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Strategic Report with Supplementary Information 2013 Contents

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Strategic Report with Supplementary Information 2013 Contents Strategic Report with Supplementary Information 2013 Contents STRATEGIC REPORT SUPPLEMENTARY INFORMATION Highlights 1 2013 Directors’ summary Chairman’s statement 2 remuneration report 40 Group Chief Executive’s Auditors’ report 47 statement 7 Summarised consolidated income Our business model and statement: EEV 48 strategy 10 Summarised consolidated statement Our resources and of comprehensive income: IFRS 49 responsibilities 12 Summarised consolidated balance Principal risks and uncertainties 13 sheet: IFRS 49 Business overview 16 Board of Directors 50 Our corporate responsibility 26 Notice of AGM 54 Group Finance Director’s review 31 Commentary on resolutions 55 2014 Financial calendar and Contact offices 56 ADDING VALUE FOR OUR MEMBERS Mutual dividend: £81m With-profits performance: 1.6% above benchmark Unit-linked pension funds: on average 2.1% above benchmark Award-winning customer service Royal London Group Strategic Report with Supplementary Information 2013 1 Highlights Returns to with-profit policyholders Mutual dividend allocated £81m (2012 £88m) Bonuses added to with-profit policies £318m (2012 £282m) Royal London with-profits fund investment performance 10.6% (2012 8.6%) Profitability EEV profit before tax and mutual dividend from continuing operations1 £551m (2012 £320m) IFRS result before tax and mutual dividend from continuing operations2 £530m (2012 £454m) Funds Group funds under management £73,598m (2012 £49,799m) EEV operating profit from continuing operations1 Mutual dividend £346m £88m £88m £322m £81m £228m 2011 2012 2013 2011 2012 2013 Regulatory (Insurance Group Directive) capital surplus Present value of continuing new life and pensions business premiums £2,749m £3,464m £3,160m £2,374m £2,893m £1,906m 2011 2012 2013 2011 2012 2013 1 2013 EEV results include £150m one-off gain arising on the acquisition of The Co-operative life, pensions and asset management. 2 2013 IFRS results include £125m one-off gain arising on the acquisition of The Co-operative life, pensions and asset management. Note: Continuing operations excludes RL360° which was sold during 2013. 2 Royal London Group Strategic Report with Supplementary Information 2013 Chairman’s statement Rupert Pennant-Rea Chairman performance, the Group’s EEV profit before Your Group changed a lot in tax and mutual dividend (excluding the Co-operative transaction) rose by 25%; the 2013, mainly because we bought value of new business increased by 36%; and we maintained a strong capital position. The the life insurance and asset Board is able to propose a mutual dividend of £81m, which represents approximately 1.7% management businesses from increase in the capital value of the policies held by our members. This dividend could the Co-operative Banking Group. have been larger had it not been for two main issues that will affect your Group in coming We waited a long time to complete years: regulation and the economy. this acquisition, but the Group’s Regulatory change During 2013, the Financial Services funds under management Authority was dissolved and two new bodies set up: the Prudential Regulatory Authority increased by £20bn, at the (PRA) and the Financial Conduct Authority (FCA). Your Group is regulated date of acquisition. by both of them – the PRA’s concern is how much capital we hold, the FCA’s is how we sell to and serve our customers. We have It will be some time before the two businesses close links with both bodies at various levels are properly integrated, but we hope new and, although we have healthy differences policyholders are already finding a warm from time to time, in general relations welcome at Royal London and, we trust, between your Group and its two regulators excellent service. have been good. On balance, the Group produced a strong On capital, though, all insurance companies performance during 2013. Times were tough in the European Union (EU) are now facing in the protection marketplace, where we saw a the challenges of a new regime (called significant decline in new business, but there Solvency II). The detail is complicated, but has been broad-based growth for our pensions the overall effect of Solvency II is clear: businesses with the promise of more to come, your Group will need considerably more and strong demand from third parties for our capital to support the business it writes and asset management services. Using some of the as a cushion against uncertainty. Solvency II conventional industry measures of financial does not come into effect until 2016, so Royal London Group Strategic Report with Supplementary Information 2013 3 “The best way to expand our market through several years from now. Meanwhile, I hope you will agree that the Group’s new share is by providing