1. Basis of preparation
The Interim Financial Statements of the Group have been prepared
in accordance with the recognition and measurement requirements of
UK accounting standards, including Financial Reporting Standard
(FRS) 102, 'The Financial Reporting Standard applicable in the
United Kingdom and the Republic of Ireland' and FRS 103, 'Insurance
Contracts'.
The accounting policies applied in the Interim Financial
Statements are the same as those applied in the Group's 2022 ARA.
The full UK GAAP accounting policies can be found in the Group's
2022 ARA on the Royal London website at
(royallondon.com/about-us/corporate-information/corporate-governance/investor-relations/).
The reporting rules applicable for the Group do not require
compliance with the requirements of FRS 104 'Interim Financial
Reporting' and these Interim Financial Statements have not been
prepared in compliance with the disclosure requirements of that
standard. The Interim Results Announcement for the period ended 30
June 2023 does not constitute statutory accounts as defined in
Section 434 of the Companies Act 2006. The comparative results for
the full year 2022 have been taken from the Group's 2022 ARA. The
Group's 2022 ARA has been filed with the Registrar of
Companies.
The Interim Financial Statements have been prepared on a going
concern basis under the historical cost convention, as modified by
the inclusion of certain assets and liabilities at fair value as
permitted or required by FRS 102.
The Group regularly performs sensitivities and stress testing on
a range of severe but plausible scenarios. Stress testing has been
performed on the capital position for severe adverse economic and
demographic impacts arising over the short to medium term, and on
the liquidity position for severe adverse economic impacts over the
short term. There are a range of management actions, both in the RL
Main fund and RL (CIS) closed fund, available to the Directors in
stress scenarios which could be considered if there were a
deterioration in the capital and/or liquidity position of the
Group, to restore the position back within risk appetite. The
capital and liquidity positions remain sufficient to cover capital
requirements and liquidity requirements respectively in all
scenarios tested. Having considered these matters, the Directors
have concluded that no material uncertainty exists over the going
concern assumption.
Issuance of Restricted Tier 1 Contingent Convertible Notes
The GBP350m Restricted Tier 1 Contingent Convertible Notes
issued by the Group in May 2023 have been classified as a debt
instrument and presented within Subordinated liabilities in the
consolidated balance sheet as the Group does not have an
unconditional right to avoid delivering payments to noteholders in
the event that the Notes were to no longer qualify as a Restricted
Tier 1 instrument. In accordance with our existing accounting
policies, subordinated liabilities are recognised initially at the
fair value of the proceeds received, net of any discount and less
attributable transaction costs. Subsequent to initial recognition,
they are stated at amortised cost. The transaction costs and
discount are amortised over the period to the earliest possible
redemption date on an effective interest rate basis.
Acquisition of Aegon UK protection portfolio
On 4 April 2023, Royal London entered into a Framework Agreement
and Transitional Services Agreement with Aegon UK to acquire a
portfolio of protection contracts, related reinsurance contracts
and net current liabilities via a Scheme of transfer under Part VII
of the Financial Services and Markets Act ('Part VII transfer'). In
the period up to the effective date of the Part VII transfer, Royal
London has entered into a Reinsurance Agreement with Aegon UK to
100% reinsure the element of the book not already reinsured with
third parties. A charge has been recognised within 'Net operating
expenses' in the Consolidated statement of comprehensive income for
the consideration paid and the initial recognition of associated
current liabilities, with a corresponding credit to 'Change in
long-term business provision, net of reinsurance'. The transaction
resulted in no gain or loss at the date of the transaction. All
subsequent amounts received under the reinsurance agreement will be
recognised within 'Gross premiums written' and 'Claims paid', with
changes in our reinsurance liabilities recognised in 'Change in
long-term business provision, net of reinsurance' accordingly.
2. Segmental information
Operating segments
The operating segments reflect the level within the Group at
which key strategic and resource allocation decisions are made and
the way in which operating performance is reported internally to
the chief operating decision-maker. The chief operating
decision-maker, who is responsible for allocating resources and
assessing performance of the operating segments, has been
identified as the Company's Board of Directors.
The activities of each operating segment are described
below:
UK
The UK business provides pensions and other retirement products
to individuals and to employer pension schemes and protection
products to individuals in the UK.
Asset Management
The Asset Management segment comprises Royal London Asset
Management Holdings Limited and its subsidiaries. Royal London
Asset Management provides investment management services to the
other entities within the Group and to external clients, including
pension funds, local authorities, universities, and charities, as
well as individuals.
Ireland
The Ireland business comprises the Group's Irish subsidiary,
Royal London Insurance DAC (RLI DAC). It provides intermediated
protection products and unit-linked pensions to individuals in the
Republic of Ireland.
Operating profit
A key measure used by the Company's Board of Directors to
monitor performance is operating profit, which is classed as an
Alternative Performance Measure. The Company's Board of Directors
consider that this facilitates comparison of the Group's
performance over reporting periods as it provides a measure of the
underlying trading of the Group.
The operating profit by operating segment is shown in the
following table.
Group - Six months ended 30 June
2023 (unaudited)
================================= =======================================
Asset
UK Management Ireland Total
GBPm GBPm GBPm GBPm
================================= ======= ============ ======== ======
Long-term business
New business contribution 93 - 6 99
Existing business contribution 97 - 1 98
Contribution from AUM and other
businesses 20 25 - 45
Business development and other
costs (13) (4) (1) (18)
Strategic development costs (20) (6) (3) (29)
================================= ======= ============ ======== ======
Result from operating segments 177 15 3 195
================================= ======= ============ ======== ======
Corporate costs (29)
Financing costs (39)
================================= ======= ============ ======== ======
Group operating profit before
tax 127
================================= ======= ============ ======== ======
Group - Six months ended 30 June
2022 (unaudited)
================================= =======================================
Asset
UK Management Ireland Total
GBPm GBPm GBPm GBPm
================================= ======= ============ ======== ======
Long-term business
New business contribution 81 - 8 89
Existing business contribution 86 - 1 87
Contribution from AUM and other
businesses 21 34 - 55
Business development and other
costs (12) (7) - (19)
Strategic development costs (26) (6) (3) (35)
================================= ======= ============ ======== ======
Result from operating segments 150 21 6 177
================================= ======= ============ ======== ======
Corporate costs (31)
Financing costs (37)
================================= ======= ============ ======== ======
Group operating profit before
tax 109
================================= ======= ============ ======== ======
Group - Year ended 31 December
2022
================================= ======================================
Asset
UK Management Ireland Total
GBPm GBPm GBPm GBPm
================================= ====== ============ ======== ======
Long-term business
New business contribution 146 - 17 163
Existing business contribution 186 - (5) 181
Contribution from AUM and other
businesses 45 56 - 101
Business development and other
costs (20) (11) (1) (32)
Strategic development costs (52) (13) (6) (71)
================================= ====== ============ ======== ======
Result from operating segments 305 32 5 342
================================= ====== ============ ======== ======
Corporate costs (57)
Financing costs (75)
================================= ====== ============ ======== ======
Group operating profit before
tax 210
================================= ====== ============ ======== ======
[a] H1 2022 present value of new business premiums discounted
using the same rate used in the H1 2023 calculation
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END
IR NKNBPFBKDCFK
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