The new business momentum we achieved in the second half of last year in our UK intermediary protection business has continued in 2016 and Royal London has again posted record sales results.
Financial highlights
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New life and pensions business (PVNBP basis)1 up by 39% to £4,201m (30 June 2015: £3,032m) which represents a new record for Royal London;
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Funds under management2 up by 11% to £93.8bn (31 December 2015: £84.5bn);
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European Embedded Value (EEV) operating profit up by 20% to £138m (30 June 2015: £115m);
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IFRS transfer to the unallocated divisible surplus before change in basis for Solvency II3 up by 419% to £83m (30 June 2015: £16m);
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Margin for new insurance business is 2.1% (30 June 2015: 2.0%) reflecting changes in mix of business;
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Solvency II Standard Formula Basis Total Company4 surplus of £2.1bn and a capital cover ratio of 169% at 1 January 2016. Estimated capital cover ratio of 166% at 30 June 2016.
New Business Review
Intermediary new life and pensions business
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Intermediary Protection business up by 24% to £287m (30 June 2015: £231m);
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Group Pensions up by 66% to £1,921m (30 June 2015: £1,155m);
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Individual Pensions and Drawdown up by 17% to £1,783m (30 June 2015: £1,524m).
The new business momentum we achieved in the second half of last year in our UK intermediary protection business has continued in 2016 and Royal London has again posted record sales results. The Group demonstrated its strong commitment to a high level of service offered to customers and their advisers with our new online quotation and underwriting systems. These innovations have been particularly well received by advisers who have appreciated the improvements to the speed of the processes for their clients.
The intermediary protection business in the Republic of Ireland continues to go from strength to strength, supported by the extension of our product range to include a new innovative whole of life proposition, and the ongoing service improvements generated by new digital capability leading to faster customer service.
The same commitment to excellent customer service and market-leading propositions contributed to the continued financial success of our intermediary pensions business. Recent innovations include enhancements to the flexibility of the Drawdown proposition and a unique Drawdown Governance service. Enhancements to the Governed Portfolios ensure that our investment solutions continue to be at the forefront of the market.
An approach to setting up automatic enrolment schemes based on personal contact rather than employer self-service means that Royal London continues to attract good quality business. Increasingly schemes set up with other providers earlier in the automatic enrolment process are switching to Royal London attracted by the quality of our service. Our pensions business continues to grow because of auto-enrolment which we expect to continue throughout 2016, although we anticipate this will reduce once smaller schemes have enrolled and the initial auto-enrolment staging process comes to an end.
Consumer new life and pensions business
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Consumer up by 93% to £160m (30 June 2015: £83m)
The Consumer division experienced strong growth for its range of direct-to-consumer protection products in the first half of 2016. Our Consumer division is still a relatively new market entrant and the Over 50s plan in particular has taken market share from established market participants. It is an innovative and value for money product which is proving popular with its target market. Strong sales growth has been seen from our distribution partnerships with Cooperative Funeral Services and Ecclesiastical Insurance in the pre-paid funeral plan market. We continue to seek further strategic distribution partnerships with consumer orientated organisations who share our objective of delivering better value for customers.
Wealth
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Royal London Asset Management (RLAM)continued to perform well, attracting gross inflows of £2.3bn (30 June 2015: £1.9bn) arising from both Institutional and Wholesale markets. This is a particularly strong result in a period of market uncertainty around the UK referendum on European Union (EU) membership.
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The Ascentric wrap platform saw assets under administration5 increase by 7% to £10.8bn (31 December 2015: £10.1bn). In common with the wrap sector as a whole, Ascentric saw lower gross sales against the background of market volatility in the first half of 2016. The business recorded gross sales of £1.07bn (30 June 2015: £1.19bn).
Review of financial performance
EEV operating profit
Group EEV operating profit increased by 20% to £138m (30 June 2015: £115m), despite the reduction in market interest rates, assisted by strong new business profit growth of £22m (34%) particularly in Pensions, Intermediary Protection and RLAM.
IFRS Transfer to Unallocated divisible surplus
As a mutual company, all earnings are retained for the benefit of participating policyholders and are carried forward within the unallocated divisible surplus. The IFRS transfer to the unallocated divisible surplus for the six months ended 30 June 2016, before change in basis for Solvency II and Other Comprehensive Income, was £83m (30 June 2015: £16m). Our IFRS result also benefits from the strong trading performance of the Group but is impacted by the low interest rate environment in the first six months of 2016.
Capital
Our capital position is robust and under a Solvency II Standard Formula basis Total Company3 surplus was £2.1bn with a capital cover ratio of 169% at 1 January 2016. The estimated capital cover ratio at 30 June 2016 is 166%.
Phil Loney, Group Chief Executive of Royal London, said: “Our strategy of differentiating Royal Londonfrom the competition by concentrating on quality, value for money products and the delivery of service excellence is driving the success of our business. Today we are announcing a strong set of results delivered against the uncertain backdrop of the UK referendum on EU membership and continuing low interest rates. Despite the reduction in interest rates, profit margins have held up well, allowing continued investment in the business to support the development of our product and servicing capabilities.
“For example, we have made a substantial investment in our protection proposition for customers introduced by intermediaries, making improvements to the customer journey with enhancements to the online application and underwriting processes and keener pricing. These improvements have resulted in wider adviser and customer engagement and an improvement in first half new business.
“We have indicated that we expect a slowing of the rate of growth in workplace pensions for some time and this indeed is beginning to come through in the new business figures. As smaller employers are now starting to auto-enrol the revenue from these schemes is lower than in earlier phases which were dominated by larger schemes. Nonetheless the number of schemes continues to grow and new business growth in Group Pensions was ahead by 66% on the same half-year period in 2015.
"As the auto-enrolled market matures we are beginning to see a new trend; the growth of a secondary market as advisers recommend schemes move to take advantage of better quality scheme administration or investment options. Royal London has benefited from this trend, taking on schemes that have already auto-enrolled with other providers. This “flight to quality” introduces competition to the market and will result in better outcomes for scheme members.
“Our direct to consumer business is now an established franchise in its chosen markets of Over 50s plans, term assurance and pre-paid funeral plans. All of these products offer customers good value for money and we will continue our strategy of targeting markets where we believe consumers are not currently well served. Sales of funeral plans through established distribution partners have been particularly strong and we will continue to seek out distribution opportunities for other products with like-minded partners.
“RLAM recorded a strong performance in the first half of 2016 with good gross and net inflows in sharp contrast to others in the asset management sector. Institutional business was particularly strong, with a number of new clients investing in the credit and government bond portfolios in particular.
“In difficult market conditions the Ascentric wrap platform saw assets under administration increase by 7% to £10.8bn (£10.1bn at 31 December 2015).
“Royal London continues to build its scale in the UK and Irish markets by offering a differentiated proposition rooted in our customer owned business model. Strong trading performance enables us to support record levels of investment in our business, with a strong capital position and growing operating profits for the benefit of our members. 2016 sees the extension of our innovative profit sharing arrangements to eligible pension customers and members. By offering a vibrant mutual alternative Royal London creates value directly for its own customers but also indirectly for all consumers through its competitive influence.”
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