value-for-money image and message capture the spirit of what products and high standards of service.” we mean to our members and customers. Board and staff This is the first time I have written to you as Chairman of Royal London, and I want to we have time to build up reserves. We are strong investment performance in 2013, salute my predecessor, Tim Melville-Ross, also in discussion with the PRA regarding which has benefited our investment who stood down at the last AGM. Tim was the suitable amount of capital to hold in policyholders. In addition, a number of on the Board for 14 years and Chairman for future in respect of our main staff pension our businesses won awards for service or seven of those. The Group was fortunate to scheme. While we are doing these, it may moved up in the star-ratings awarded by have his wise guidance through what were be necessary to take a cautious view of the independent financial advisers (IFAs). But often choppy waters. The rest of the Board is mutual dividend over the next few years. we could still do more to attract attention unchanged since the last AGM, and I thank in the market place, which is why our the Directors for their support during my Your Board’s other concern is the state of re-branding exercise is of such importance. first year in the Chair. the British economy, and what that might mean for our business. Although economic After extensive market testing and I also want to thank all our staff, who had a growth has made a welcome return, prices discussion, it has become clear that the lot to cope with in 2013. They have put us in are still rising faster than incomes. Our Royal London ‘whole’ should be worth a good position for the challenges ahead. customers have less to spend on everything more than the sum of its parts. We are (including life insurance) and less scope to therefore dropping the names of some of our I am sorry to tell you that Kerr Luscombe is save. Perhaps the squeeze on real incomes individual businesses, and highlighting the standing down as Group Finance Director will ease during 2014, but at some stage Royal London brand. As part of this process, in May due to personal circumstances. The interest rates will start to rise from their we have organised the Group into three Board would like to thank him for all he has abnormally low levels – welcome news divisions: Intermediary (the products we sell done for the Group since October 2011 and for savers, but not for younger families via IFAs); Consumer (the products we sell as an Executive Director since July 2012. with mortgages. All in all, the Group’s directly to customers); and Wealth (our fund We have appointed Tim Harris as Group growth opportunities will depend less on manager, Royal London Asset Management Finance Director to replace Kerr. an expanding market for our products and (RLAM), and the Ascentric wrap platform more on winning a bigger share of that that we provide for intermediaries). You Tim is currently the group chief finance market from tough competitors. will find full details in the Group Chief officer for Torus Insurance. He has also held Executive’s statement. senior positions at Aviva (including CFO The best way to expand our market share is AVIVA Europe and Deputy Group CFO) by providing value-for-money products and Re-branding is expensive but it is badly and PwC. Tim is a Chartered Insurance high standards of service. It is encouraging needed. Nor is it something that can be done Practitioner and a fellow of the Institute of that our asset management arm produced overnight, and its benefits will still be coming Chartered Accountants. Group funds under management £73,598m £49,799m £46,222m £42,202m 2010 2011 2012 2013 4 Royal London Group Strategic Report with Supplementary Information 2013 Royal London Group Strategic Report with Supplementary Information 2013 5 TOGETHER At a time of change for financial services, our brand and strategy leverage the advantages of mutuality: the difference that is our strength. WE HAVE BEEN ABLE TO ALLOCATE A DISCRETIONARY MUTUAL DIVIDEND Phil Loney Group Chief Executive Royal London Group Strategic Report with Supplementary Information 2013 7 Group Chief Executive’s statement Phil Loney Group Chief Executive For Royal London, 2013 also marked the A lot changed in 2013, both completion of the last elements of our Strategic Review, and the first stages of for Royal London and for financial implementing our new strategy and business model. We completed the acquisition of services in general. Our businesses the life insurance and asset management businesses of the Co-operative Banking had to contend with new Group (CBG), taking our assets under regulations at the same time as management from £50bn to over £70bn. We also developed a new, unifying Royal tough market conditions. London brand, which we are launching with this annual report, and which is central to our strategy going forward.
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